Tax engagement letters

Some time ago (I won't confess quite how long ago) I was asked to chair a working party comprising the members of the main accounting and tax bodies.

Our task? To review and update the guidance provided to our members as regards the issue and content of engagement letters for tax work.

I mention this now because the guidance has at long last just been published. We all underestimated quite how much time and effort this project would consume. This was probably because we decided to do more than simply update the previous 'standard' guidance.

I had this idea (which was shared by the other members of the working party) that the updated guidance should be helpful to our members and that whatever we produced should be commercial, client friendly and uptodate. Oh - and SHORTER than previous standard letters.

I must say that I'm pleased and proud of the outcome. It's taken an enormous amount of time and I hope that the reaction from members will be positive.

The professional bodies last updated their guidance on tax engagement letters in 2001, largely by adding additional paragraphs to previous versions. Before that the guidance was updated at the start of the self assessment system.

In more recent years many commercial publishers have been updating the original ‘standards’ – most of these are however seem to be based on those published by the professional bodies. There have been some innovative approaches too – including at least one that allows practitioners to use an online facility to pick and choose which sections they want to include and for a tailored letter to then be created very quickly and simply.

Anyway, I was asked to write a piece for Taxation magazine about the new guidance and speciman documents. I understand that this will appear next week. Copies of the guidance and documents should now be available from the professional bodies concerned: ICAEW, CIOT, ACCA, ICAS, ATT, IIT and CIMA.

Although the new guidance has been produced for the members of those professional bodies I have no doubt that it will become more widely available in due course. I am hopeful that our efforts will be welcomed and that commercial publishers will, in time, update their own offerings – in so far as this may be appropriate to reflect the latest guidance. I am happy to assist in resolving any queries in this regard.

Partnership tax returns - submission deadline 31 October

Following the publication of our practical tax update for general practictioners this week, I have been thanked for the reminder it contained about the new submisison deadline for hard copy (paper) tax returns.

I thought twice before incoluding the piece as I guess we've all known about the new deadline for some time. Still, if it helps one person...

The reader who thanked me had actually read something into the piece that was not explicity stated. And as it's likely to be relevant to so many firms of accountants I thought I'd highlight the point here.

If your partnership return is going to be filed other than electronically, you will need to get it ready to submit by 31 October. It's all very well focusing on the rules as they apply to clients but they also apply to practitioners.

And it's important to note that the late filing penalty of £100 per partner is NOT reduced to nil even if all partners pay any outstanding tax by 31 January 2009.

So, if you'd missed this critical implication as regards your own firm's tax returns, I'm pleased to have given you a few weeks warning! Good luck.

Please add your comments to this thread to indicate your views on this issue.

Council tax and the sex lives of taxpayers

Now there's a subject that I didn't anticipate I would ever address in this blog. Council Tax.
I picked this up from the Sunday Times who reported on it yesterday. It's also covered in other media too.

If further evidence were required of the inability of tax policy makers to appreciate the consequences of their decisions, this is it. OK, it's not one of the taxes dealt with by HMRC but it could quite easily be so. The paper reports that:

Local authorities have adopted the techniques after the government urged them to carry out “spot checks” on properties where a single-person council-tax discount is claimed.

Given the transient nature of many relationships and households these days a tax system that provides for discounts if you CLAIM to be living alone is ripe for abuse. There are only three options;

1. Reform the system
2. Accept the abuse
3. Discourage the abuse by checking up on people

And it is option 3 that is being followed here:

Undercover snoopers are being used to find out how often lovers visit and whether supposedly single residents are sharing a bed every night with the same person.

To my mind a system that necessitates such checks requires revision. It is a disgraceful intrusion into how people run their lives. I entirely accept that there is a high probability of widespread evasion and abuse of the current system. Even if these spot checks were morally justifiable they will not have enough of an influence on behaviour. As such they are all but pointless and will merely serve to increase the overtime claims of voyeristic Council staff.

The only logical way forward is to reform the system.

Don't hold your breath.

Dispensations dispensed like smarties

I've long been an advocate of employers seeking dispensations to cover straightforward business expense reimbursements. But I've just learned something rather shocking. Let me explain.

First, some background.
If the application for a dispensation is agreed by HMRC the employer has a reduced compliance burden. The other advantage is that the employees do not have to include the expense reimbursements on their tax returns and claim tax relief - to avoid being taxed thereon.

Earlier this year there were reports that HMRC was cracking down on contractor umbrella scheme dispensations. HMRC announced that they would not tolerate negligence or misrepresentation. They would be looking to identify expenses and benefits provided under a dispensation when they should have been subject to income tax and NICs. In such cases, said, HMRC they would pursue retrospectively the income tax and NICs liabilities due when the expenses payments and benefits were originally provided.

And it is these same contractor umbrella companies (and agencies) that are the target of a recent discussion paper, published jointly by HMRC and the Treasury, on tax relief for travel expenses. It focuses specifically on 'temporary workers and overarching contracts'.

Following on from the earlier announcement we learn (at para 6.2) that:

"some umbrella companies and employment agencies often urge their employees to claim the maximum amount their dispensation allows, regardless of whether these expenses were actually incurred, or that the underlying journey actually qualified for relief."

And at para 6.4 that:

"Evidence, both from HMRC compliance activity and anecdotally from the sector, suggests that the abuse of dispensations by umbrella companies is widespread"

So, you might wonder, as did I, why do HMRC continue to dispense dispensations like smarties when they are rightly concerned about the potential for abuse?

It was when reading Anne Redston's excellent Comment article on this subject in the current issue of Taxation magazine that I learned the answer and identified a solution.

Anne asks the same question as do I. She notes that:

The difficulty, apparently, is that HMRC have no way of identifying the umbrella companies in advance. The tax office receives a fairly standard dispensation request, and, in the interests of reducing red tape, agrees it, only to find out later that it is an umbrella with 3,000 temporary workers."

Is my answer to that issue too simple? It must be or surely HMRC would already have changed their procedure. Couldn’t HMRC simply put a cap on the number of employees that would be covered and the aggregate amounts that can be paid within the exemption granted by the dispensation? How difficult can it be to amend the application form? Or am I missing something obvious?

"Paying tax is entirely a question of personal choice"

There are not many things in life that I hate. But I do hate the way that some authors and publishers of tax books mislead their target audience with hyperbole.

Where this happens it must be due either to a deliberate ploy or due to naivety. I appreciate that some publishers may fall into the latter category. But there is no excuse when an author claims to be a tax expert and has evidently written the hyperbole themself. It is the deliberate intention to mislead that I hate.

In this context I recently came across an Advertising Standards Authority (ASA) report that upheld a number of complaints against the direct mail promotional pieces for a publication allegedly written by "a specialist tax advisor" who claims to have:

"been in this game for over twenty years. I have worked closely with ex-Inland Revenue and HM Customs and Excise Inspectors for most of my working life, so I do know what I'm talking about. My clients are mostly wealthy people who I assist to avoid paying tax ... my client list is full and I can take on no more people. And yet I have a yearning to distribute my specialist knowledge to as wide an audience as possible."

The ASA upheld complaints that a number of the promotional statements used in the direct mail piece were misleading in so far as the book "How to avoid paying taxes" was concerned:

The publishers asserted that the statement "Paying tax is entirely a question of personal choice" was correct. They said that individuals could use trusts, offshore tax structures and tax havens to avoid paying tax. They said a simple strategy to avoid paying taxes was to move offshore either physically, by incorporation, by using trusts or moving all assets offshore; they said strategies incorporating some or all of those options might allow an individual to eliminate paying any UK taxes.

The ASA considered that the claim "paying tax is entirely a question of personal choice" in the mailing implied that all readers could choose to stop paying all UK taxes if they wished. Because that was not true, the Authority concluded that the claim was misleading. It told the advertisers not to use the claim in future.

The publishers asserted that the statement "How to cut your income tax bill in half, literally" was true as the book explained how individuals could halve their income tax bills, for example, by redistributing assets between spouses, using dividends, using tax free investment vehicles, establishing trusts and incorporating private companies.

The Authority acknowledged that the book explained how tax deductions on savings and assets could be reduced and how self-employed individuals could reduce their income tax payments. It considered that the claim "how to cut your income tax bill in half, literally" would be understood by readers to mean that the book explained how tax on earnings could be reduced by most readers and not just the self-employed. It concluded that the claim had not been substantiated and was misleading. It told the advertisers not to repeat the claim.

The publishers asserted that the statement "How any self-employed person can defer paying taxes indefinitely" was true as self-employed persons could defer income taxes by incorporating their businesses and using offshore vehicles. They said the statement "how any self-employed person could defer paying taxes indefinitely" referred specifically to the deferral of Capital Gains Tax on the sale of a business.

The Authority considered that the claim "how any self-employed person could defer paying taxes indefinitely" would be understood by readers to imply that the book explained how all self-employed persons could defer paying all taxes indefinitely, and not Capital Gains Tax on the sale of businesses only. The Authority told the publishers to qualify the claim in future to make clear that it referred to Capital Gains Tax on the sale of businesses only.

The ASA report in question is three years old (it's dated 24th August 2005) . However the same alleged author and (presumably the same publisher) are still promoting what appears to be much the same book via a number of websites. And on those websites we still find the three offending statements:

• Paying Tax Is Entirely A Question Of Personal Choice;
• How to cut your income tax bill in half, literally; and
• How any self-employed person can defer paying taxes indefinitely.

I hate that anyone would be mislead by such nonsense. And I hate the fact that books and reports such as this one, that pander to those who fall for this hyperbole outsell the more honest books that tell it how it is. If it were simply marketing spin it would be bad enough but everyone involved in this book has known for at least 3 years that there are at least 3 unacceptable statements in the marketing material. It does neither the publishers nor the author any credit to continually ignore this fact.