Calculation re Tax Freedom Day seems to be flawed

According to the Adam Smith Institute - and as faithfully repeated without question by the media - today, 30 May 2011, is 'Tax Freedom Day'.

30 May is the same date as they reported in 2010 but the Institute has issued a press release that suggests there is a 3 day difference! (The 3 day movement was actually from 2009 to 2010). Here is the Institute's own record of the dates over the last ten years.

2001 - 5 June

2002 - 27 May

2003 - 24 May

2004 - 26 May

2005 - 30 May

2006 - 1 June

2007 - 1 June

2008 - 2 June

2009 - 27 May

2010 - 30 May

2011 - 30 May

I've never been a fan of this calculation of the notional day in the year when the average person has earned enough to pay his or her annual tax bill. The concept of Tax Freedom Day was developed in 1948 by a Florida businessman. The Adam Smith Institute's records of Tax Freedom Day date back only to 1963.

I've checked back and can find no reference to the 2010 date being revised. All reports show it as being 30 May - the same as this year. How odd then that The Institute explain why Tax Freedom Day is 3 days later than in 2010. Apparently it is because the government has raised VAT. The Telegraph notes that:

"Increased National Insurance Contributions (NICs) and restricted personal allowances added to the burden."

It seems to me that either the calculation of Tax Freedom Day is flawed - as it doesn't reflect the tax increases mentioned in the reports, or else the calculation evidences the absence of any overall increase in the taxes paid by the average person compared with last year.

What do you think?

15 Arrests prompted by 250 strong team of HMRC investigators

If I hadn't seen the official press release on HMRC's website I wouldn't have believed it. Despite all the ongoing cut backs HMRC can afford to allocate around 250 investigators to a single long-running enquiry - codenamed Operation Enigma.

Last week 15 arrests were made when the HMRC team were assisted by officers from a number of police forces, in carrying out over 20 property searches in Rochdale, Manchester, Bradford, Southport and Nottingham as part of the enquiry.

The HMRC investigators were from HMRC’s criminal investigation team. Little further information has been provided as the investigation is continuing.

We might not like HMRC's ability to enquire into our tax affairs but who would pay tax if there was no such threat or penalty for failing to do so. I'm pleased to note that it's not just the little guys being targeted. It's great to hear that HMRC do still have the resources to tackle the threat of widespread tax evasion. Although the press release references money-laundering and the proceeds of crime, HMRC's involvement suggests that the crime is tax evasion.

HMRC targets VAT cheats - or rather, it will do soon...

At last HMRC have decided to take advice BEFORE they announce a new plan to crack down on tax evasion.

Previous campaigns have targeted offshore investments, medical professionals, the restaurant trade and people working in the plumbing industry. In the latter case though, anyone could take the opportunity to 'come clean' under the terms offered by HMRC.

The latest initiative will focus on those individuals and businesses who are trading above the VAT threshold (£73,000) but who have not yet registered for VAT. It is likely to start "late summer".

This time around HMRC's initial announcement is simply that they are holding talks with interested parties. These will include the accountancy and tax professional bodies which have all been critical of elements of previous initiatives behind the scenes. This is implicitly accepted in HMRC's press release which states that:

“Our aim is to get as much input as possible into our future campaigns so that the views and experience of people and organisations outside the department play a fuller part in what we design for customers."

In due course, this VAT related campaign is likely to offer taxpayers simple, straightforward opportunities to put their records in order on favourable terms. As previously noted on this blog though the focus is on capping the penalties payable. All tax and interest on late paid tax is always collected.

After the 'amnesty' period HMRC activity will focus on the non-compliant who choose not to take up the opportunity. HMRC typically use new technology and legislation to gather and analyse data, from internal and external sources, to identify people who should come forward. This has provided thousands more investigations, now being worked through, including a number of criminal investigations.

If you regularly report turnover figures just below the threshold - watch out! You may genuinely manage your business to avoid the need to register for VAT, but HMRC will not know this. They suspect that plenty of people falsely report lower than true turnover figures and are pocketing the VAT they are charging illegally as they're not registered for VAT.

Steve Baker MP wants a simpler flat tax system. WHY?

The Daily Politics BBC News reports on the spaghetti like complexity of our tax laws. No news there. What did surprise me though was the brief interview included in the piece with Conservative MP Steve Baker who advocates the benefits of a flat tax system and then reveals he doesn't understand the implications.

He was referring to a change to the income tax system. It would involve everyone paying income tax at the same rate with no reliefs or deductions other than a single personal allowance. So whether you earned £1,000 above the allowance, £10,000 above it, £100,000 above it or £1m above it you would pay the same rate of tax on your income.

This idea is not new. Back in 2005 the Conservative party commissioned an investigation into the possibility of introducing a flat tax system in the UK. Such a proposal was not in either of the Coalition parties' election manifestos. But the idea of a flat tax does 'sound' like it should lead to a simplification of the tax system. Which of course is part of the attraction.

What Steve Baker MP said in the interview though makes no sense:

"A flat tax....would be likely, based on the evidence, to raise a greater amount of revenue."

Clearly this will depend on the precise rate of tax. And if does raise more money then who will be paying that extra tax? Not the top rate taxpayers who would no longer be paying tax at 40% and 50%. On that basis alone it's a disgraceful suggestion.

In 2007 Richard Teather published a model in 'A Flat Tax For the UK - A Practical Reality'. He assumed a 22% flat rate of tax and a £12,000 personal allowance to balance the equation. It leaves no losers, ensures that those on just-below average incomes benefit most, and sees that the poorest third of all earners gain proportionately more than the richest third. Sadly it is also £50 billion short of cost neutrality. More recent estimates anticipate that we would need a 25% flat rate of income tax payable by everyone on all of their taxable income.

Like many people I'm keen to support ideas that would genuinely lead to a simplification of our tax system. Such developments would reduce the incentive and opportunities to engage in what are now known as 'abusive' tax avoidance schemes. A flat tax is appealing in theory. But only in theory. A bit like having a chocolate bath.

Key arguments here include:

• Graduates would pay the highest effective rate of tax when their student loan repayments are added to their flat tax;
• The tax burden would fall more on the 'squeezed' middle than at present due to the drop in the the 50% and 40% higher rates of tax down to the flat tax level; and
• The so-called success of flat rate tax systems elsewhere are unproven.

Other arguments are, I think, more about stressing the practical difficulties of implementing such a system. They are not insurmountable. None are. But frankly I don't see it happening in the foreseeable future.

Should HMRC's right to make random inspections be abolished?

The legitimacy of HMRC's powers were called into question last night during the annual CTA Address, given by the Rt Hon Sir Paul Kennedy, Interception of Communications Commissioner.

Speaking on the subject of 'Powers...Between Citizen and State' he suggested that the professional bodies campaign for the abolition of HMRC's right to make random inspections. He indicated that he thought that this right is neither reasonable nor propotionate.

Sir Paul considers that the risk of random checks by HMRC is unlikely to act as an effective deterrent. He likened the concept to breathalysers and said that the risk of being breathalysed seems to have little effect on those who continue to drink and drive.

I'm not sure I agree on either point. Many people have clearly moderated their drinking or choose not to 'drink and drive' due to the risk of getting caught. (NB: I think the risk of causing accidents should be the primary motivation, but I'm not sure this is always the case).

As the public become aware of the full extent of these powers I think the threat of random checks could be a powerful motivator. BUT I'm not sure that the worst offenders will operate any differently - other than perhaps to make it even more difficult for HMRC to find their ill-gotten gains in the event of a random search!

On the question of the reasonableness of their powers I have long accepted that HMRC need onerous powers to prevent deliberate defaulters from exploiting the system. Senior officials always assert that HMRC will only use extreme powers in extreme situations. The worry, evidenced by some of the questions last night, is that some of these powers are capable of exploitation and that not everyone in HMRC can be trusted to exercise the necessary restraint.

Of course all HMRC powers should be reasonable and propotionate. Before the newest powers were given statutory force there was much debate over their extent. HMRC powers were subject to more discussion documents and meetings between HMRC and the profession than on any other matter I can remember for some time. I suspect that some of the professionals closely involved felt that their concerns were not given an adequate hearing or reflected in the new laws.

The legislation introducing HMRC’s new powers to make 'compliance checks' powers was contained in the Finance Act 2008. Most of the new powers came into force just two years ago on 1 April 2009. There's a useful summary in HMRC's FAQs re 'New compliance checks'.

NB: A quick internet search for 'HMRC powers' reveals that HMRC's website on this broad subject still contains guidance that dates back to the merger of the Inland Revenue and HM Customs & Excise in 2005.

Are stamp duty avoidance schemes worth the money?

I was intrigued by a response to one of the Questions of Money items in the Times on Saturday. I had asked a similar question of a top stamp duty tax lawyer during the week.

The questioner in The Times noted that he was:

"looking to buy a two-bedroom flat in London and was contacted out of the blue by an outfit selling a stamp duty avoidance scheme."

Was it effective or too good to be true?

The answer contained good advice to the questioner that it really wouldn't be a good idea.

"The risk is that you pay a [promoter] a substantial sum to avoid tax, HMRC get wind of it, closes down the scheme and you end up having to pay stamp duty [land tax] after all, having already forked out the fee."

These schemes rely on the naivety and greed of people who object to paying stamp duty land tax. They are no doubt advised that the scheme is legal and robust. Why should anyone question this?

Last week I asked a top stamp duty tax lawyer his opinion of SDLT avoidance schemes. He said that there are NO off-the-shelf schemes around any more that work and which are legal. The anti avoidance tax changes in recent years have had the desired effect. In effect, unless one is spending more than a £1m and is willing to enter into convoluted transactions that can be complex to unwind, SDLT tax avoidance is dead.

You wouldn't think so if you look online for SDLT avoidance schemes. One promoter claims they can save you tax on the acquisition of properties worth more than £250k. At least two others set a minimum of £500k.

If you are still tempted, you may feel there is nothing to lose if the promoter promises to refund the fee if the taxman forces you to pay the tax. But who knows whether the promoter will be around, contactable, able and willing to refund the fee when that happens? In which case you would be well out of pocket and you will have had the deep joy of facing a tax enquiry. They're not much fun. Still; each to their own.

The GAAR Commandments

I was fortunate to speak with Graham Aaronson QC just before his talk at a CIOT Commerce & industry event last night. Graham is Chairman of the official UK GAAR study group set up in January by David Gauke the Exchequer Secretary to the Treasury. (GAAR stands for General Anti-Avoidance Rule).

I told Graham of the conclusion I had reached after listening to him on the recent radio programme Unreliable Evidence. I also mentioned that I had heard from others who had heard him speak elsewhere and concluded precisely the opposite. Graham told me and later repeated to the wider audience that his position is absolutely clear. He knows what a GAAR should achieve but he doesn't know if it's achievable.

It is clear that he hopes his committee will be able to formulate a workable GAAR but does now yet know if this will be possible.

During his talk Graham set out a number of key principles which, due to the way he referenced them I think we can fairly describe as the GAAR commandments:

1. Thou shalt not create more uncertainty.
2. Thou shalt not increase executive (HMRC) discretion.
3. Thou shalt not increase the burden on taxpayers or on HMRC .
4. Thou shalt not damage the competitiveness of the UK for international business.
5. Thou shalt adopt drafting that is intelligible and generally acceptable to all interested parties.
6. Thou shalt not catch transactions that would be regarded as legitimate tax planning (by sane, sober and sensible people in practice and in HMRC).
7. Thou shalt incorporate the rule in the legislation.

The third commandment means there can be no clearance procedure - which will surprise many commentators. It is only realistic if the GAAR satisfies the sixth commandment which is a pretty fundamental challenge.

As previously noted the committee's report will be published by the end of October. At this stage I wouldn't place any bets as to whether or not it will recommend a GAAR. I simply hope it will.

"Too busy for the taxman"? - don't blame your accountant

I admit I was unaware that 'British couple' Sharon and Ozzy Osbourne had admitted to owing the IRS around £1,065,000 as a result of being “too busy” to look at their finances. Now it seems they owe a further £213,000 for unpaid federal income taxes from 2007.

According to the Daily Express Sharon's schedule has left her little time to meet with her accountant.

“I cancelled two meetings with him over the past 18 months because I was way too busy. Even though he is paid to do a job, the buck stops with me. I was too involved with myself – because I think I love myself a little too much.”

I am pleased to note that Sharon is not blaming her accountant. I trust that he or she has the necessary experience to advise Mrs O on US tax matters and was aware of the likely reaction of the IRS to late filings and payments of tax. I wonder if Mrs O's UK tax position is uptodate. Our tax system is very different and it can take some time before the demands start to pile up for unpaid taxes.

It is likely that the accountant has tried to meet with Mrs O more than twice in the last 18 months. At least I hope so. It's hard to imagine dealing with her tax affairs properly with just one face to face meeting each year.

Some people want to blame their accountant when problems develop with the taxman (in the US or the UK). This is rarely fair. Most accountants will have been in regular communication and warned the client of the consequences of letting their tax affairs get in arrears. Most accountants will also stop chasing clients if their fees are left outstanding. At which point the client has no one to blame but themselves.

It doesn't pay to be "too busy for the taxman".

By the way. As from 2012 the penalties for late filed UK tax returns are increasing. If you traditionally wait until the last minute and file your tax return online in January each year, I'd get a move on. You really don't want to risk missing the next filing deadline.