Tax tease: Late filing penalty STAYS at £100

The media have been reporting that the £100 penalty for late filed tax returns is about to rise from £100 "to a possible £1,300". Nice and newsworthy. Whilst arguably true it's not as big a deal as the reports suggest. Quelle suprise!

Most of the media stories are lifted directly from HMRC's press release about the new penalty regime for 2010/11 tax returns: File your tax return on time and avoid the new penalties.

This highlights two key changes. The first is that the £100 penalty will be charged even if you have no tax to pay or you have already paid all the tax you owe. And there will be further penalties for returns filed more than 3 months late. These penalties could rise to £1,300. previously the £100 was all that could be charged. Late paid tax continues to be subject to interest and to late payment surcharges.

I don't suppose it really matters that the changes addressed by the press release were actually announced by Alastair Darling in his April 2009 Budget. This followed a (so-called) Consultation document issued just a few months earlier as part of the 2008 Pre-Budget Report. That was in the days before the Coalition Government's new approach to tax policy making - the policy decision to abolish the £100 penalty had clearly already been taken by Mr Darling. The Consultation was a formality.

I accept that the £100 penalty is not much of a deterrent as plenty of people who were late filing their tax returns simply paid their tax on time and could then avoid a late filing penalty. This will no longer be possible.

I have two concerns though - which will affect those people who file their tax returns just a few days late:

The first relates back to the reason for the penalty being limited to the amount of outstanding tax at 31 January. When the self assessment system was introduced it was thought it would be unreasonable to charge disproportionate penalties. There were fears that a pensioner who owed, say, £10 of tax, would have a legitimate complaint if charged £100 just because her tax return was filed a few days late. What's changed here?

My second concern is that the taxman's computers are fallible. Erroneous penalty charges are inevitable. Under the present system many such errors go unnoticed as penalties are routinely refunded once the late tax return is processed and the computer recognises that sufficient tax was paid before the deadline. In future the £100 penalty will be payable regardless so there will be plenty of arguments about precisely when tax returns were filed.

Will the prospect of higher penalties for late filed returns motivate you to ensure that your next return is filed well before the 31 January deadline?

Blog release: Award winning accounting practice chooses Tax Advice Network

The Tax Advice Network has been selected as preferred specialist tax advisers by Elaine Clark, founder of the award winning and fast growing online accounting practice: Cheap Accounting.

Despite the name of the practice Elaine stresses that “Quality is in no way compromised. CheapAccounting operates to a set of very high service values”.

Inevitably, perhaps, most of Elaine’s clients have straight forward accountancy and taxation needs. Needs that her experienced network of CheapAccounting.co.uk accountants are well capable of addressing. However from time to time there may be a more complex tax issue which requires more specialist advice.

I am delighted to announce that Elaine has chosen my Tax Advice Network to provide tax support when required. We have agreed a working alliance which is clearly promoted on her website.

I really admire Elaine's approach. Many accountants are in much the same position - in that they have all the skills necessary to advise clients on day to day tax issues. But, unlike a GP who refers patients to a specialist every now and then, some accountants are reluctant to do the same when clients have unusual, complex or difficult tax problems. Elaine has chosen to focus her practice on the expert provision of services required by most clients. Her team know their limitations and, on those odd occasions when their clients require more specialist tax advice they can access this through the Tax Advice Network.

For obvious reasons I do not give permission for just anyone to include our logo on their website. Indeed Elaine is the first person to have that authority – beyond the tax adviser members of the Tax Advice Network of course.

And the award for best budget night commentary goes to.....

I've long been critical of the 'me too' type of overnight budget commentaries. Indeed, these days 'overnight' is slow and many commentaries appear online within hours.

I have seen dozens of such identikit commentaries since the Chancellor sat down yesterday. Almost all contain pretty standard lists of the headline measures, cut and paste extracts from the budget press releases and sundry similar 'commentaries' containing the initial views of the author or a 'senior tax partner'. There are a few that contain bog standard 'advice' and a few firms have provided commentaries on specific measures - although most of these note that we don't have enough detail yet to know how the proposals will work in practice. Others reference what the writer would like to have seen or how limited the proposals are in specific situations.

Of course there will be many more such commentaries that I haven't seen. There's a limit as to how many I can pick up through the email lists I am on and through links contained in tweets on twitter. Still, two very different budget commentaries stand out and deserve an award*

Runner up - and with a special commendation for dividing up the announcements: Informanagement

• Budget Summary March 2011 - New tax changes announced today
• Budget Summary March 2011 - Future changes announced today
• Budget Summary March 2011 - Changes previously announced for 2011-12, now confirmed

And the winner is.........

....Elaine Clark of Cheap Accounting for her blog post: Not A Budget Newsletter!

It won't suit everyone but I love it!

* 'Award' in this context simply means to be acknowledged on this blog with an online link! ;-)

If you've come across any others that are clearly distinctive do please reference them in the comments section below and provide links if possible. Many thanks. I'm also keen to receive feedback challenging my view that the effort devoted to these overnight commentaries is a waste of time. By all means share your experiences of how and why you feel differently. Any evidence of the value would be great too.

Budget prediction: No immediate merger of tax and national insurance

It was inevitable that, due to a short holiday last week, I would miss the opportunity to offer timely comment and debunking of some key tax stories. As I'm back just in time for the Budget there seems little point in writing about anything else today.

However there is one point about which I've been unable to resist tweeting this morning:

We can safely ignore the scare stories about a merger of income tax and national insurance. The coalition Government will NOT advocate simply adding NI to IT. There will be a consultation and many wrinkles to iron out first.

Last week The Office for Tax Simplification published their interim report on small business tax. The executive summary notes that:

"genuine and long lasting simplification can only be brought about through major structural changes to the UK tax system. Our key recommendations are that the Government starts to look at reforming the structure and we recommend that a timetable be set out by the end of the year. The two key areas that require attention are:

• The integration of income tax and national insurance contributions (“NICs”); and
• Introducing a radical new approach to taxation for the very smallest unincorporated businesses.

Studies on how best to achieve this could be carried out, for example, by setting up a working party and through consultation with advisers and professional bodies within a specified timeframe."

At chapter 3 the report sets out the proposed integration steps - being the issues that would need to be considered and addressed:

• Consistency in the definition of earnings;
• Consistency in the required calculations;
• Reliefs and exemptions on either income tax or NICs;
• Treatment of pensioners;
• Treatment of self-employment; and
• Treatment of savings and dividend income.

Many commentators seem to assume that this would all be done in isolation. For example, they suggest that a new combined rate of IT and NI would be charged on all dividends - whether received by small business owners from their own companies - or by pensioners with investment income. This is wooly thinking and most unlikely in my view.

Even though the objective would be to try to retain the same level of aggregate tax (incl NI) I firmly expect this will involve changes to relevant allowances and reliefs.

I'll resist commenting further now as I anticipate we will hear more about this in the Budget - or more precisely, we'll read more about it in the Budget paperwork later today!

HMRC turn the Spotlight on the newest EBT related tax avoidance schemes

Employee Benefit Trusts (EBTs) have long been used for tax avoidance purposes. They have evolved over the years as advisers tried to avoid the impact of tax cases and changes to the tax rules.

HMRC have clearly got fed up of playing catch-up and last December the Government announced onerous new rules to tax "disguised remuneration". In addition to EBTs, the rules would also impact Employer Financed Retirement Benefit Schemes (EFRBS).

Some commentators suggest that the proposed rules are draconian. This may be right. But in most cases those who would be caught are only those who persist in their attempts to frustrate the rules that would tax income when it is earned. Don't want to get caught by the new rules? Avoid fancy and artificial payment arrangements. Pay the tax otherwise due on what would be your income but for the fancy scheme.

Following a consultation on the draft new rules HMRC published a list of Frequently Asked Questions on February 21. These confirm that the new rules are intended to apply to arrangements

"involving a third party to reward employees and directors which seek to avoid, defer or reduce income tax and national insurance contributions",

and to arrangements that are

"used as a tax-advantaged way to save for retirement, using an employer-financed retirement benefit scheme as an alternative to, or to top up, savings in a registered pension scheme."

In advance of the new rules coming into effect, some newer avoidance schemes have been promoted. These are designed to shelter funds in current EBT schemes from the effect of the proposed legislation. These new schemes rely on the availability of credit for loan repayments made before 6 April 2012.

HMRC have wasted no time in adding such schemes to the Spotlights page of their website.

In HMRC's view, while these convoluted arrangements seek to weave a way through the legal changes, they do not succeed. Even if they did HMRC would still challenge them as delivering remuneration which should have been subject to PAYE from first principles.

Subject to parliamentary approval, the new legislation will be effective from 6 April 2011 and some aspects of the proposed new law will apply from 9 December 2010. These changes are designed to prevent the avoidance of PAYE and national insurance contributions on employment income.

Individuals considering entering into such income tax avoidance arrangements should be aware that HMRC will pursue people who seek to avoid tax on monies they earn, through the courts where necessary.

But, hey, if you want to risk such activity go ahead. Some promoters no doubt will sugest that (part of) the financial cost of such legal cases can be covered by tax risk insurance. That is of course just one of the issues to consider. Each to their own.

Related posts:

• NO. The Revenue do NOT approve Disclosed tax schemes
• Tax planning to be wary of
• Were you wasting time advocating this tax scheme?
• Naive promoters of tax avoidance schemes
• Tax avoidance is a card game - the metaphors multiply