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

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

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

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

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

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

Any more suggestions for undue complexities?

New tax rules on pension contributions favour Ministers

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

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

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

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

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

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

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

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.