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?

PMA Tax: The ten tax questions that are more complicated than you might think

This is my list of ten common tax questions where it is almost impossible to provide a simple answer that is of any value. And I say this as someone who has a reputation for providing clear, easy to understand and pragmatic advice!

Anyone tempted to think there are easy answers that apply in all situations has probably fallen for those Popular Misconceptions About (PMA) Tax I referenced in an earlier blog post.

1. How do I become non-resident?
2. More than 20% of the income of my company comes from letting an investment property, but the assets, time and expenses are all more than 80% trading. Will it qualify for entrepreneurs' relief?
3. As a sole trader, can I claim the cost of my lunches back when I am out on business?
4. I run a restaurant, and recently took a bottle of wine home to drink for my birthday. At what price do I have to account for it - the price on our wine list or the price in an off-licence?
5. And what about the bottle of wine I took home last birthday - do I have to account for that at anything more than cost?
6. My partner and I own a company in equal shares, but I have other income, I recently waived part of my dividend so that she could receive a larger one. Am I still taxable on it?
7. Rather than do A which would have given me a tax liability, I did B C and D, which had the same combined effect but with no tax liability, on a literal reading of the tax legislation. Am I liable to tax anyway?
8. How much tax will I save if I incorporate my business?
9. How much of my car costs, mobile phone costs, home related expenses etc can I get off my tax?
10. I'm not domiciled in the UK, is it worth me paying the £30k bung?

What other questions would you add to this list?

PMA Tax: "Give your House to your children to avoid IHT"

This is a great example of the sort of Popular Misconceptions About (PMA) Tax I referenced in an earlier blog post. As I said: "It's more complicated than it seems"

The simple idea is to ensure that the house isn't owned by the parents when they die and IHT becomes payable. It should come as no surprise that the tax rules are wise to this idea.

Firstly the gift would be ignored for IHT purposes of the parents continue to live there. So the House gets caught by 'Gift with a Reservation Of Benefit' rules and is still subject to IHT.

But the position is now probably worse than it was. For example:

1. When the house is sold by the children the gain will be subject to Capital Gains Tax (CGT) unless they happen to live there with Mum & Dad. If no gift had been made there would no CGT if the property was sold shortly after the parents death.
2. The parents security of tenure in what is no longer 'their' property is now vulnerable to any court rulings that follow of their children divorce or become bankrupt.

It's also worth noting that under the current rules no IHT is payable unless someone's taxable estate when they die is more than £325,000 (£650,000 for married couples and registered civil partners).

So if anyone acted on this PMA Tax idea they would simply have created more problems and more tax liabilities than if they'd done nothing. Far preferable to seek out professional advice from someone who really understands the IHT rules and gives this sort of advice on a daily basis. If you want expert IHT advice you will find the ideal tax expert through the Tax Advice Network.

The best tax advice you will ever hear

The best tax advice you will ever hear is that: "It's more complicated than it seems."

It's not what you want to hear of course. And, to be fair, it isn't true for every person in every situation. But, it IS worth bearing in mind when someone offers you unsolicited tax advice that seems to be too good to be true.

Whenever someone promises you fantastic tax savings, that you can avoid paying tax on your income or that the taxman will never know, BEWARE. You will invariably end up worse off if you act on the basis of what I am calling PMA Tax (Popular Misconceptions About Tax).

Even the simple 'best tax advice you will ever hear' that I wanted to share in this blogpost is in danger of getting complicated. I've written many time before about tax avoidance schemes and will refrain from getting sidetracked down that path today.

All too often the tax advice shared by amateurs proves the truth of that old adage that 'a little knowledge is a dangerous thing'.

Simplistic PMA Tax advice is often shared by people who are unaware that the tax rules are more complicated than they realise. They only know part of the story. They are unaware of the caveats that should accompany their views; thus, if acted on, their naive tax advice will cause more problems than it solves.

I will be sharing some examples of PMA Tax in future blogposts and wanted to provide some background first.

Does the tax saving warrant the investment advice?

There was a naive piece of tax planning advice in the Money section of one of the Sunday broadsheets. At least I thought it was naive so I showed it to my 22yr old son to see what he thought. He was astonished that such advice could appear in the paper.

It was included in a piece titled: "Make the most of marriage tax breaks" and in a section sub-titled: "Transfer the right investments". Here it is:

"It is worth transferring assets between spouses even if one of you pays tax at 50% and the other at 40%". For example, if you have £50,000 of savings earning 3% gross interest a year - or £1,500 - a 50% taxpayer would be left with £750 after tax, whereas a 40% taxpayer would have £900".

It's technically correct of course and the example makes clear what's involved. Transfer £50,000 of investments from one spouse to another to save £150 pa of tax. Even my son could see that the tax saving paled into insignificance in the context of the value of the investments that would need to change hands. £150 is real money of course and would always come in handy.

There's an implicit assumption in the example that ownership of the assets could be legally transferred without incurring any transfer costs. In most cases however such costs would exceed the tax saving making it a daft thing to do.

I am a great fan of using examples when offering tax saving advice. This can help in understanding the tax at stake, whether it is to be saved, deferred or avoided.

As shown by the example above, when you consider the figures involved the tax at stake may not warrant the actions involved - especially when you take account of the costs (and of any risks) of implementing the advice as compared with the tax at stake.

"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.

Teach them about tax too

Does anyone else consider today's 'news' to be ironic?

Under a new personal, social, health and economic (PSHE) curriculum which becomes compulsory next year, all pupils in England, aged five to 16 will be given financial literacy lessons and taught how to save. This is commendable stuff - more so when you read the details rather than simply controversial and contrived headlines. The Mirror, for example, reports that "Children as young as FIVE will be taught how to manage bank accounts and budget." - Er. No. That's not very likely at all nor is it what the announcement says.

I prefer the Observer's headline: Children to be taught perils of debt or The Times: Pupils to be given lessons on debt. And there is the irony as it this Government that has created a new generation of graduates who are saddled with £15-£20k of debt even before they start work. It's all too easy to anticipate that these same graduates will spend upto the limit on new free credit cards. After all what's another £2k?

Ed Balls, the children schools and families secretary, is reported to have said: "It's really important that we teach our children about pensions, responsible saving and effective money management." The full departmental press release is here.

Teaching children about the difference between good debt and bad debt is important. Justifying student loans as 'good' debt will then have to follow - although I'm not sure it satisfies all the usual criteria.

One crucial element of effective money management concerns the basics of our tax system. Children don't need to know about this in detail at the age of 5 any more than they need to learn how to manage a bank account at that age. However they do need to understand some of the basics about tax before they leave school to go out to work.

A recent conversation with a hairdresser serves to ilustrate the point. She told me she is self employed but works in a salon owned by someone else. When she left school she started working in a local salon and got paid her wages each week. The expression 'cash in hand' didn't mean anything to her. As far as she knew this was normal and she did what her boss - whom she assumed to be her employer - asked of her. That was all long ago but no one had ever taught her the different tax obligations for the self employed and for employees. Or indeed the differences between being an employee and really being self employed even if working regularly for the same person.

According to the National Curriculum website, Personal, Social, Health and Economic (PSHE) education brings together personal, social and health education, work-related learning, careers, enterprise, and financial capability. In practice PSHE is intended to cover all those life lessons that we demand schools 'teach' although they are not examined so are rarely seen as a priority.

Bottom line? Even though PSHE has its detractors, please can we also ensure that we teach pre-school leavers a few key facts about the tax system?

What do you think?

Inheritance tax - Who's right? Who is really at risk?

The two main parties are arguing as to the impact of inheritance tax and who would benefit if the rules were changed.

Back in October I posted an item here: IHT receipts FALL under Labour - what's going on? This followed a report in the Guardian that Inheritance tax drops to all-time low under Labour. Exploring the issue further I concluded that the number of estates paying IHT would fall in the immediate future. My conclusions were drawn from HMRC's data and the impact of recent changes to the IHT rules.

I suggested that the number of estates paying IHT would fall, probably to something around 4% which accords with the Chancellor's later assertion in his PBR that "fewer than three per cent of estates will pay inheritance tax." Leaving aside arguments as to whether the tax is wholly "avoidable" if one is very wealthy and employs top tax experts, this is not going to affect 'Middle-England'.

The Tories have now extrapolated data from the Office of National Statistics that seems to show that over 4 million adults have non-pension wealth above the current inheritance tax threshold of £325,000. And this leads to the conclusion that one in five families and one in 10 people above the age of 18 are potentially liable to IHT.

It's simply not true however to suggest that "More than 4million face inheritance tax bombshell under Labour." Over and above the £325k per head exemption the rules also provide further exemptions (in effect) for qualifying business and agricultural assets.

These exemptions also mean that some very wealthy people are not currently subject to IHT as there is no cap on the value of qualifying assets that can escape IHT.

In any event, it seems fair to review the Government's data to which I referred above. If it is wrong the Tories' plans will benefit Middle-England as they assert. On the other hand, if the data is reliable, the Tories' plans will simply improve the well being and perceptions of Middle-England as they are not really at risk of a substantial liability to IHT.

The real issue is the soaring value of houses (homes) owned by people when they die and the disparity in such values across the UK. The average price of a home is now £162k so to many people only the very wealthy own homes worth £800k (which together with other assets could take an estate upto £1m). However in parts of London and the South East this is not uncommon. And I assume this is why the Tories want to raise the headline threshold so high. It might be less contentious to do something I think John Major suggested in the 1990s and John Redwood proposed, to a degree, in 2007. To exempt the main home from IHT?

The key issue for both parties is to shift the fear of inheritance tax from the consciousness of average families - wherever they live. If this requires changes to the tax rules, and I think it does, then such changes should be welcomed.

And this would also lead to a consequential and welcome development. The end of inheritance tax avoidance seminars run by promoters of standard trust-based 'solutions' - many of which are dubious in the extreme - especially in so far as they purport to reduce the IHT payable by reference to the value of your main residence.

I've heard stories of how slick presentations result in long queues of audience members who sign up and pay for a supposedly legal document there and then. They are encouraged to do this without any real regard for their personal situations and without the benefit of any qualified tax or legal advice. That's NEVER a good idea. If you have any IHT concerns do speak to a suitably qualified and independent tax adviser.

MP could not register his business at Companies House

Sadly I continue to be fascinated and frustrated by the MPs' expenses scandal to which I have referred many time on this blog.

This morning's revelation about MP David Wilshire suggests he blatantly disregarded the rules. However the story also perpetuates a myth about owner managed businesses in the UK.

Mr Wilshire is said to have "used his House of Commons expenses to pay more than £100,000 of taxpayers’ money to his own company." Then we are informed that "there is no official record of the company’s existence and it has never filed public accounts" and that "it had never been registered as a company."

Er, perhaps that's because the business, Moorland Research Services, was a partnership and NOT a company. And of course, this in itself seems to be a clear breach of the Parliamentary expenses rules. It suggests, in effect, that Mr Wilshire was claiming expenses for payments to himself as a partner in the business.

But the implication that there is some further wrong-doing by virtue of the partnership not having been registered at Companies House serves only to perpetuate the myth that 'business', 'partnership' and 'company' are different words for the same thing.

It's important to note that being in business is NOT synonymous with running a company. I would expect most regular readers of this blog are already aware of the distinction, but for the record, there are actually four alternative 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.

LLP's are a relatively new innovation and far less common than conventional partnerships.

There is no obligation or facility to register sole trader businesses or conventional partnership businesses at Companies House.

Before you start a business it is important to consider carefully the respective benefits, obligations and disadvantages of each of the alternative structures. And there's a lot more to the decision than simply comparing the respective tax rates. There's a host of other tax, administrative and strategic issues to consider. Sadly many people rush ahead without giving these all due consideration - but that's another subject for another day.

Five more facts all accountants need to understand about tax avoidance schemes

This is a follow up to a recent post: Five facts all accountants need to understand about tax avoidance schemes.

That first list essentially provided support for those accountants who have already chosen NOT to advice on such schemes. Below I have listed five more facts which should also be borne in mind by those accountants who are nonetheless tempted to look further into the subject:

1. Encouraging a client to undertake a structured tax avoidance scheme is much like encouraging them to make a specific investment;
2. It takes a fair amount of time to get to grips with all of the relevant details of a structured tax avoidance scheme;
3. HMRC may announce a change in the law at any moment - leading to rushed (and perhaps botched) attempts to revise the scheme by the promoters;
4. Having committed all that time to learning about the scheme there may be a temptation to persuade someone to 'invest' even if they might not otherwise choose to do so;
5. If, some years later, the scheme is ultimately held not to work the client may sue the accountant for failing to adequately highlight the risks.

Together these ten facts should provide support for those accountants who choose not to advise clients on structured avoidance schemes. As before I'd be very happy to explain or expand on these and also to receive comments from people with a different view.

How to avoid the secret new steath taxes

In the past couple of months the media has reported several secret stealth taxes on car parking, broadband connections, mobile phones, patios , and company cars. There have been plenty of other reports in the past too.

However, often when I look at such stories the suggestion that they refer to secret or stealth taxes is spurious to say the least. Sometimes it is simply media speculation and on other occasions the story has it's origin in Government spin.

Of course including the word 'taxes' in the titles makes them more newsworthy. Adding the words 'secret' or 'stealth' almost guarantees reader interest. I think that's proven if this is the first time you've read an item on this TaxBuzz blog! ;-)

Typically such stories in the media refer either to:

• charges to be levied by local authorities or commercial businesses;
• ideas being floated by the Government to assess public reaction; or
• plans that the Government has little intention (or prospect) of introducing - but which it wants to be seen to have advocated.

Rarely are these taxes already in place or even inevitable.

At the risk of being flippant, the best way to avoid any such secret new stealth taxes is to stop reading about them. At least until and unless they actually start to affect you - and that's often going to be 'never'.

As and when you are subject to taxes or want to better understand how you can legally avoid them impacting you, do ensure that you talk to real tax specialists - such as members of the Tax Advice Network - simply click one of the links above or use the search facility (top right).

Five facts all accountants need to know about tax avoidance schemes

This post follows on from a recent item I wrote about: Naive promoters of tax avoidance schemes.

So here are what I call the Five Facts you need to know about tax avoidance schemes:

1. Accountants should only promote such schemes if they are confident that they understand ALL of the risks and consequences for their clients;
2. Accountants do NOT have to advocate structured tax avoidance schemes;
3. Accountants who promote such schemes honestly will find that typically only around one in ten clients will proceed once they understand all of the risks;
4. Accountants do NOT have to notify all clients that such schemes exist;
5. Accountants are NOT at risk of successful negligence claims if they fail to alert clients to such schemes.

Do I need to expand or explain the justification for any of these? I'm happy to do so and also to receive comments from people with a different view. Experience suggests however that these five facts will be quite comforting for those accountants who are on the receiving end of promotions like the one I mentioned in my previous post.

MPs' expenses: ministers not exempt from tax laws

Day 20 of the MPs' expenses scandal and HMRC have been forced to confirm that they are pursuing potential irregularities in MPs' tax returns. At least this is what some of the media are reporting.

Today's Daily Telegraph notes that HMRC confirmed that MPs were not exempt from tax laws and that tax must be paid on some expenses. In a statement it said:

“It’s a general principle of tax law that accountancy fees incurred in connection with the completion of a personal tax return are not deductible.

“This is because the costs of complying with the law are not an allowable expense against tax. This rule applies across the board.”

It now seems that more than 40 Ministers claimed and received reimbursement of accountancy fees as part of their Parliamentary allowances.

In recent posts on the TaxBuzz blog I have explained:

• The Green Book guidance that seems to allow such claims to be made
• The tax rules that make clear that such expenses are not deductible for tax purposes
• Why I consider it likely that Ministers will owe tax on their accountancy fee claims
  
• The tax rules that enable only self employed people to 'Do a Darling' and claim tax relief for their accountancy fees
• The tax questions that have yet to be asked and answered about the MPs' expenses scandal
  

I have also set up a specific page that contains links to the key formal guidance on such matters, including the current and previous editions of the Green Book, the HMRC guidance booklet "MPs, ministers and tax" and also The June 2008 report of the Members Estimate Committee which led to the latest edition of the Green Book.

Previous posts here on the subject address:

• MPs, Ministers and their expenses claims for accountants' fees
• MPs claiming tax relief for tax advice from an MP's spouse
• MPs' expenses - the Chancellor's claim for help with his tax returns
• MPs' expenses - The tax questions that have yet to be addressed
• Hazel Blears and Gordon Brown - a genuine gesture or deliberately deceptive?
• Tax Advice Network on BBC - twice in two days
• Flipping properties - avoiding CGT when you have more than one main residence

Quickies from the Budget

Almost against my better judgment I was posting tweets* during the speech and immediately afterwards, quoting the #budget09 hashtag link that enabled others to follow an aggregation of everyone's tweets* on that subject.

For the record here is a selection of the comments I tweeted* (most recent is at the bottom)

(* If you don't know what I mean when I refer to tweets etc, you may find this article about twitter on my other blog helpful)

Darling claimed that tax cuts announced in PBR are helping people now. Not true for self employed who won't benefit until 31/1/10 #budget09

Darling claims that retail price index will be NIL next year. So will standard VAT rate stay at 15%? #budget09

Darling has evidently accepted the loss relief he announced in PBR was overly restrictive. A good move. Shows he listened. #budget09

Darling will consult (hooray) as to how to achieve a reduction in tax relief for pension cont'ns for those with incomes > £150k #budget09

Will high earning public sector workers (>£150k) be equally penalised re pension provision paid for by their employers? #budget09

Darling claimed the £50k pa investment allowance introduced 2 yrs ago to be increased. No one has had a penny relief from it yet. #budget09

Why does he think that changing cap allowances for the current year will help NOW? Tax relief won't flow through until late 2010. #budget09

Misleading to suggest that anyone has seen tax go down this month. PAYE changes will first apply in May. And for the s/e 31/1/10 #budget09

Increasing taxfree limit of ISAs won't help many as interest rates are so low the tax charge is of little impact. #budget09

And the trap for the Tories. Labour puts up top rate of tax to 50% - to force a comment as to whether it will be kept or reduced. #budget09

Starting to go through the 93 Budget Notices. I think a BIG issue has been overlooked. #budget09

While I look for the BIG one, note that the increased 40% first year capital allowance will not affect tax cashflows until 2011 #budget09

VAT registration threshold is only up to £68k - not the £100k implied in @BookMarkLee April Fool Budget leak. No surprise. #budget09

NB:Budget effectively encourages entrepreneurs. Don't draw high earnings - Build business for the future; Tax will be just 18% #budget09

"Despite the Budget - minimise your tax". (How?)

"5 ways to lower your revenue bills" - These are headlines on the 'Your Money' page of today's Daily Telegraph. The online version seems to be a different list titled: 'How to cut your tax bill'

Two things struck me about the print edition. The first was that someone had almost certainly changed the title from "5 ways to lower your TAX bills" - which is presumably the list that the journalist was asked to construct. The second was how inapplicable to most people were the five tips. And in this respect the Telegraph is no different to most other papers that I see.

Of the 5 tips, 2 were related to reducing tax on savings, one encouraged more pension savings, one was only relevant for people making significant capital gains and the final one related only to people who have stopped working or who don't pay any tax.

The tips are fine so far as they go but they're hardly mainstream in my view.

How does this happen? Is it really that there is nothing that the average reader can do to reduce their tax bills?

I assume that the Editor asks someone to get an uptodate list as this should be of interest to readers. Journalists then call up friendly tax accountants and tax specialists and ask for some generic ideas. I've contributed to such lists in the past and I also frequently assist journalists who need practical and commercial insights into our tax system.

Most of the points in the online version of the article appear to have been contributed by IFAs rather than by tax advisers. Most strange.

If I'd been asked about compiling such a list this week I would have suggested that the problem arises from trying to compile one generic list. I'd say that, in theory, at least 4 are required. One for employees, one for the self employed, one for those who run their own company (which is not the same as running a self employed business) and one for the Retired and savers. If you want a generic list that is of little real benefit then by all means repeat the age old tips about checking tax codes (without giving any tips as to what to look for when you check them) and the old favourite of holding investments jointly with your spouse - only relevant to a sub-set of married readers.

The telegraph is not alone in publishing such standard lists; Equally, there's no need to get 'clever, clever'. Having said that there is in fact very little that most employees can do to reduce the tax on their employment income - it's more a question of just checking that there are no mistakes being made. And that's the other problem, who'd want to publish tips lists that alienate the majority of readers by saying that your tax bills are pretty fixed but here are some tips for the self employed and those running their own companies?

Just to be clear, I'm certainly not thinking about including anything that could be termed abusive. But I do frequently hear about people who are paying more tax than they need to because of simple oversights or a lack of understanding about the tax system.

Maybe members of the Tax Advice Network should construct such lists and I could offer them more widely through the taxbuzz blog. Anyone interested?

Tax relief for Networking - can you or can't you?

I'm told that some accountants tell their clients that they shouldn't claim tax relief for the mileage involved in traveling to networking events. I'm astonished by such a suggestion.

As most of us know, what matters to the tax man (and more importantly the underlying tax rules) is the taxpayer's objective when incurring costs. Were these incurred for business purposes? Is there a specific rule that denies tax relief (eg: as there is for entertaining expenditure)?

Someone who is an employee probably won't be able to claim tax relief for networking related costs that come out of their own pocket. In most cases they'll be fine though as their employer will reimburse them. This is as important for directors of their own Limited companies as it is for all the business expenses they pay for personally (in error?).

The self employed (and the limited companies that pay or reimburse networking costs) can generally claim tax relief for the costs of attending and of getting to and from business networking events. The test is whether the expenses were incurred "Wholly and exclusively" for business purposes.

Even if someone enjoys networking (and some of us do) this does not disqualify the related costs. Tax relief is still available if the costs satisfy the tests above. So what matters is whether attendance is driven by a desire to build relationships and advocates that could lead directly to new work or introductions to prospective new clients? Invariably these are the primary purposes. And they are evidently directly related to increasing the level of business. Networking is just another form of business development; it's a marketing cost; face to face business promotion and advertising. And as such it's tax deductible.

The water can get muddied if the promoter effectively downgrades the Networking element of the event and focuses on the provision of free food and drink. And of course the retention of related receipts (and maybe even the promo material) would form part of the necessary record keeping to support valid claims for tax relief.

I'd welcome comments on this blog post especially from accountants who have advised on this topic and where they draw the line.

Is there a future for Tax Boutiques in the UK?

As we move into 2009 and whilst many accountants are focused on helping dilatory clients beat the 31 January filing deadline I thought I'd reflect on a development I noticed taking place in 2008.

Was it my imagination or did there seem to be an acceleration in the demise of independent tax boutiques? There were a number of catalysts and different firms reacted in different ways but I'm aware of long standing boutiques that no longer exist as a result of one or more of the following:

• Anti-money laundering rules requiring unregulated firms to register with HMRC;
• Clarification of HMRC and the courts' view as regards the availability of legal professional privilege in the context of tax advice;
• Absence of sufficient regular work flows to cover all overheads and generate a profit;
• Widespread reduction in appetite for structured tax avoidance schemes;
• Difficulties in securing fast enough take up for such schemes before they were blocked;
• Acquisition by a larger practice looking to boost it's tax capability.
  

Of course there remain plenty of tax boutique firms around. But as we move forward into the recession I suspect that the long term survivors will be those independent advisers providing quality, client centered advice from the lowest fixed cost base. After all, how does the client (be it a tax payer or an accountant) benefit if they instead obtain specialist tax advice and support from a niche practice with a flashy office, trainee staff and other indirect and heavy overheads. It will invariably be more expensive but will it be commensurately better? How can anyone tell?

One of the challenges for those seeking Vetted Independent Specialist Tax Advice is how to find someone capable of providing that quality, client centered advice. And it was to resolve this quandry that I established the Tax Advice Network in 2007. And we've now introduced a facility for users to rate our tax advisers and to post testimonials to assist other users (like on Ebay and Amazon).

I tend to think that the number of boutique tax practices will reduce further this year with more independent tax advisers seeking admission to the Tax Advice Network. But I would say that wouldn't I!

What do you think?

Who wants to pay the 'right' amount of tax?

The Freedom of Information Act only seems to reveal interesting results after 'battles'. I've just read about one in Private Eye (I was catching up during the Xmas break).

After a 7 month battle, HMRC has released the results of a survey conducted in 2004 amongst senior tax inspectors. Apparently they classified 16 of the 102 (sic) largest companies operating in Britain as "serial [tax] avoiders"and 40 as "opportunistic avoiders". Thus these Inspectors believed that 55% of the biggest companies were consciously avoiding tax (presumably in an "unacceptable" manner).

The Private Eye story suggests that this runs contrary to the alleged assumption within HMRC that:

"The majority of businesses want to pay the right amount of tax at the right time."

And that got me thinking. Does anyone really believe that mantra?

Coincidentally I was debating a similar point, concerning the general appetite for tax avoidance on another blog last week where I stated that:

I accept that many people do not want to ‘abuse the law’.

However I think that most people DO want to keep their tax liabilities to a minimum. They ask their accountants (and their friends) “What can I do to pay less tax?” “How can I pay less tax?” “How can I avoid having to pay all this tax?” And of course the weekend papers are full of ads for guides as to how to AVOID IHT.

To me this all indicates a desire amongst the general public to AVOID paying more tax than necessary.

Does that make 'most people' tax avoiders'? Of course not. But it does suggest to me that few people willingly pay their taxes without hoping that there are ways to reduce the sums due to HMRC.

Those who know me will know I am no fan of what some might describe as 'abusive' avoidance schemes. And, of course, I am no longer in practice myself as a tax adviser - for reasons that I described in detail last July. So I am keen to distinguish such schemes from simple 'good advice' of the sort that can be obtained from independent tax advisers.

Does it all come down to a question of what is the 'right' amount of tax? Is the 'right' amount of tax the same as the 'lowest' amount that can be paid without breaking the law, without lying, without hiding income and without overstating expenses?

What do you think? Do you agree with my definition or can you offer your own?

Tax breaks for small business - an off the wall idea?

As we enter a period of recession expect to hear calls for more 'tax breaks' and promises of these from politicians on all sides. 'Tax break' is a more accurate term than the alternative of 'tax incentive' which has previously been used despite the inbuilt inaccuracy of the term. The truth is that so called 'incentives' are simply rewards for spending money in ways that the Government wishes to encourage.

Wikipedia's current definition of 'tax break', whilst US in style, seems quite clear to me:

A tax break is a tax saving. This includes:

• Tax exemption, an exemption from all or certain taxes of a state or nation in which part of the taxes that would normally be collected from an individual or an organization are instead foregone.
• Tax deduction, an expense incurred by a taxpayer that is subtracted from gross income and results in a lower overall taxable income,
• Tax credit, more valuable than an equivalent tax deduction because a tax credit reduces tax dollar-for-dollar, while a deduction only removes a percentage of the tax that is owed.

Then reason I prefer this term to 'tax incentive' is that the latter is a complete misnomer when it comes to decisions made by most owners of micro and small businesses - who are often the main target of the so-called 'incentive'. The problem being that the targets are rarely aware of the incentives and even if they do hear about them they either don't qualify or can't afford to invest the money required to benefit from the 'incentive'.

A couple of examples will suffice:

• Research and development tax credits - these don't so much incentivise investment in R&D as reward those who have spent the money - some time after the money has been spent; If your expenditure qualifies your subsequent tax bill will be reduced or you will receive a tax refund - at such time as you would otherwise have paid your corporation tax;
• Annual Investment Allowance - again, not so much an incentive to acquire qualifying plant and machinery expenditure as a reward. Actually this is a very welcome simplification. The 100% relief removes the need for anyone to worry too much about the distinction between such capital expenditure and other business expenditure.

The problem with tax incentives and tax breaks is that so many people seem to misunderstand what's really going on. In business terms neither tax breaks or tax incentives actually impact decisions, other than at the margins. A pro-active accountant will, for example, encourage a client to advance expenditure plans into the current tax year so as to secure the tax benefits a year earlier than would otherwise be the case. But either the business has access to the funds or they don't.

The promise of tax relief at least 9 months (often more) down the line, by way of a tax break or a tax incentive is NOT going to have a significant impact on business owners' motivation. And, more than anything else it isn't going to provide the funds to facilitate the expenditure that is supposed to have been encouraged.

The only way I can see to do this is to effectively subsidise the cost of the items in question so that the purchaser only plays, say 70% of the normal price. The vendor then recovering the remaining 30% of the price from HMRC. This is not a million miles away from the way that the GiftAid system works for charities. We give them a donation and they recover a related sum (of tax) from HMRC.

Would this work? Is it worth considering further?

HMRC hires retired tax advisers

Now that's going to come as a shock to a few people. It was included in that report from Reuters to which I referred in my tax blog post yesterday.

I've long been aware that HMRC employ accountants to assist with the accounting issues that arise when Inspectors are reviewing business and company accounts. Indeed when an accountant in practice tells me that a Revenue official has made an ill informed comment about a client's accounts I suggest that the accountant asks for the matter to be referred to a revenue accountant. One of the roles is specifically to help their colleagues and to reduce the time wasted on 'non points'.

But - 'retired tax advisers'? Now that could put the cat among the pigeons. You shouldn't have anything to worry about of course as long as you have nothing to hide.

I suspect that initially the 'retired tax advisers' will be expected to provide insights and advice in connection with large corporates and corporation tax issues. Will they also suggest questions, challenges and arguments to adopt in negotiations with accountants who advise 'smaller clients'? We'll have to just wait and see.

Perhaps this is a further prompt of what to do when tempted to advice on tax related issues with which you're not totally familiar. You could try a bit of research. You could ask a mate. Or you could speak to an independent tax specialist adviser. And where better to find one than in the Tax Advice Network? ;-)