Taking a break

It's been almost a month since I last posted a blog here. Only one person has asked me if I've given up. Did anyone else notice?

Over the last 4 years I've posted almost 400 blogs here at the same time as posting regular blogs, articles and commentaries on other sites. I have enjoyed the intellectual stimulation and the facility to have an easy outlet for my thoughts, advice and insights.

I haven't given up but I am experimenting with some changes to my priorities. This blog generates very little in the way of comments, feedback and links so maybe it's not worthwhile after all.

I'm sure I'll return but for now I'm focusing my energies elsewhere. Do let me know if you miss me here! ;-)

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?