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?

Lord Turner champions environmental taxes - Is it that easy?

The Guardian reports that, in an interview with BBC Radio 4 to be broadcast tonight, Lord Adair Turner will be saying:

"If we have to raise taxes – and we will to some extent – we can deliberately design those to tax bad environmental things, like overuse of fossil fuels..."

It's long been known that one of the key attractions of environmental taxes is the double dividend of:

• generating additional tax revenues; and at the same time
• discouraging 'bad' behaviour so as to help the fight against climate change.

I mentioned this in my post here last August: Environmental taxes - going up

The Institute of Directors' view is that:

"Environmental taxes have their place in the tax system, but there is a real danger that because they are seen as being in a good cause, they will be set higher than they should be, or will become a way of increasing the total tax take."

Er, yes. That's the idea. Most informed commentators anticipate that taxes will rise in 2010. As I concluded in August: "It seems inevitable to me that environmental taxes will rise."

The key question, which it seems Lord Turner will not be addressing, is the extent to which such taxes are eventually borne by the consumer.

One key attraction of environmental taxes is that they tend to be paid by big industrial conglomerates. Typically however they will simply raise their prices in order to maintain their profit levels. Thus the effective burden of the 'green' taxes is borne by the ultimate consumer.

One of the best ways to avoid this is to offer tax incentives to develop, produce and supply alternative environmentally friendly products which consumers can choose to buy instead.

I predict that rather than big rises in income taxes and VAT, 2010 will be the year in which we focus on green taxes and environmental taxes. In addition to those charged on businesses there will also be those intended to change our behaviour as consumers. The big challenge will be to ensure that the greener options exist so that we are not simply forced to pay the taxes for doing 'wrong' when there is no real alternative.

Review of TaxBuzz blog 2009

The TaxBuzz blog is now over two years old and contains over 200 posts covering a wide range of tax related topics. As 2009 draws to a close, you may be interested to see this summary and review of my posts over the last 12 months.

At the start of 2009 I set myself a target to add at least two topical tax related commentary or policy related posts to the blog each week. I've tried to steer clear of trying to achieve the impossible - ie: commenting on every tax related story highlighted by the media. Equally I did not want this to become a series of posts about tax planning. So how would I decide what to write about? And could I identify a consistent style or approach?

How did I do?
Well, in 2008 there were only 86 posts. In 2009 we moved up to 113 including this one. So, on average I exceeded my target although I didn't manage 2 posts every single week. Looking back I can see that some of the posts are much longer than I would have liked - and longer than I had anticipated. As Abraham Lincoln is reputed to have said: “I'm sorry I wrote such a long letter. I did not have the time to write a short one.” One of my ambitions for 2010 is to write shorter pieces for the TaxBuzz blog.

Focus
As you might expect from the note at the top of this blog many of the posts were inspired by tax related stories in the media. In some cases I simply offered support, clarification and, where appropriate, balance. More frequently though I questioned, challenged or disputed news reports that had the potential to mislead; I sought to offer a more informed view. This was particularly evident when I posted 3 items by reference to the TV programme 'Taking on the Taxman' last April. Here's a reminder of some others:

• It's not just married couples who are 'punished by tax system'
• No £30k exemption from tax when you leave a job
• One way or another "Talk of tax cuts for savers" is shortsighted gesture politics
• Taxman visits to home businesses - the truth
• Non Doms set to leave the UK - so what's new?
• Flipping properties - avoiding CGT when you have more than one main residence
• Undisclosed rental income from buy-to-let properties
• The letter HMRC is sending to the banks
• How to avoid the secret new steath taxes
• "Bereaved families hit by tax hike"
• "Shopping receipts to expose stealth taxes
• Five tips to spot scam emails from 'HMRC'
• IHT receipts FALL under Labour - what's going on?
• IR35 rules are not being applied to BBC freelancers
• Tax Tease of the week - resident or non-resident?

There were 4 other key areas of focus in 2009:

• Forecasts, predictions and insights - Anticipating the impact and behavioural changes that will follow from tax developments and announcements;
  
• MPs expenses - I first started writing about the tax related issues in a post on 11 February 2008, then in January and March 2009 before a series of posts in May 2009 when the Telegraph revelations were published. I've returned to the subject a couple of times more recently too.
  
• Hard to believe - a number of posts highlighted bizarre but true topical stories about our tax system.
  
• Tax avoidance - even I'm surprised by how often I have written about this subject. Many posts highlight the commonly overlooked risks and downsides of structured schemes; others refer to misunderstandings as to what the system allows; and others refer to changes in the tax rules that affect the likely success and penalties for abusive tax avoidance and tax evasion.

Thanks
Many thanks to all those who have read, linked to, retweeted, ticked the reaction box at the end of a post or added comments to posts on the TaxBuzz blog this year.

It was quite instructive to look back at all the posts made during 2009. Many stood out and some I had forgotten. One of these amused me especially. It's from February and was titled: Instead of customers, why doesn't the taxman call us...? Having considered many options, including those suggested by others, my conclusion was that we should be known as CBI (Companies, Businesses and Individuals).

Feedback
Please feel free to add below your thoughts and perceptions of the TaxBuzz blog 2009.

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.

Tax Tangle - "a vague and very likely muddled arrangement"

This tax tangle was apparent from the decision of a recent VAT tribunal case. Balkwill v Revenue & Customs [2009] UKFTT 314 (TC) (19 November 2009)

The case concerned a plumber who claimed that he sold his business and retired in 2001. He deregistered from VAT but continued to declare profits from the business on his personal tax returns. HMRC noted that the turnover being disclosed was just above the VAT registration threshold and claimed that he should have remained registered until 2004.

The evidence pointed to a most unusual arrangement between the ‘retired’ plumber and the Mr Smith to whom the business was sold in 2001. According to the Tribunal Judge "it very much sounded as if no accountant or solicitor had been involved in clarifying the form of what at best may have been a vague and very likely muddled arrangement".

At the time of the Tribunal hearing in July 2009, the plumber was over 80 years of age, in poor health and recently out of hospital. The taxpayer contended that he was living off the state pension and was unable in any case to pay a VAT assessment for over £19,000 plus interest.

The Tribunal judge accepted that HMRC had acted in proper manner and had evidence that VAT was properly due. However, it was not evident that the taxpayer made false claims but rather significantly misunderstood his filing requirements.

"we suspect that whatever the arrangement was it will have been vague and entirely capable of being misunderstood."

"this is not a case where we have fundamentally dis-believed all the Appellant's evidence. We frankly do not know what happened in this case, but we believe that there was probably some vague arrangement between the Appellant and Mr. Smith, and that the current confused state of affairs probably results from misunderstandings, rather than simply from a false claim by the Appellant who appreciates that he was trading at all times until 2004."

"we very much hope that HMRC will not proceed to try to collect any of the tax in dispute. "

As will be apparent from these quotes the taxpayer's appeal was dismissed but was accompanied by a strong plea from the Tribunal Judge that HMRC show considerable restraint in seeking payment of the assessment and penalties due and not proceed to collect any tax due.

Sadly I fear that the Tribunal Judge's plea will fall on deaf ears. We know that HMRC consider that they have no power to exercise such discretion. Recently they even planned to end their long standing practice to only pursue an 'equitable liability'. What chance they will agree not to pursue a liability that has been confirmed by the Tribunal.

The lesson for all is to avoid informal, muddled business arrangements. They invariably lead to trouble with the taxman.