Budget prediction: NO IHT changes and I'll tell you why...

In its report, published last week, the Office of Tax Simplification (OTS) said:

"On the basis of the low number of estates caught by IHT and the useful but relatively low revenues [after reliefs] that it raises, we consider that a more appropriate approach may be to review the whole of IHT rather than to consider individual IHT reliefs. Such a review may also encompass a review of capital gains tax and we envisage this as a longer term project."

I am surprised that anyone could use this statement as the basis for predicting that:

"Inheritance tax squeeze expected in budget"

That was however the Guardian's online headline on Sunday in a piece that heavily quotes Danny Cox, head of advice at the independent financial adviser Hargreaves Lansdown.

In fact, at para 2.33 of the OTS report, they state that the review they are suggesting:

"a proper review of inheritance tax, whether by HMRC, HM Treasury or the OTS....would clearly be a longer term project."

What do I think?

I doubt anyone in HMRC, let alone the Government, Treasury or OTS has the time to "review the whole of IHT" in the near future. The OTS were tasked with reviewing tax reliefs and this included those available when computing liabilities to IHT. This is the only reason why they make reference to it. There is no agenda to review IHT or to increase the tax generated by IHT.

IHT is expected to generate about £2.3 billion tax this year. A large sum in itself but this comes from only around 12,000 estates out of the 560,000 adult deaths (these are both 2009 figures). So just 1 in every 46 deaths gives rise to IHT. And the main reliefs from IHT do not have a significant impact on the amount of tax collected.

Back in 2007, when in opposition, George Osborne talked about raising the IHT threshold to £1m. The objective being that:

“only millionaires pay death duties”

It really is all but inconceivable that, now he is Chancellor, Mr Osborne would suddenly decide to change the rules and attempt to increase the take from IHT. It would take such an about-turn that he would get very dizzy!

Tax tease: OTS provides headline fodder re tax reliefs

The Office of Tax Simplification (OTS) has produced the first of two reports due in advance of the Budget later this month. Next week should see the much awaited interim report on possible simplification of small business taxation - including the IR35 rules and 'income splitting' between husbands and wives.

But first we have Recommendations to simplify UK’s “spaghetti bowl” of tax reliefs. And inevitably the media have sought out what they hope are issues that will cause most concern amongst their readers and viewers. For example:

• BBC business news notes that the 15p a day luncheon voucher relief may be removed.
• Money Marketing notes the calls for IHT and CGT reviews and the suggestion that merging income tax and national insurance would be a long term project that would deliver “major simplification”.
• The FT headline writer went for: Call to scrap blind person’s tax allowance

In each case however the report explains the thought process behind the recommendation and none are made lightly.

It is also worth noting, from the executive summary, reference to a number of key themes that emerged during the OTS review of tax reliefs:

• Merging income tax and NIC – this is a long term project of structural reform that would deliver major simplification;
• Employee benefits and expenses – The longer term aim would be to align the treatment of employee benefits, with shorter term aims of simplifying many minor benefits with a de minimis limit of £100/£500, or amending the current £8,500 threshold;
• Inheritance tax and trusts – the reliefs for inheritance tax are integral to the policy and we consider that a more appropriate approach would be to review the tax as a whole;
• Capital gains tax, particularly as applicable to companies – the capital gains systems for individuals and companies have drifted apart, with gains by individuals taxed at a lower rate than income to reflect inflation, whereas companies are still required to calculate indexation. Our aim would be to realign the treatments and simplify the tax, but as there are changes in relation to corporate capital gains expected in Finance Bill 2011, this is clearly a longer term project; and
• Environmental taxes – Both landfill tax and aggregates levy should be reviewed, as both regimes contain basic charging provisions with numerous exemptions and it may be more appropriate to define what is caught rather than what is excluded.

"Our review has suggested that these areas are particularly complex areas, for example due to the number and complexity of the reliefs involved. Whilst each area is deserving of a full review, we recognise that these are complex and time consuming areas involving important matters of government policy that go beyond the current remit of the OTS"

My observation is that commentators should ensure that they read the detail behind these headlines. The OTS team are neither stupid or naive. Each of the above themes is explored in the report and recommendations made that the related issues be the subject of consultations before any changes are made. This is as it should be. None of these suggestions is going to happen overnight and certainly not in the Budget on 23 March.

HMRC impact assessment is a disgrace

If you knew the taxman was going to come round to your office to check your business records, how much do you think it would cost you?

The taxman has made up some numbers that it is hard to take seriously. They suggest that the only costs to small businesses will typically be related to the "up to" 4 hours that each 'business record check' will take. HMRC have then placed a value of £11.70 per hour on all the accounts and wages clerks, book-keepers, other financial clerks and sole traders who will be involved in each 4 hour meeting.

These numbers are contained in HMRC's Impact Assessment of Business Records Checks. It was published in December alongside the consultation document on the subject of 'Business record Checks'. The deadline for responses was 28 February which is why the Institute of Chartered Accountants in Scotland (ICAS) view has now been made public.

HMRC's estimate is that each half a day, will cost a business £54. ICAS has re-costed an average visit using “realistic” estimates of business disruption and adviser’s time - coming up with a total of more than £560 per visit.

ICAS' revised estimate of £562 for each HMRC visit is as follows:

• 1 hour preparatory meeting between the business (£50 per hour) and its accountant (£75 per hour) = £125
• 3½ hours spent by the business (£50 per hour) and its accountant (£75 per hour) in dealing with HMRC visit = £437

I think this is still woefully short of the real cost to most small businesses. Don't you?

One of the problems with HMRC's impact assessment is that it only reflects estimated figures for the smallest of small businesses and assumes they do not have an accountant. Perhaps this is deliberate and HMRC do not intend to visit businesses that already have someone, like an accountant, to check their business records. If this were the case though the impact assessment should make it clear. It's not an assumption that accountants are making.

I don't check every HMRC impact assessment and missed this one when it was published in December. The last one I looked at related to Mr Darling's plan to reduce the rate of VAT to 15% for 13 months. That too was woefully inaccurate. I blogged about it here.

Last chance for tax cheats to get their tax affairs straight

Last week HMRC published a statement about how they are going to manage deliberate defaulters by a new programme of special rules. The intention is that anyone who is identified as a deliberate tax defaulter will will have their tax affairs closely scrutinised - not just when they are caught but for the next five years too.

This week HMRC announced the Plumbers Tax Safe Plan (PTSP) - which I mentioned in an earlier blog post. This Plan contains a very useful facility. ANYONE can ask to get their tax affairs straight - and benefit from the same offer of a 20% cap on the penalties that will be charged. This should mean you can avoid being subject to ongoing scrutiny for the following five years.

Previous tax disclosure facilities have been criticised as they were specific to people in certain situations or businesses. This time round though the paperwork is very clear and HMRC says:

Customers who voluntarily come forward and put right their tax position can expect very similar terms to those on offer through PTSP. If you do not come forward and HMRC later find that you owe additional tax, you may face higher penalties or even criminal investigation.

I doubt that there will ever be a better time to take specialist advice to help you bring your tax affairs in order. Anyone who wants to use the PTSP to come clean on past tax arrears must register for the scheme by 31 May and will need to pay any back taxes plus interest and penalties by 31 August.

The maximum penalty under this scheme, of 20%, will be reserved for cases where more serious and “deliberate” irregularities have occurred. In such circumstances, the taxman will seek back tax over 20 years. This is why it is so important to work with experienced tax specialists who have plenty of experience of negotiating settlements with HMRC in respect of previously undeclared taxable income.

Anybody with extra income or gains to disclose, whether in the plumbing industry or not, should seriously consider coming forward now. Those who do not and who are subsequently found out will be liable to penalties of between 35% and 100% of the tax evaded. And may well be subject to increased scrutiny for the next five years. The rules are changing. Tax cheats - whether local tradespeople, property owners, entrepreneurs or anyone else are all in the same boat. Make sure yours has a paddle - or even a motor!

Tax amnesty for Plumbers is a good thing but it's not an amnesty

You'll see lots of reference to this so-called tax amnesty' for plumbers over the next few days.

HMRC says:

The Plumbers Tax Safe Plan (PTSP) is designed for people working within the plumbing industry who have not told HM Revenue & Customs (HMRC) about all their income in the past and who now want to get back on track. It is intended to cover people who work (or worked) in the plumbing, heating or gas installation trades and this includes anyone who installs and repairs pipes and fixtures for water, drainage or gas systems in a building.

This is part of HMRC's plan to catch up with everyone who has been doing cash in hand work and who wants to get straight with the taxman. There is NO TAX AMNESTY though.

Everyone who 'fesses up' will be required to pay all of the taxes they had hoped to avoid, plus interest on the late paid tax and a penalty. The 'Plan' simply means that the penalty will be limited - in most cases to 20% of the late paid tax.

As HMRC says:

It's basically a 'fresh start'. If you decide to take advantage of PTSP, you can stop worrying about what might have happened had HMRC found out that you'd not been telling them about all of your income. It's a chance to start getting things right from now on, whilst knowing exactly how much it's going to cost to sort out things for the past.

The guidance around the Plan is quite complex and many people will benefit from professional help especially if their confession covers many tax years.