Tax tosh of the week: 50p tax rate to STAY

Another day, another report about how the 50% top rate of income tax is BAD for the British Economy. This week it is the respected UK Centre for Economics and Business Research (CEBR). In September it was a group of 20 high profile economists.

Let me be clear I don't WANT to pay over half my income away in taxes - who would. (It's over half, by the way, as most high earners also pay an extra 2% NICs). I don't think the 50% rate is a good thing. BUT equally I cannot, for one moment, imagine that the Coalition Government are going to abolish the 50% rate any time soon. The CEBR report is balanced and fair but it's clearly intended to influence the Chancellor and the Coalition Government. In this it won't succeed.

Now, if someone were to be rather more imaginative, a different campaign might have more chance of success. How about showing what the impact would be of raising the income level at which the 50p rate starts from £150k to say, £250k? Clearly this would reduce the tax take but not by benefiting the 'super-rich' - by definition. It would however reduce the concerns of the vast majority of 'ORDINARY' business owners who MIGHT otherwise feel demotivated by the prospect of paying 50% tax. Remember that the rate is actually higher than this for many people earning between £100k and £150k.

As I've said before though at this stage NO-ONE yet knows how much tax the 50% rate is generating. All the reports, letters in the press and campaigns are based on speculation. The CEBR report admits as much.

I have explained the rationale for my observations and predictions before (see below). So today I will simply present the CEBR with my Tax Tosh of the week award.

Related posts

17/8/11 - Why we will have at least 3 years of 50p tax

29/7/11 - Tax tease of the week: Cutting the 50p top rate tax

5/4/11 - 50% tax rate announced in Budget 2009 but 2 years on and the self employed haven't paid it yet

12/1/11 - Tax tease: Fallacious demand to "Abolish the 50p tax rate"

Did Vince refuse to engage in tax 'avoidance'?

Leaving aside Vince's well publicised Tax Mistake on which I commented in my last blog post, there is another angle to the story.  Did Vince refuse to engage in what he perceived to be 'tax avoidance' even though the facility in question is set out very clearly in the rules?

I was wondering why Vince's accountant (Myrus Smith) hadn't encouraged him to register for VAT long before the problem became apparent.

They seem to be a reputable firm and I suspect they did give him the advice any decent accountant would have done. But clearly Vince did not register early.  He also seems to have ignored the standard advice that he would need to monitor his income as the year progressed, and then register for VAT once his earnings were likely to exceed the registration threshold.  This is of course harder to do in practice than in theory - despite the rules.

I suspect that his accountants gave him good advice. I suspect that they explained to Vince that he could register for VAT even when his earnings were below the VAT registration threshold. And that if he did so it would reduce his taxes.

There are two angles here. The first is that once registered Vince would simply be charging his clients VAT and then paying over this VAT to HMRC. But it would also mean that he could claim a reduction for the VAT he paid on all business related expenses. This would have saved him money.

The second angle is that he could have registered to use HMRC's official VAT flat rate scheme. This is particularly beneficial for smaller businesses with very low outgoings. I suspect Vince was in this position and could have saved hundreds of pounds a year had he registered.


But to Saint Vince, both of the above tax savings might have sounded like 'tax avoidance'. As such he probably chose not to register for VAT before it was necessary and then lost out by leaving it too late.

If I'm right this is as good an example as any that the term 'tax avoidance' is being used too widely.

What do you think?

Vince wins Tax mistake of the week - tho there's more to this than meets the eye

I couldn't resist bringing this blog out of hibernation to comment on the story about Vince Cable and the £500 fine he paid for failing to register for VAT. (And who can blame the Sun for reporting this under the headline 'Vince Avoids Tax').

Of course he wins my Tax Mistake of the Week award.

But I have some questions that the mainstream media seem to have missed. And in so doing they have misreported the story.

1 - Did Vince or any of his staff issue invoices for the fees and royalties that he earned during the year in question? If not how will he satisfy HMRC re the adequacy of his books and records? (I mean his accounting books and records, not the book he wrote or his Dancing records!) Let's assume the answer to this questions is 'yes'.

2 - Was VAT added to the fees he charged? If so, the invoices will have falsely suggested to his clients and publisher that he was registered for VAT and they will have accounted for VAT in error. So this probably didn't happen.

3 - But, if VAT wasn't added then his taxable income will have been overstated. Has he claimed his tax refund? For example on just one invoice he would have paid income tax on £8,000 but HMRC have now deemed this to include VAT such that his taxable income should be reduced to £6,667.

4 - How much has this error really cost Vince?
If his taxable income is now lower than he thought he will also have gifted more to charity than he intended to do so. In the above example, Vince is said to have gifted the KPMG fee of £8,000 to charity (under Gift Aid presumably).  He has sufficient other income to cover this but his 'embarrassing' error has cost him more than the fine. He's out of pocket by the excess donations to charity. And if he hasn't claimed back the additional income tax then that's a further cost too.


There is also the question of whether Vince would have been treated as generously by HMRC under the new new penalty regime. And whether he received any special treatment.
I doubt we will ever know.


Let me be clear. I sympathise with Vince's embarrassment and agree that he did absolutely the right thing in sorting things out, unprompted, as soon as the oversight was brought to his attention.  He neither sought to nor did he avoid any tax. Indeed he may well have refused to engage in what was to him tax avoidance by registering early for VAT. (See next blog post).


The above points are relevant to each invoice Vince issued for his speeches and for his book royalties. For example it has been reported that Vince charged £8,000 for a speech to KPMG. Did he invoice £8,000 or £9,600 (being £8,000 plus VAT)? If he only charged £8,000 then HMRC are deeming this to be VAT inclusive. The VAT included in such a fee would be £1,333 leaving net earnings of £6,667.

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.

Evan loves tax

The BBC's Evan Davis has a series of programmes at 9am each morning on Radio 4 this week in which he explores our vexed relationship with tax.

I caught part of yesterday's episode during which Evan interviewed:

John Whiting twice - once in his capacity as Technical Director at CIOT (and an ex PwC partner giving tax advice) and later as "interim head" of the new Office for Tax Simplification.

Dave Hartnett (before last week's media frenzy) - who explained his distinction between tax avoidance and aggressive (and implicitly unacceptable) tax avoidance - which results in HMRC petitioning Government to change the rules.

Lord Howe and Lord Lamont - two ex-Chancellors

Each episode is available on BBC iplayer for a few more days if you care to listen.

Tax truism - our tax system is more complex than it needs to be

On his President's page in the January 2010 issue of Tax Adviser magazine, CIOT President Andrew Hubbard puts his finger on one of the many problems with our tax system that resulted in me choosing to cease giving tax advice myself.

Andrew says, in the specific context of a merger between two large accountancy practices, but referencing commercial transactions generally:

"It is extraordinary how often most of the big commercial issues can be agreed without too many problems, but then some obscure technical issue - which is of course completely impenetrable to all but the tax experts - comes up and threatens to derail the whole process."

I made a similar point as regards more day to day complexities in my Taxation article in 2008. I indicated that I had reached the limit as to the number of times I could explain to clients that:

• despite being law abiding citizens and in principle deserving of a widely available tax relief, their circumstances took them just outside the qualification criteria;
• there were apparently arbitrary distinctions in the tax code and inconsistencies in HMRC practice;
• there is a continued absence of tax rules to reflect the new working practices of the 21st century;
• we cannot appeal HMRC's refusal to apply a concession or statement of practice (as we are 'taxed by legislation, and often only untaxed by concession');
• tax credit claims can only be backdated by three months. Thus if you unexpectedly make a loss in your business, you cannot claim the tax credits to which you would have been entitled if you made a claim (for no credits) at the start of the year, just in case you made a loss;
• there are different rules for computing income for income tax, National Insurance and tax credit purposes;
• bizarre arguments and distinctions are highlighted in tax cases, albeit that I can sympathise with HMRC to a degree when it is evident that clever tax advisers have encouraged their clients to push the envelope.

Any more suggestions for undue complexities?

New tax rules on pension contributions favour Ministers

Bill Dodwell, head of the tax policy group at Deloitte suggests that HMRC's analysis of the tax gap could have a previously overlooked reason for non-collection: "daft law"

Bill makes the point in the January issue of Tax Adviser magazine after referencing the new extension to restricting tax relief for pension contributions in respect of high-earners. He points out this led to a 115 page document to explain how the rules will work and asks, quite reasonably:

"Didn't it occur to anyone that if the chancellor wanted to restrict tax relief, a simple flat-rate amount would be the solution?"

This tax change was announced in Budget 2009 last March and included what were called 'forestalling measures' which led me to write a piece last May: Pension tax changes that hit high earners NOW.

I remain of the view I first expressed last May that the new rules were refined to reduce the potential impact on ministers and civil servants. In effect this is another example of taxing 'real people' without impacting those in power. But it's been done in such a way that Ministers can deny that they are receiving beneficial treatment - unlike the position with MPs' severance payments and MPs' expenses. With the pension tax changes there is no specific exemption - it's just that Ministers and civil servants are among the very few high earners still in final salary pension schemes and are thus unaffected.

Special tax rules for MPs are wholly indefensible in all but the most extreme cases and those who argue otherwise are clearly unaware of what goes on in the real world.

IR35 rules are not being applied to BBC freelancers

There is no mention of IR35 in an otherwise balanced article in today's Sunday Times under the heading: "BBC advises stars on avoiding tax". And yet, unless we expect BBC freelancers to be subject to a different regime to everyone else, the rules in IR35 are clearly very relevant. Let me explain:

When I first saw the article I thought 'Here we go again'. I expected it to be a biased piece about how the BBC encourages its freelance presenters to provide their services through personal service companies.

That message was indeed the thrust of the article although it was far more balanced and informed than the opening paragraphs had led me to expect. I suspect the input of Richard Murphy who is quoted later in the article and who may well have influenced the tone and coverage. It is still misleading in part though and this is largely a function of undue complexities in our tax system.

The use of personal service companies really took off shortly after Gordon Brown introduced a 0% (and later 10%) rate of corporation tax. Many genuine freelancers set up such companies to reduce the effective rate of tax on their incomes. The overall benefits of such arrangements have significantly reduced in recent years such that some contractors (and even BBC stars) could end up out of pocket if they use a company structure without a great deal of careful thought and planning.

Many large corporates though have also, over the years, insisted upon the use of personal service companies by their contractors. This is to enable the 'employer' to pay the contractor's company without having to worry about PAYE or employment law. Such an approach reduces the 'employment' cost to the 'employer' and shifts any tax risk to the contractor - who might otherwise be deemed to be an employee. This seems to be what the BBC has been told by HMRC.

The tendency for people to seek to reduce the tax on earnings through the use of personal service companies was the rationale for the now notorious 35th Inland Revenue press release notice on Budget day 1999. Ever since then 'IR35' has been used as an abbreviation for the subsequent legislation that applies to personal service companies.

I have written previously on this blog about IR35 and how fears about it's application are often overstated eg: Is it IR35 or the pressure to work as a quasi employee?

The key points in the Sunday Times article then are:

• Many BBC stars have set up personal service companies to avoid the new 50% tax rate that comes in next year. - IF, and only IF the stars in question were previously on staff then this may be a fair accusation. I suspect however that this is journalistic licence and that the use of personal service companies long predates the announcement of the imminent new top rate of tax.

• HMRC told BBC to either take the freelancers on as employees or require them to set up personal service companies. - This is the advice that tax advisers often provide to employers whose freelance workers are at risk of being identified as employees. It shifts the tax risk from the 'employer' to the 'employee'. When an employer, such as the BBC is found to be making payments to freelancers who are later identified as employees the 'employer' becomes liable for back taxes and penalties for failing to operate PAYE. If a freelancer supplies their services through a personal service company it is that company that becomes at risk if HMRC challenge the disguised employment status of the BBC stars. If HMRC did suggest this to BBC then clearly HMRC considers that the freelancers are potentially BBC employees - under the arrangements then in force - which may of course have since changed.
  

• The arrangement is less beneficial for the British taxpayer - This is because the BBC is avoiding the payment of employer NICs on payments that would otherwise be 'salaries' and because the tax payable by the stars (looking at both the corporation tax payable by their company and the income tax they pay on money paid out of their companies) is less than the PAYE tax that would be due on their 'salary'.

• Many freelancing BBC stars are effectively employees (as are those named as such in the article) - In which case surely HMRC plans to apply the IR35 rules to those companies. And if successful then the only people to lose out will be the stars themselves. IR35 effectively removes the hoped for tax saving that comes from paying corporation tax and then dividends - with income tax due thereon at a later date. But if HMRC plans to attack the companies using the IR35 rules surely the article would have reported this?

And yet there is no mention of IR35 in the article. My conclusion is that either:

• HMRC are not seeking to challenge the disguised employment status of freelance BBC stars;
• The employment status of the freelance BBC stars in question is NOT as cut and dried as the article suggests;
• HMRC do not want to risk losing what would be a high profile case that exposes the flaws in the employed vs self employed rules which are one of the foundations for the IR35 rules;
• The article has omitted reference to the contrary argument that would make the piece less newsworthy.

Answers on a post card (or as comments below please).

ps: If you want a smile - check out the sponsored links on the Times own website if you search for - tax bbc freelancers (Surprisingly the article I was seeking didn't appear though!)

UK tax law ruled illegal by EU Court

To be fair this concerns a tax that will affect very few of us - stamp duty reserve tax (SDRT). The principle though has wide implications. The case in question involves HSBC which has just won what is predicted to be the right to a tax repayment of £27m after the European Court of Justice ruled that a tax [HMRC] has collected since 1986 is illegal.

It seems that elements of the law concerning SDRT have always been incompatible with EU law such that refunds will be available dating back to when the tax was introduced. In the light of this decision the government scrapped the tax on some share transactions yesterday after the European Court of Justice ruled it breaks EU law. The Telegraph reports that the UK Treasury (ie: the taxpayer) could be "forced to repay as much as £20bn to companies" as a result of this ruling.

One of the arguments employed in the battle against abusive tax avoidance and tax evasion is the rule of law. We should all comply with it. And of course we should. Equally so should the Government.

There are numerous cases however making their way to or through the European Court because the Government has not complied with European law - when framing or amending UK tax laws.

Where such allegations are made the cases are staunchly defended by HMRC on behalf of the Government. Many such cases are the subject of Group Litigation Orders - where a number of taxpayers claim that the UK law is incompatible with European law and thus the tax in question should not be paid or should be repaid to them.

As is well known I am no fan of abusive tax avoidance schemes. I am even handed however and am also disappointed when HMRC pursues cases that should never have come to court.

I'm no lawyer so would not presume to construct a legal test. However I do see a difference between those cases where:

• the EU law was not properly considered when the UK law was framed; and those cases where,
  
• after full consideration, the UK law was crafted in an effort to avoid the restrictions imposed by EU law.

Some might argue that the latter can be compared with contrived avoidance schemes and that consistent principles should be applied to deny both types of cases from having the desired impact - partly to discourage future such attempts to achieve the same ends. The alternative view, which I tend to prefer, is that it is perfectly proper for a sovereign state to want to retain the power to impose taxes and that to do so it has to examine the EU law to ensure that it is not breached. Occasionally the wrong conclusions will be drawn.

The real problem however comes when others take a contrary view and secure convincing legal backing for this. I imagine that HMRC does not want to have to admit that it's advice or parliamentary draughtsman made a mistake. Rather let the Court decide even in the face of compelling evidence. This ensures that the issue takes years to resolve even if it also costs hundreds of thousands of pounds in legal fees. My heart says this is what must happen in practice but my head tells me to believe that HMRC no longer pursue cases where they have been advised they have a less than 60% chance of winning. The sums involved in cases such as this however probably make the gamble worthwhile as the cost of fighting (even with only a small chance of winning) is so low - relative to the cost of losing or of giving in before going to Court.

In this latest case HSBC has won its case that the UK stamp duty reserve tax it was charged when it bought CCF, the French bank, contravened EU law. HSBC was fighting for, we are told, a refund of £27m. The full tax at stake - reports the Telegraph, could be nearer to £20bn. If this is right we should not be surprised that HMRC fought it all the way.

There have been other such cases in the past and there will be more in the future.

Lib Dems property tax suffers same fate as plans for local income tax

Some years ago I attended a breakfast presentation given by Charles Kennedy and Vince Cable at the ICAEW. They talked, inter alia, about their plans for a local income tax.

I recall asking how such a plan would work. It became evident that despite the headline grabbing idea they had not a clue about how to make it a reality. They were unable to say whether we would all have to file a second (local) income tax return or whether our normal tax returns would suffice. No thought had been given to the unwaged, employees and pensioners who were not required to file tax returns and there was no apparent understanding of the time lag before the self employed pay income tax on the money they earned. And it was also clear that the plans to establish and critically to operate a system of local income tax had not been costed - even vaguely. In short the policy was little more than an idea that had yet to be fully thought through.

I was reminded of this exchange yesterday when I heard about the (outline) Liberal Democrat plans for what was promptly dubbed a 'mansion tax'. Like many commentators my first thought was for the practicalities. Who would value these properties? How often would they be revalued and how would people with low incomes in large properties be expected to pay the supplemental council tax? Who would pay the tax on mansions owned by offshore trusts and how much would this new system cost to put in place and keep uptodate as compared with the tax it might raise?

It has since become apparent that there is little in the way of practical answers, and attempts to deflect such questions reveal a similar lack of understanding of the related issues as was apparent in the context of a local income tax.

This is a shame as, in an ideal world, we should be able to debate the pros and cons of tax policy without having to worry about HOW changes would be implemented. We should be able to discuss ideas and agree as to what would be fairer policies. Then, once there is a consensus we could work to find ways to make them a reality.

In the real world however we do not have such luxuries and have to start from where we are. If new ideas are not costed and practical they will be dismissed ab initio. That is, unless they are put forward by the Government of the day....
(How many such illogical, uncosted and impractical such plans can you think of from recent years? Please add your comments below)

Twice as much tax law under Labour as in previous 18 years

The Telegraph reports today that: UK has longest tax code handbook in the world. This allegation, proposed by the tax publishers, LexisNexis, is judged by reference to the size of their annual publication 'Tolley's tax guide". Apparently the handbook of tax legislation now runs to 11,520 pages, a 10pc increase on last year and more then double the number of pages from 12 years ago.

A similar point was also noted recently by the ICAEW, which monitors the size of Finance Acts since 1979. In it's fifth annual report of the Big Ben Statutory Tax Burden the ICAEW noted that Finance Act 2009 is one of the longest on record.

In the last 12 years, during which Gordon Brown was either Chancellor or PM, the annual Finance Acts have added over 5,300 pages of tax legislation to the statute books. This is more than a 25% increase over the previous 18 years (during which 'only' 4,000 pages were added). The average size of each Finance Act is now more than double what it was during that earlier period.

Average size of Finance Acts 1997-2009 = 382 pages
Average size of Finance Acts 1979-1998 = 190 pages

In 1982, when I first qualified as an accountant and started to specialise in the provision of tax advice it was normal to hope that one would eventually be able to advise across all areas of tax. My, how times have changed. These days few accountants and tax advisers are able to do this and even fewer would ever hope to able to do so. The wealth of new tax material each year is astonishing. And it's not just the annual Finance Acts one has to be monitor there are also:

• Statutory Instruments
• Case law
• Tribunal decisions
  
• HMRC publications and guidance
• Tax law rewrites
• and so on

I gave up giving tax advice myself 3 years ago. I decided that I no longer wanted to try to keep up sufficiently to advise clients. I admire those who continue to do so - but only if they are honest enough to admit that they don't know everything.

No one should expect their accountant or tax adviser to be fully conversant with all aspects of our tax laws. I continue to sit on the ICAEW Tax Technical Committee, alongside some of the top tax accountants in the country. Not one of them would pretend to have a full handle on all our tax laws - even in their specialist areas.

This is just one of the reasons for the existence of the Tax Advice Network - because even the best accountants sometimes need specialist tax support. If you have a serious tax problem, worry or challenge and want to consult a specialist simply use the drop down 'specialisms' menu above and choose from our members' profiles.

"Shopping receipts to expose stealth taxes"

The Sunday Times features a piece today suggesting that shop till receipts could soon include a detailed analysis showing all of the taxes paid by the business. This would include employers' NICs, business rates, landfill taxes, tax on business profits, climate levies as well as, presumably, road fund licences, import duties and anything else that the business owner fancies.

VAT vs other taxes
At the moment the only tax figure shown on receipts is the VAT that is ADDED to the charges levied by the business owner. VAT is easy to calculate as it's simply 15% (soon to be back to 17.5%) of the charges. It's a tax on the value of the goods and services provided. And it's collected on behalf of HMRC (the taxman) .

I'm sorry but the suggestion that any of the other taxes paid by the shop could be shown on the receipt is quite fanciful. Although if it were to happen I could see plenty of work for accountants to help with the necessary calculations.

Could it be done?
The report, titled, "Shopping receipts to expose stealth taxes", suggests that more than one business is doing this. Er, I don't think so. And even if they wanted to do so they would be making up the numbers.

Too many assumptions would be required to make this 'plan' happen on a widespread basis. It's just not possible to identify how much of the taxes paid by a business relate to each sale they make - at least not until after the end of the year when you know how many sales have been made and how many expenses and taxes have been paid. Then you could work backwards and show how much of each bill represented raw materials, staff costs, overheads, tax and profit.

Business benefits
Despite my reservations I do like the idea that businesses might want to do this.

Before totally dismissing the concept let me highlight one positive consequence that such an approach might deliver. That is to encourage businesses to focus on their gross margin and their overheads. Not all businesses are aware of these key metrics when setting their prices. As a result they make smaller profits than they had hoped for - or even end up with losses and possibly a failed business.

It's not that easy
After suggesting that Avanta and British Gas are considering introducing such a system the report does then concede:

"However, while Vat is a uniform 15%, critics point out that the amount paid by companies in other levies, such as corporation tax, depends on their profits, making accurate calculations on receipts difficult".

In my view, it wouldn't just be 'difficult' it would be close to Impossible - unless you include so many assumptions as to make the receipts little more than a PR stunt. And that's what this report is based on - and a successful one too I'd suggest. So well done to Michael Van Clarke, who claims to be leading the 'protest'. Just so long as no one seriously expects to see these detailed receipts appearing in shops any time soon.

HMRC welcomes the "super-rich" to a new unit

Four months after launching their new High Net Worth Unit, HMRC is reported to have written to 5,000 of the UK's richest people to advise them that their tax affairs have now been transferred.

The new unit was created to be responsible for a small number of the wealthiest taxpayers with complex tax affairs. We're talking here about assets of approx £20million or more but there is some flexibility especially if someone's assets are growing fast and also if members of a family have interconnected tax affairs. And accountants may be able to nominate clients they would like to be transferred to the new unit.

According to the Telegraph the welcome letter is couched in the friendliest possible terms and sets out what each person can expect from the Revenue's new approach:

It says the unit will: "Build relationships and develop our commercial awareness to help us better understand our customers and make it easier for you to get things right; provide a better service for you through proactive engagement and by providing a single point of contact for all your tax affairs; and encourage open communication to achieve swift resolutions to any contact you have with us."

Most of the taxpayers whose affairs have been transferred would previously have been dealt with in the 'Complex Personal Returns' (CPR) unit. That unit seems to have been a victim of its own success. Stories abound of accountants asking for their client's affairs to be transferred TO the CPR as the staff there seemed more switched on than in certain other offices. Nevertheless the rump of taxpayers previously dealt with by CPR teams have been transferred to the main Customer Operations unit in Stockton-on-Tees.

It seems likely that HMRC will conduct more real time interventions into the tax affairs of the 'super-rich' and probe deeper into their financial affairs using a wider array of information sources, including data from overseas authorities. HMRC will be as interested in determining the origins of an individual's or family's wealth as in ensuring that all tax due on income and gains is paid on time.

Do any readers of this blog have any experience of the new unit or views as to this development?

The tax simplification project is abandoned - not that it got very far

I don't think many people were surprised last week when the Financial Secretary announced that the Tax Law Rewrite project is to be wound up once the next two Bills become law next Spring.

Originally announced in 1995 the project was launched in former Chancellor Kenneth Clarke’s 1996 Budget speech. It was intended to herald the start of tax simplification and Mr Clarke suggested it was as ambitious as ‘translating War and Peace into lucid Swahili’. The project was forecast to take five years and would, he promised, translate 6,000 pages of Inland Revenue tax legislation into plain English. In the event the translation of Tolstoy's famous novel would have been easier and faster!

The Self Assessment (SA) system that had been planned for even longer was always going to be the SA system - but originally this was to stand for Simplified Assessing. But it was quickly renamed to avoid the inevitable criticism when simplification didn't happen. And it didn't.

Many people have assumed that the Tax Law rewrite project was intended to simplify the tax system. That was never it's objective. It was always focused only on simplifying the language of tax law. The first Rewrite led to the Capital Allowances Act 2001. Since then we have also had

• The Income Tax (Earnings and Pensions) Act 2003
• The Income Tax (Trading and Other Income) Act 2005
• The Income Tax Act 2007
• The Corporation Tax Act 2009
• The PAYE Regulations

The list will be completed when the current exercises are complete, leading to:

• A second Corporation Tax Bill; and
• The Taxation (International and Other Provisions) Bill, which rewrites provisions that deal mainly with international taxation issues.

This will leave the Capital gains tax legislation in a bit of a mess as those elements relevant to companies will have been rewritten but those elements relevant to other taxpayers will be left in their present state.

In announcing the (sadly as we had expected) early termination of the project, the Financial Secretary said:

"The mainstream direct tax legislation is now far more accessible and easier to apply than the legislation that went before and when the project's next two Bills are enacted, the time will be right to bring this work to an end.

This has proved to be a major task which would not have been possible without the huge contribution and dedication of everyone involved in the project. Many tax professionals in the private sector have given their time and expertise in reviewing and improving the new provisions during their development. Their input, and the dedication and guidance of the project's Steering and Consultative Committees, have been vital in achieving the excellent quality of the rewritten legislation"

In the early days of the project I was still in practice and well remember wondering if all the time and effort devoted to the project was worthwhile. I think we hoped that the issues that were revealed would lead to simplification of the tax system. Sadly this was not to be. It's long been apparent that all we have is better written legislation. It's easier to follow, more logically sequenced and easier to understand.

These are, of course, all worthy outputs - even though it makes it more difficult for experienced practitioners to find their way around the rewritten legislation for a while. But it's easier for those new into the profession to get to grips with the law and that has to be a good thing.

On occasions however newer Government tax initiatives have been legislated so quickly that 'old' style drafting has been used to amend rewritten legislation. It's all quite sad really.

In 1996 Mr Clarke said the rewrite project would "bring the benefits of clarity and certainty to businesses and ordinary taxpayers". I'm not sure that's happened.

Looking back now, what are your views on the Tax Law rewrite project and the new-style legislation?

"MPs breaking tax laws" - Surprised?

Sadly, it should come as no surprise to learn that:

MPs are regularly breaking the law by failing to pay tax on their expenses, the country's chief tax inspector told the committee probing House of Commons allowances yesterday.

As is reported in the Telegraph today.

I suggested this was the case when I was interviewed for BBC Newsnight last month. I posted a note on this blog too in which I explained why I was very doubtful that MPs had paid tax on the accountancy fees that they had claimed back as expenses.

I explained this on camera in the afternoon of 26 May and the Newsnight team then contacted the MPs concerned. Later I had a call from the journalist to say that MPs and their spokespeople were claiming that they had paid the tax due. I repeated that this was almost certainly because they didn't understand the rules. Still Newsnight had to report the MPs' assertions that they had done nothing wrong. One MP's spokesperson apparently claimed that there was no problem as the accountants' fees were paid out of taxed income so it was fine to claim them back!

I feel vindicated to note that Dave Hartnett told the Commons committee yesterday that MPs were frequently breaking the rules by failing to pay up after claiming back the cost of accountants' fees for personal tax advice on their Commons allowances.

And that Dave added:

"Over the last three months I have learned more about MPs expenses than I have over the rest of my career."

Like so many of us!

I'm hopeful that HMRC will put forward some proposals to bring MPs into line with the rest of us when it comes to determining which expenses are taxable and which are not.

Would this have Government support? I think it might - for the reasons I will explain in a separate posting about Finance Bill 2010.

What do you think?

A wild and wiki approach to developing tax law

Each year the Chancellor announces tax changes in the Budget and the legislation then appears in the Finance Bill. If there is time this is then amended to correct errors, oversights and revisions to reflect feedback from interested parties.

Sometimes draft legislation is exposed for consultation beforehand but this is very much the exception rather than the rule. This year the Finance Bill appears to have been drafted in such a rush that I'm told that some of the clauses are being corrected even without being flagged in committee (principally erroneous cross refs to section numbers in other legislation)**

Few of those who have an interest in following the progress of the Bill and of the various amendments that are tabled, withdrawn, revised or accepted, are able to do so. Indeed one wonders whether further errors will slip through due to the inability of anyone outside of Parliamentary draughtsman's office to keep track.

So here's a novel idea. Could the Finance Bill be published as a wiki? Access to the updating facility would be limited to Parliamentary draughtsman, however all commentators and interested parties would be permitted to read the Bill and to see how amendments will affect the legislation to which they refer.

I can see further applications to extend this concept. What do readers of this blog think please?

** Keith Gordon advises me that the most obvious examples are in Schedule 14 and Schedule 57 of the current Finance Bill

Free Tax Advice and Tax Help for business start-ups

Many people start up in business without first taking professional advice. That's a fact.

Many of these people are unaware of the services and advice they could get from an accountant. There is also a common misconception that all accountants are the same. They're not. Some specialise in advising business start-ups. Many others are far better at advising only established businesses.

I would always encourage a business start-up to discuss their plans with a suitable accountant. This will provide an objective insight into the feasibility of the plans and financial projections. It could make all the difference down the line - although there is a limit as to the valuable advice you will get for nothing.

One of the issues that an accountant should address are your tax obligations as a new business owner. This is not a subject that the Tax Advice Network attempts to address. Our role is more to provide support and advice in cases of tax investigations and other issues arising from the less common tax difficulties, challenges and difficulties.

But we do get visitors to our website looking for free tax advice - especially in the context of business start-ups. Whilst we don't seek such visitors the challenge is how to help them find what they want even if it's not something that we can provide ourselves.

So I was very pleased that the Tax Advice Network was selected as one of 20 trusted organisations to share some simple new tax support material and tools, tailor-made for small businesses. Included are easy-to-read PDF guides and 'bite-size' videos on a variety of key subject matters - from record keeping and how to avoid a penalty, to PAYE.

We will be incorporating links to some of this material into our website shortly. For the moment here's a link to the relevant items which are being made available through the Business Link website. Do please add your comments to this post to let us know what you think of them.

I'm also posting links on twitter and am curious as to whether that will generate much traffic to the Business link website. So far as I know we're the only one of the 'trusted organisations' to have a twitter strategy so it'll be interesting to ascertain the reach of our message after ReTweets. Please help if you care.

Tax Advice Network on BBC - twice in two days

Not strictly TaxBuzz but arguably worthy of note. I was interviewed for BBC's Newsnight programme on Monday evening and subsequently appeared live on BBC's Working Lunch programme on Tuesday.

For Newsnight I think they filmed about 15 minutes of Q&As and broadcast just 15 seconds.
(It's around 19 minutes in if you're desperate to catch it on BBC iplayer for the next few days).

For Working Lunch my piece was somewhat longer - about 3 minutes of air time right at the start of the programme.

On both occasions I was asked to comment on Flipping properties - avoiding CGT when you have more than one main residence - partly on the back of the TaxBuzz blog comment I wrote on Sunday.

Newsnight simply used one sentence I said, in the context of the final 3 years deemed useage rule for property that has at some stage been your main residence: Looked at objectively one has to question whether the rule has remained in place and as generous as it is because so many MPs are able to benefit from it.
After all how many other people take 3 (or even 2 years as it was previously) to sell their old house after buying a new one?!

On Working Lunch the journalist explained the basic 3 year 'overlap' rule then Declan Curry (the presenter) asked me to explain the facility to elect which of two properties is your main residence. I also had to explain the rent a room scheme and the charge to CGT if you sell a rented property. So, not much to squeeze into 2 or 3 minutes of airtime!

Budget tax changes can't help self employed until 2012

Although written in advance of today's Budget I can predict with reasonable confidence that most tax changes announced later will have NO IMPACT on our pockets until January 2012. That's right 2012 (twelve).

Let me explain:

The current tax year (2009/10) started on 6 April 2009. It ends 5 April 2010. There is almost no prospect of the Chancellor changing the rates of income tax that we pay in the current year. The new rates and allowances that took effect from 6 April were announced last year.

In any event, although employees pay tax each week or month through the PAYE system, the self employed pay tax in 3 instalments. If the rate of tax payable for the current year were to change this will only impact the tax paid by the self employed on 31 January 2011.

If, as is more likely we are told of tax changes that come into effect from 2010/11 - then the impact will not be felt by the self employed until 31 January 2012. This is when they will be liable to pay the balance of their tax bills for 2010/11.

The same dates are relevant for Capital Gains Tax. Thus:
For capital gains made in the current tax year - the tax will be payable on 31 January 2011.
For capital gains made after 6 April 2010, the tax will not be payable until 31 January 2012.

Hope that helps clarify things. Now let's see what Mr Darling has in store?

Two dozen tax changes this year announced BEFORE today's Budget

Let's see now. What's more relevant to hard pressed taxpayers struggling with the impact of the recession? The announcements that the Chancellor makes later about FUTURE tax changes? Or the tax changes that are impacting the tax payable THIS year?

I have explained in a separate blog that there is invariably a long time lag between Budget announcements and the time that they actually impact the tax bills payable by the self employed.

With due credit to the ICAEW Tax Faculty, (who first collated a list) here's a list of 24 tax changes that will have more of an immediate impact than almost anything the Chancellor might mention during the Budget later today. (NB: Tax rates and allowances for 2009/10 appear at items 1 and 2 of the second list 'From 6 April 2009'):

From 1 April 2009:

1. New powers and safeguards covering PAYE, VAT, Income Tax, Capital Gains Tax and Corporation Tax. I've blogged about these here and here.
   
2. New time limits for tax claims and assessments. Many are now 4 years rather then the 6 years they were previously.
   
3. New two-tier system of tax tribunals - a 'first-tier tribunal' and an 'upper tribunal'. General Commissioners, Special Commissioners and the VAT & Duties Tribunal no longer exist.
   
4. Corporation tax rates were to change but will now remain 28% (main) and 21% (small) for Financial Year 2009.
   
5. The Corporation Tax Act 2009 (CTA 2009), produced by the Tax Law Rewrite project, received Royal Assent on 26 March 2009. It came into force on 1 April 2009 and has effect for corporation tax purposes for accounting periods ending on or after 1 April 2009 and for income tax and capital gains tax purposes for the tax year 2009/10 and subsequent tax years. Although, the CTA 2009 does not change the effect of the law it does correct some minor anomalies. It also incorporates two extra-statutory concessions and one statement of practice. Particular features include the removal of references to 'schedules' and 'cases 'and the amalgamation of profits arising from UK and non-UK sources.
6. New rules for tax relief for business expenditure on cars (Corporate) – capital allowances will be dependent on emission levels. Hire charges for cars will only be restricted for cars emitting over 160g/km using flat rate of 15%. The new rules for cars are that those with:

• Emissions below 160g/km go into 20% pool
• Emissions over 160g/km go into 10% pool
• 100% FYA still available for cars not more than 110g/km

7. Headline rate of Industrial/Agricultural Buildings Allowances falls to 2% (was 3%).
   
8. Amended loan relationship rules for accounting periods beginning on/after 1 April 2009. Where one company releases a trade debt owed by another, the debtor will not be charged on the amount released. As before, the creditor company does not get relief for the amount written off.
   
9. Changes to simplify the entry and leaving rules for small businesses using the VAT flat rate scheme, see PBRN25, 2008 Pre Budget Report Notes. The entry test requiring total business income to be less than £187,500 is removed completely. Eligibility to join the flat rate scheme will be determined solely by the turnover of the business.
   
10. VAT staff hire concession ends (announced in Budget 2008). This had allowed employment businesses supplying temporary staff to charge VAT only on their own fees and not on wages paid by the client to workers.
    
11. Turnover ceiling for using a published VAT retail scheme is raised to £130m, , see PBRN24, 2008 Pre Budget Report Notes.
    
12. Newly rated premises qualify immediately for small business rate relief.
    
13. For 2009/10 only empty premises with rateable value below £15,000 are exempt from business rates.
    
14. Expenditure incurred on or after 1 April on restoring long term derelict land may qualify for land remediation relief.

From 6 April 2009:

1. New rates of tax free allowances for 2009/10: eg: personal allowance up from £6.035 to £6,475
   
2. Income tax rates and bands for 2009/10 eg: basic rate of 20% (unchanged) will now apply to incomes upto £37,400 (previously £34,800)
   
3. Employers with 50 or more employees have to file their employee starter and leaver notifications and similar pensions notifications online.
   
4. Mandatory e-filing of PAYE end of year returns by small employers (<50>
5. A new A4 version of the P45 form replaces the old style A5 form.
   
6. Changes to form P46 (Car), used for reporting the private use of cars supplied by employers.
   
7. Benchmark rates for day subsistence introduced - HMRC have introduced a set of benchmark scale rates that employers can use to make certain day subsistence payments free of tax and NI to employees who incur allowable business travel expenses. Employers do not have to use the benchmark rates. They can reimburse their employees' actual expenditure or apply to HMRC to agree a scale rate appropriate for their business needs in a dispensation.
   
8. Only earnings up to ‘upper accruals point’ of £770 per week will accrue entitlement to the income related S2P. Earnings between UAP and upper earnings limit incur additional NIC but for no extra pension. Upper earnings limit rises from £40,040 to £43,875, giving an increase in annual NIC payable by many higher rate taxpayers, of £383.
   
9. Leaflet IR20 replaced - Booklet IR20: Residents and non-residents – liability to tax in the United Kingdom has been replaced by booklet HMRC6: Residence, domicile and the remittance basis. Any practices associated with IR20 – whether overtly expressed or not – will not apply from 6 April 2009, unless provided for outside of IR20 (in statute law, in case law, in a published extra statutory concession, or in a guidance note).
   
10. New rules for tax relief for business expenditure on cars (unincorporated businesses) as for companies, see above.