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.

HMRC's agent strategy shows they HAVE been listening

The professional press has been full of knee jerk comments on the latest HMRC consultation document: “Establishing the future relationship between the Tax Agent community and HMRC”.

Like many commentators I welcome this document and agree that it foreshadows enormous changes in the relationship between accountants, tax advisers and HMRC.

I am also pleased to see that the document reflects much of the feedback submitted two years ago in response to an ill-judged and confused document: "Working with Tax Agents". This was far more adversarial and unhelpful than is the current effort.

I submitted a detailed response to that document on behalf of The Tax Advice Network. Although most of our tax advisers are members of one or more of the professional bodies, some are Qualified by Experience. This typically includes substantial training whilst working within HMRC or it's predecessors, the Inland Revenue or HM Customs and Excise. As such my comments were intended to offer an independent and more objective view than the professional bodies are able to do.

Looking back at my response I note it was very critical of the style, tone and content of the Working with Tax Agents document. I can also see that the new one addresses many, but not all, of the points I made. This proves that HMRC have been listening.

That said two specific points I made seem to have disappeared off the radar. I asked that HMRC:

• establish a Tax Adviser Review BodY (TARBY) to receive and consider reports from HMRC about tax agents whose performance may be unacceptable; and
• simplify the procedure for taxpayers to recover wasted costs when HMRC procedures and mistakes lead to increased fees from their tax agents.
  

HMRC say they will be undertaking a separate consultation over the summer re 'dishonest tax agents'. Perhaps we will then get a TARBY after all!

There are two types of tax consultation...

It was pointed out to me recently that there are only two types of tax consultation...

One - "We're doing it regardless"
That is, where HMRC, the Treasury or the Chancellor have every intention of introducing new legislation. In recent years (indeed for at least 13 years!) there were plenty of examples of where the consultation process was almost a farce. Certainly it typically wasted a lot of time given the legislation that was subsequently published with undue haste before responses to the consultation could have been properly considered. Almost as if the outcome was a forgone conclusion....

Two - "We don't really want to do this"
This is where there is no real desire for change but there is a political rationale for exploring how best to introduce a change. The tax law equivalent of kicking a ball into the long grass.
It has been put to me that the Coalition Government's proposed study into the possibility of drafting a GAAR falls into this category.

Such a view of course will be familiar to fans of Yes Minister. And it may be telling that the person who shared this view is an ex civil servant.

It would be nice to think that the new approach to tax policy making we were promised in June will involve a third type of tax consultation. The genuine one. Undertaken with no pre-determined preferred outcome. Or maybe that's just naive. What do you think?

"STOP giving tax advice - or face a charge of deliberate wrongdoing"

Of course no one needs to stop giving tax advice. And I think it's irresponsible to suggest that such a situation will ensue. But that is what some people are doing after reading the Draft legislation on deliberate wrongdoing by tax agents published by HMRC on 8 February.

The good news is that HMRC have bowed to pressure and are extending the deadline for responses to 28 April. The original deadline of 3 March (just 23 days after publication) was quite disgraceful as it gave far too little time for effective consideration and reasoned responses.

Over the last few days I have rejected the wilder fears from certain accountancy commentators that tax advice is to be banned; and at the same time I have flagged the issue for the IFA and will-writing communities, for the reasons I have set out below.

The first point to note is that the draft legislation goes WAY beyond the aspirations of the consultation document issued in December (Working with Tax Agents: The next stage). As drafted the legislation means that all Tax Agents would be potentially subject to tax geared penalties for giving advice that results in a reduction in someone's tax liability. This is clearly a nonsense and I'm sure it will be changed. As such I favour formal representations to HMRC by the widest possible range of tax agents.

In this context the draft legislation also extends the accepted meaning of 'tax agent' to include voluntary sector advisers (eg: CAB, TaxAid, TOP) and those in the financial services and will writing professions. It also extends to all employees as well the principals in firms/businesses.

I have enormous sympathy with HMRC's ambitions and am a supporter of many of the objectives set out in the Working with Tax Agents consultation documents. I can also see exactly what they were seeking to do with this legislation. Whether the parliamentary draughtsman was inadequateley briefed, chose to extend the potential scope of the rules or was asked to do so we may never know.

I have long deplored the extent to which we are already taxed by legislation and only untaxed by concession and discretion. The anti-terror laws are already used in circumstances way beyond their original intent. The original assurances given that they would not be misused are worthless. Sadly it is much the same with tax law - as those who have negotiated with HMRC will confirm all too readily. There are already too many examples of where, having been asked to trust HMRC not to abuse their powers, that trust has itself been abused.

We have also seen with the health and safety laws (in particular) that law abiding citizens end up taking things to extreme to ensure that they don't get close to crossing the line. Tax law is very different of course and to an extent HMRC want to discourage tax agents from 'planning up to the edge'. But the draft legislation is too widely drawn and too open to abuse by HMRC.

It has evidently been drafted in a hurry and needs to be revised in a number of places - not least to make clear that it can ONLY be applied to counter the real targets rather than only 'in particular' those targets. It is this prospect of wider application that is the biggest worry in my view. I confidently expect that HMRC will bow to pressure and common sense and revise the drafts now they realise how much wider it could be applied than they originally intended.

However, until the draft is amended, it says what it says and the more people who point out that it is much too widely drawn the better.

IFAs are now Tax Agents and subject to new penalties

Last week HMRC published draft legislation on deliberate wrongdoing by tax agents. This is part of the ongoing consultation re Working with Tax Agents. The legislation contains a very wide definition of "tax agents" who will be subject to penalties for "deliberate wrongdoings" - which are also very widely drawn.

It's clear to me that anyone who ever provides advice related to inheritance tax is a tax agent for this purpose. This will certainly include many financial advisers. This could have very wide repercussions for those advisers who currently believe that HMRC are not interested in their advice. This is about to change!

Remember that this legislation is focused on deliberate wrongdoings by tax agents. And deliberate wrongdoings are very widely defined by reference to helping clients pay less tax. We think that the target at which HMRC is aiming comprises 'naughty' tax schemes. However it's not currently restricted in this way. Thus it could be used to penalise far more tax agents for far more advice than you might think.

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For the record - here is the definition of 'tax agent' in para 2 of Schedule 1:

(1) A person is a tax agent if the person assists another person (a 'client') with the client's tax affairs.

(2) A person may be a tax agent even if -

• (a) the assistance is given free of charge,
• (b) the assistance is given otherwise than in the course of business,
• (c) the assistance is given indirectly to the client or at the request of someone other than the client, or
• (d) the assistance is not given specifically to assist with the clientís tax affairs, but the person giving the assistance knows it will be used, or is likely to be used, for that purpose.

(3) Assistance with a client's tax affairs includes assistance with any document that is likely to be relied on by HMRC to determine the client's tax position.

(4) Assistance with a client's tax affairs also includes -

• (a) advising a client in relation to tax, and
• (b) acting or purporting to act as agent on behalf of a client in relation to tax.

(5) If a client is assisted by more than one individual in a firm or business, each individual may be regarded as a separate tax agent.

And inheritance tax is included in the definition of 'tax' at clause 39.

What now for undisclosed offshore bank accounts?

The deadline for admitting the existence of previously undisclosed monies in offshore bank accounts expired on 4 January. Early indications are that the number of reports made to HMRC under the 'New Disclosure Opportunity' were much lower than the taxman had hoped.

If true this will be disappointing for the taxman and for the Chancellor.

What does the future hold for those who were unaware of or chose to ignore the deadline?

HMRC will, at some stage, write to offshore account holders who are resident in the UK and who are not recorded as paying tax on the interest. Such letters could start to appear as early as next month, later this year or at any time in the next few years.

Anyone receiving such letters would be well advised to take professional advice from tax investigation specialists to assist them in negotiating the best possible settlement - or indeed to make HMRC go away if there really is no undeclared taxable income.

The prospective penalties if HMRC identify unpaid taxes will now be at least 35% of the late paid tax. This will be payable in addition to the unpaid tax and interest charges by reference to when the tax should have been paid. The interest can really mount up if the tax liability has been unpaid for some years.

And the 35% penalty is simply the lowest possible charge going forwards. The maximum penalty payable at the moment is 100% of the unpaid tax. And beware: As part of his Pre-Budget report the Chancellor published a consultation document: "Modernising Powers, Deterrents and Safeguards: Tackling Offshore Tax Evasion". This included a note that:

"For periods prior to April 2009, HMRC will view non-compliance involving an offshore element as conduct of the utmost gravity, and will seek penalties accordingly. The maximum penalty prior to the introduction of the new FA 2008 penalties is 100 per cent"

The Document also suggests that:

"a taxpayer seeking to evade tax by failing to declare the existence of an overseas account or the interest arising from it could be subject to two separate tax-geared penalties. In the most serious cases of tax evasion, the sum of these two penalties could reach 200 per cent of the tax evaded."

These new rules could come into effect next year. The deadline for responding to the consultation is 3 March 2010.

The 'New Disclosure Opportunity' (NDO) was the second so-called tax amnesty operated by HMRC in recent years. The previous 'Offshore Disclosure Facility' (ODF) in 2007 raised more than £400m in revenue when offshore account holders with five major UK banks were given the opportunity to put their tax affairs in order. Now HMRC has access to information from more than 300 banks and has assured us that there will be further such tax 'amnesty' as some misleading reports describe the Disclosure Facilities. To an extent the NDO was required as the ODF had insufficient publicity; a mistake HMRC has attempted to avoid this time around.

And just a word about the separate Liechtenstein Disclosure Facility (LDF) which some very wealthy tax avoiders are hoping will allow them to come clean whilst paying less tax. Er, no. The tax and interest charges will be the same as ever. The penalty charges MAY be lower than normal but only if HMRC are satisfied that the undisclosed funds fully satisfy the terms of that Facility.

Previous blog posts on this subject:

• Offshore bank accounts - HMRC warning video
• 5 tax facts and advice if you have an offshore bank account

How many tax agents are there in the UK?

It all depends what you mean by 'tax agents' of course.

HMRC use the phrase to mean all those advisers who file tax returns or claim forms on behalf of clients. HMRC say this includes accountants, tax advisers, solicitors, payroll bureaux and VAT advisers. It also includes all such advisers who are members of one or more professional bodies and also all those who have no professional qualifications.

There is no definitive list of tax agents so we are reliant on HMRC figures and here I am struggling. The references below are to paragraphs in their recent con doc: "Working with Tax Agents".

• At para 1.2 it states that 70% are affiliated to one of the main professional bodies within the UK. And then goes on to say that 80% of agents have a professional qualification. The implication being that 10% are qualified but no longer affiliated. Even if this were the case, how would HMRC know? It seems to me that either the statistics are spurious or that HMRC has more information about tax agents than has hitherto been revealed.

• At para 5.2 it states that "at least 12,000 tax agents in business in the UK are unaffiliated to any major professional body." I wonder how this figure has been determined. Given the figures noted at para 1.2 it implies that this represents 30% of the tax agents and that, therefore there are only around 40,000 tax agents in the UK. This accords with the figure quoted on page 5 of the Impact Assessment; this states that “there are approximately 43,000 tax agent establishments in the UK who act for more than five clients.”

• At para 5.10 it states that HMRC currently recognise 80,000 agents who act for less than 5 clients, including friends and family and those supporting the not for profit community. This seems to be twice the total number of tax agents previously identified. And yet it is clearly intended to be a minority of the total number of tax agents recognised by HMRC. According to the Impact Assessment this 80,000 figure is over and above the 43,000 tax agents who act for more than 5 clients. But this fact is not made clear in the con doc itself.

So how many 'tax agents' are there in the UK? Anyone want to make a guess?

Stopping the duff accountants and 'tax agents' spoiling it for the rest

HMRC published a new consultation document last week - the latest in a series under the heading 'Modernising Powers, Deterrents and Safeguards'

The document is titled 'Working with Tax Agents' and it explores how HMRC interacts with 'tax agents' - a phrase said to include "accountants, solicitors, payroll bureaux, specialist advisers and VAT specialists." The main target of any changes that follow are intended to focus on the small number within the tax agent community whose work falls below a professional standard.

The consultation is intended to raise issues and ask questions rather than propose definitive solutions. It contains assurances as regards "the reinvigoration of regular 'working Together' meetings between groups of local tax agents and HMRC staff".

I've no doubt there will be cynics who will doubt the sincerity of some of the aspirations set out in the document. In my view however I think the message has finally got home. Accountants and tax advisers are a critical element in making our tax system operate effectively. This is something that representatives of the main professional bodies have been trying to bang home for some years now. I recall Ian Hayes, my predecessor as Chairman of the ICAEW Tax Faculty, telling us how he had been stressing this point at every opportunity some years back. And many of us have repeated it more recently.

Simply stated, with ever reduced internal resources, HMRC need to be able to rely on the work done by reputable accountants and tax advisers. If you are in practice you have a choice. You can either help your clients to fulfil their legal obligations and do so in a professional manner, or you can (deliberately or otherwise) keep your clients' tax bills to a minimum through dubious means whilst hoping that HMRC's stretched resources will not catch up with you or your clients.

Now is not the time for cynics to dismiss this invitation to contribute to the debate. I think it's a once in a lifetime opportunity to contribute to HMRC's plans to enhance its relationship with accountants and tax advisers. This invitation is a direct result of the efforts made by many in the professional bodies over many years of debate and discussion with HMRC.

The Tax Advice Network will be formulating a response and welcomes contributions from 'tax agents' who have considered views but do not intend to respond to the conultation themselves.

Do please add your comments to this blog post or email us through the feedback facility on our website.

How far can you bend the rules?

HMRC's proposed Charter starts by listing what "You can expect" of HMRC. Of the 6 items listed only one is causing particular controversy. "You can expect HMRC to...

Pursue relentlessly those that break or bend the rules"

Background
I imagine that this line has been included at the direct request of the PM who is known to harbour strong feelings about the level of 'contrived' tax avoidance schemes that 'deprive' the Treasury of tax that ought reasonably to be paid.

Indeed back in 2004 I was invited to 11 Downing Street (in my capacity as the then Chairman of the ICAEW Tax Faculty) to be told as much when the 'Disclosure of Tax Avoidance Schemes' regime was first announced. One official told me that the regime was required to satisfy Mr Brown's personal antipathy for the 'abusive' tax avoidance activities promoted by (so far as he was concerned) the largest accountancy firms. Apparently his first thoughts had been to levy a fine on the firms that had been promoting and profiting from (what was then) the almost ubiquitous 'Gilts Scheme'.

Concerns
Back to the Charter (which has also featured in previous posts on this blog). I am aware of concerns about the line I have highlighted above. And I understand these. 'Bending' and 'Breaking' the rules are two quite separate concepts. The latter is illegal. The former is presumably intended to refer to what HMRC and Government describe as 'abusive' or 'contrived' tax avoidance schemes. The problem here is that 'bending' the rules could also cover a much wider range of tax planning activities.

Playing with fire
The wording in the draft Charter is presumably intended to act as a warning that 'he who plays with fire should expect to get burned'. The targets being those who set bonfires not those who play with matches. And yet I suspect that most people attempt to bend the rules. No one wants to pay any more tax than they are required to do so by law. And the fact that it's NOT illegal is a key selling point of many a tax scheme.

To take just one example - the Money sections of the national press are often full of tips and advice to reduce your tax bills. Yesterday for example I was reading about how to realise capital losses and yet, effectively, retain the shares by using your SIPP to buy them back. This is similar to the old 'bed and breakfasting' idea of selling and repurchasing shares that used to be a common tool of tax planning. It was outlawed a few years back but variations remain legal as long as it's not you who buys back your own old shares. It's bending the rules though so would be pursued 'relentlessly'?

Employees vs everyone else
Employees (and this would include MPs and HMRC officials) can do very little to reduce the tax payable on their salaries. If they actively undertake tax planning in this regard it's likely to be a 'scheme' of some sort.

I wonder if some MPs think that the same considerations apply to companies, the self employed, partnerships and private investors? Of course they don't. The fact is that they can all undertake tax planning activities and some of these will 'bend' the rules. When such bending becomes unacceptable is a matter of opinion. It's not a simple matter of fact.

Two other related thoughts:
1 - It's also relevant to note that HMRCs resources are being reduced to the position where they are wholly unable to adopt a consistent approach to pursue those taxpayers thought to be bending the rules. So the statement in the Charter is an empty threat;

2 - Note that the sentence refers to bending 'the rules'. Is this deliberate or should it say 'the law'. The former are set by HMRC and the latter is approved (usually with only perfunctory consideration) by Parliament. But there is still a crucial difference.

My view
I've been here before. I can see both sides of the argument. The statement is controversial because it's ambiguous. It's also not going to be applied consistently due to resource constraints.

Should HMRC have the right to 'relentlessly pursue' and close down 'abusive' schemes - yes, but we need greater clarity as to what is and what is not considered 'abusive'. It's not easy to draw a clear dividing line but it's not impossible either.

I'm hoping that the consultation around the draft Charter will result in greater clarity as to how far taxpayers (and their advisers) can bend the rules without risking the wrath of the Revenue.

What do you think?

HMRC Charter - asking young people what they think

It took a year to develop and everyone recognises that the output is simply a first draft. I'm referring to the 'new' HMRC Charter for which the consultation period ends on 12 May.

HMRC have created a specific 'Charter Consultation' area of their website and last week they launched 'Charterpelago' which is 'a new consultation game' aimed specifically at a 'younger audience'. Created by Delib this is the 'e-consultation' announced when the draft charter was issued last month.

In the context of their involvement with the 'youth engagement tool' Delib's own blog asks: "is there anyone who isn’t affected by the work of HMRC?" - er, yes. YOUNG PEOPLE!

Nevertheless, young people are told on the Charterpelago site that:

"Charterpelago has been created to allow you to tell HMRC what rules you think it should include in its customer charter - the rules HMRC and its customers (that's pretty much everyone) should follow when dealing with each other."

I'm unclear at which age group the Charterpelago is aimed. It looks like a kids game and it involves clicking and draging sentences from the draft charter onto a virtual PDA. This is after choosing the look of your PDA. Finally the 'young people' choose in which order they would like to see the statements.

Let me be clear. I'm all for teaching younger people more about their responsibilities to pay tax and the various roles that HMRC fulfills. But this e-consultation is a joke. And I'm not blaming Delib. I'm not sure I even blame HMRC - it was probably Government advisers that came up with the idea.

Why do I brand this concept a joke?

1 - The consultation element is limited to asking young people to choose which statements they would keep or discard and then to decide the sequence of these in the charter; There is no facility to suggest variations - perhaps because it's clear that young people are not in a position to comment more constructively, but that's not consistent with the idea of the e-consultation.

2 - There is no context for this consultation. Young people don't pay tax. Their experiences of HMRC are entirely determined by their family circumstances and what they see or hear on TV. Their parents may pay tax. Their family may receive tax credits. Parents may have been penalised for late paid tax or for overclaiming tax credits. They may have explained their situation to their children or they may simply have expressed their views of the 'taxman'. And I'm not aware of any positive role models on TV. The only other references that young people may have noted are all the adverts (on tv, on radio and in the press) with the misleading and irritating strap line: "Tax doesn't have to be taxing".

3 - There is no explanation as to what HMRC is, what it does, why it refers to customers, the fact that it deals with tax credits as well as tax payments, what a charter is, etc etc

4 - It's hard to see how responses to this e-consultation can possibly provide any valuable input to the real consultation process. Indeed I fear that 'votes' for which of the statements should remain in the final charter will be reported as part of the overall responses without making clear the context in which such 'votes' were provided.

5 - Any responses to this supposed e-consultation will no doubt be reported out of context and to trumpet the success of asking young people for their input.

A cynic might suggest that this was all about the next General Election when Labour will need all the help it can get and wants to make clear to first time voters that it's interested in their views. Of course most of them will not have taken part in this e-consultation. But they will pick up on the media reports that their views were sought and that they will be heard. And that this will influence their vote.

What do you think? [My apologies to those who know me. Reading this back I fear I may across as an angry old man - and you'll know that's pretty far away from my normal enthusiastic and positive persona]

Instead of customers, why doesn't the taxman call us...?

Have you noticed the way that the taxman refers to you as a 'customer'?

I know it's grated with many taxpayers and accountants ever since the old Inland Revenue started to use this word some years back. Then they merged with HM Customs & Excise and the new HMRC still calls us 'customers'.

The argument they use is that they want to be able to use just one word when referring to all sectors of the public to whom they have a responsibility. That's both taxpayers and tax credit claimants.

The first alternative I come up with was 'stakeholders'. But that goes further than taxpayers and tax credit claimants.

I recently asked for further suggestions on Ecademy and received the following responses:
- Tax Liability Owner
- Victims
- Lemons (as in "squeeze them until the pips squeak")
- They can call us whatever they like as we're never allowed to argue with them anyway. So how about 'the disenfranchised majority'?
- We need to find someone involved in organised crime. There must be a common term for the people who pay a bit of squeeze for "protection".
- How about "Codees"? Anyone who deals with the tax authorities has to have a code, so that's the common element.
- I wonder how they refer to "customers" internally. Punters?
- I was going to say Victims - but, as that's already taken, how about "Mugs"?
- Suckers seem appropriate for both parties only the first party should have blood tagged in front;
- Cash cow?
- How do pickpockets name their victims?
- Users of HMRC's services
- Citizens [although companies aren't citizens and you don't have to be a citizen to be subject to UK tax]

Having thought about this further I've realised that 'taxpayers' isn't strictly accurate anyway. We have to file tax returns whether or not there is any tax to pay,

HMRC's February 2009 Consultation Document on a Charter perpetuates the idea of 'customers' although it's clear that this isn't an obvious or universal collective noun even within HMRC:

They say they will "test the Charter with staff, stakeholders and customers prior to the launch";
They "have held a deliberative[?] event with customers, representative bodies and staff";
As part of their previous engagement they provided an opportunity "for stakeholders" to provide written comments" and they received 42 responses from "representative bodies, businesses and individuals";
The Executive summary states that "a tax Charter could play an important role in ensuring that the tax system is understandable and accessible to all taxpayers";
Then, in Chapter one we're all "customers" again;

By the way I have yet to find anyone who likes being called a customer of HMRC. Equally none of the conventional dictionary definitions I have traced support the idea that it's an appropriate term.

On balance my preferred solution is to call us all:

The CBI - Companies, Businesses and Individuals.

But I guess that could get confusing.

So please share your views as comments on this blog:
a) do you like or loathe the way that HMRC use the word 'customers'?
b) do you have any suggested, workable and printable alternatives?

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?

Engaging with representative bodies

I was frustrated to read the following paragraph (4.5) in HMRC's consultative document Meeting the obligations to file returns and pay tax:

HMRC is continuously looking at ways to improve the experience
taxpayers have when interacting with the department, including support
and guidance available to taxpayers and such things as the design of
forms. This work is undertaken in collaboration with key stakeholders in a
variety of ways, including through standing stakeholder forums such as the
Corporation Tax Operational Consultative Committee (CTOCC).
Engaging with representative bodies, taxpayer and stakeholder groups in
this way helps to ensure that guidance, support and forms better meet
taxpayer needs.

The reason for my frustration is due to the number of occasions of which I am aware (and there are probably more) where the 'representative bodies' have been given almost no time at all to review, consider and feedback comments about the design of forms and the content of guidance.

The fact that the rep bodies are asked for feedback and input is to be applauded. However. all too often the timescales are too tight for meaningful input. I'm not sure that those at the top of HMRC are aware if this. They are probably told that the rep bodies have been asked for input and that their views have been incorporated in the final versions of the forms or guidance.

I would therefore restate the final sentence of the extract I have quote above:

Engaging with representative bodies, taxpayer and stakeholder groups ON A MORE TIMELY BASIS would help to ensure that guidance, support and forms better meet taxpayer needs.

Tax return stats

The following quotes are worthy of note, either as a source of information, amusement or incredulity. You decide which. They are taken from the HMRC Consultation document
Meeting the obligations to file returns and pay tax, published on 19 June 2008 as part of the wider exercise: Modernising Powers, Deterrents and Safeguards. In most cases I have added my own obseravtions.

Para
1.3 - The first substantial measure, legislated in Finance Act 2007, was a single new penalty regime for incorrect returns for income tax, corporation tax, Pay As You Earn (PAYE), national insurance contributions (NICs) and value added tax (VAT) (the main taxes). [NB: this includes NICs which the Government refuses to accept is a tax]

2.3 - In 2006/07, HMRC expected to receive almost 23 million returns across all of the taxes. Of these, some 3 million were filed late or not at all. [That's an unlucky 13%. And seems very high so 'something needs to be done'. Ok, some returns will have been filed late and some may still be outstanding but how many were never due at all? I suspect that the 23m figure is the aggregate of all notifications to file that were issued by the computer. Looking back to prior years, what proportion of issued notifications have not resulted in a filed return after 3 or 4 years? New penalties (or incentives) are not going to make a difference here. The real figure of late returns is probably much lower.]

2.6 - It is important that HMRC receives a return even when there is no tax due. This is because HMRC needs to check the basis of the calculation by which the taxpayer calculated a zero liability. [Hmmm. Self assessment has always been described as meaning 'process now, check later'. Except that we know that HMRC do not (indeed they probably cannot) check all returns. So what are they saying here, if you have a nil liability your return will always be checked? Surely not.]

2.15 - The vast majority of people in the UK pay the right tax at the right time because they believe it is the right thing to do and because they are aware of the link between tax and public services. [Hmmm. I think the reason that most people pay the right amount of tax is fear of the consequences of not doing so. And one reason why tax compliance statistics have worsened since the introduction of self assessment is that fewer people are getting caught - so there are fewer people telling their 'war stories'. The direct consequence of this is that more people think they can get away with non compliance for longer.

3.4 - Despite the continuing efforts of HMRC to shorten and/or simplify returns, they can still appear complex and difficult to understand. ["Appear"??]

5.3 - It is important that before considering how any new penalty structure for late or non filing and payment could work time is taken to ensure that appropriate safeguards are in place to protect the taxpayer. [Hooray. The message is getting through]

6.6 For 2006/07, HMRC issued over 1.7 million penalties for late or non filing of an ITSA return. Of these some 153,000 were cancelled. This could be for a number of reasons, the most common of which is that the taxpayer successfully appealed against the imposition of the penalty. [Hmmm. According to para 6.8: 'of the 1.7 million penalties issued in 2006/07, 917,000 (over half) were capped.' - ie: not payable as the amount of outstanding tax was wither nilo or less than the £100 penalty. This suggests that almost 20% of the uncapped notices were cancelled (as distinct from the stated figure of 9% given in para 6.20).
That seems remarkably high, even more so when we are told that the most common reason was successful 'reasonable excuse' appeals.

7.2 - The available research and evidence suggests that the structure of a penalty is far more important than the level at which it is set in determining its effect on behaviour. [How strange. If the late filing penalty for self assessment tax returns was £500 rather than £100, I'm sure that most people would make more effort to ensure they file their tax returns in good time.]

7.13 - The suggestion made in consultation responses was for a' failure to notify penalty' to be suspended on condition that payment and filing obligations were met on time for a set period. [Yup. This makes sense to me too. Why then does HMRC continue in this paragraph to merely set out the difficulties that it sees with such a solution? Incidentally these are all expressed in terms of consequences that 'may' happen.]

7.34 - Assessments and determinations have the advantage of beginning the process of bringing something generally approximating to the right amount of tax into charge. [Wow. HMRC have crystal balls. I don't buy it. Where a tax return is outstanding HMRC will guess a figure that may be reasonable. It could just as easily be a gross underestimate or significantly more than the sum actually due. Indeed at para 7.52 we get the following worrying statement: "In most cases if the estimate is too high, the taxpayer can submit a return to overturn the estimate." - Most???

7.54 - It is important to note that from 2008 there will be two filing dates for Self Assessment. Those filing on paper will have to do so by the 31st October whilst those filing online can do so by the 31st January of the following year. There will therefore need to be two penalty dates – one for submitting a paper return after the 31st October and a second for failing to file a return at all by the 31st January. [As I predicted last year, the 31 October deadline is a red herring. There is no effective penalty regime in place for paper based tax returns filed between 1 November and 31 January.]

8.7 - There is a good argument that penalties should escalate for repeated failures, to discourage such behaviour. If this is appropriate, the challenge will be to combine this with recognition that prolonged failure should also be treated more seriously, and still produce a framework that is fair, proportionate and simple. [There is also a good argument that penalties should be remitted in the event of subsequent compliant behaviour - so as to encourage such behaviour. I can see no recognition of this 'carrot' approach as distinct from the 'sticks' set out in this con doc.]