I'll huff and I'll puff - empty threats from the taxman?

The press seem to be reporting ever more stories of how the taxman is going to crackdown, challenge or investigate this and that. The implication is that all who do such things are at risk of a heavy handed enquiry - and that what they are doing is wrong.

Here's an example from yesterday's Sunday Times:

HM Revenue & Customs (HMRC) is thought to have begun a fresh wave of investigations into so-called “image rights” payments by Premier League clubs to their playing staff.

Such arrangements, which are entirely legal and are commonplace, allow players to channel part of their pay into private companies set up for their benefit.

I've highlighted a key point. As in many such cases when you read carefully it becomes clear that the tax avoidance activity in question is 'entirely legal'. I drew an analogy between this approach to tax avoidance and the rule regarding MPs expenses on the blog last week (and indeed last year!)

It seems clear that the objective of these announced crackdowns can only be to catch out the amateurs - those who have copied the avoidance technique but without taking informed professional advice. As a result they have probably missed the subtle nuances that are required to achieve the desired tax outcome. And this means that the amateurs are at risk of getting 'caught' but that the experts continue to 'get away with it' - until the law is changed.

On the one hand this situation is great for tax advisers who are well placed to help 'amateurs' to secure the same tax benefits as the 'professionals'. On the other hand are the press reports simply scaremongering?

Recent and prospective cuts in staff numbers mean that HMRC do not have the resources to investigate many of the tax avoiders in question. And as long as the tax planning involved is legal the time and effort involved in such challenges could generate a better return if focused on chasing illegal evasion.

Would it not be a better use of time, effort and money if the law were changed to counter the tax avoidance in question? It may not be easy to achieve the desired outcome but it's not impossible either. Is it?

Taxman visits to home businesses - the truth

No one will be interested in this blog post. It contains the truth about the taxman's new powers of entry to enter your home. Don't bother to read on if you simply want reinforcement of the scaremongering that has been widely reported over the last few days.

The Times for example reported "HMRC given powers to raid home businesses" and that

"Anyone running a business from home could soon have an unannounced visitor — in the form of the taxman"

The Telegraph piece was headlined: "HMRC allowed to raid homes without warning"

Both papers and many others quoted just ONE firm of accountants (a decent firm to be fair) that had issued a press release giving a worse case scenario about how the taxman could use their new powers after 1 April. It includes the following statement, which is factually correct as far as it goes:

“The many thousands of business people and sole traders who claim expenses for 'use of home as an office' should recognise that from next month, HMRC has the right to enter their home to inspect business records. This power includes visits to any business premises, including any part of a residential home used as an office,”

Background
The new powers were introduced by Finance Acts 2007 and 2008. Over the last couple of years HMRC has held extensive consultations with professional bodies who have been very concerned about the extent of the new powers. HMRC has also made the official line very clear. Unannounced visits to private homes will be very few and far between. And I believe that.

When I was Chairman of the ICAEW Tax Faculty I met with many of the top officials from HMRC. I still see some of them at official functions. They are honourable people and I generally believe them when they explain how they intend the law to be applied. They require extensive powers to constrain the efforts of the worst tax evaders. They don't intend that their new powers will be used on a day to day basis.

Insufficient safeguards
Having said that I have also written previously on this blog about the widespread concern across the profession that taxpayers have insufficient safeguards to protect them from abusive use of HMRC's new powers. So you might expect me to agree with the suggestion that small businesses operating from private homes are suddenly at risk of imminent and frequent visits from the taxman - after all this is the scenario painted by the recent press reports.

My position is clear. I share the concern that others have expressed that the new powers could be misused - just like children enjoy playing with their new toys and learn to use them in unexpected ways. But that won't happen immediately. Of that I'm sure.

In practice
Richard Tyler writing in the Telegraph paints a fairer picture. He notes that:

"The new powers mean that income and corporation tax inspectors will have the same powers of entry and the longstanding powers enjoyed by Customs officials investigating upaid VAT"

There we have it. How often have home based businesses had such unannounced visits in the past? Rarely, if ever.

What this means is that if you are a compliant taxpayer you have nothing to fear. Contrary to the press reports, there is next to no prospect of the taxman starting to make unannounced visits to check up on people running their business from home.

If however you've been defaulting on your taxes you could expect a visit. If you've ignored requests from HMRC to produce your books and records for investigation you could expect a visit. And if you've been involved in tax evasion or even possibly 'abusive' tax avoidance schemes you could expect a visit.

But even then I don't expect such unannounced visits to take place in the near future. Indeed there is a very clear statement in HMRC's own instruction manuals for it's staff:

"a visit would only be justified in exceptional circumstances, perhaps to support a challenge to the amount of domestic expenses claimed as a business deduction."

And note even then such a visit would rarely be "unanounced".

HMRC's public comment
This features at the end of some of the recent press reports:

"HMRC does sometimes need to access premises connected with businesses to see such things as goods and assets where it is reasonable to do so, to ensure the right tax is being paid. Although HMRC is extending these powers, it is also extending safeguards. In particular, unannounced visits can only be made with the approval of specially authorised officers."

Bottom line
What this all means is that someone senior has to sanction an unannounced visit by the taxman. In practice it will be far easier for them to make appointments. Even then they will only insist on coming to your home if there is no other way to secure the information they require. In most cases you will be able to go to the taxman's office. Better yet is to meet with him on neutral ground - eg: your accountant or tax adviser's office.

New 90% tax charge on bankers bonuses

This is not as far fetched as it might seem. Indeed it's what may soon become the law in the USA.

Last week the House of Representatives voted by a massive majority - 328 to 93 - in favour of a plan that would force employees who earn more than $250,000 a year to pay $9 in tax of every $10 they receive in additional "rewards".

The Bill creates a 90% tax charge on any bonus received by those affected on or after 1 Jan 2009, even if it is in relation to a previous year. It must still pass a Senate vote and be signed by President Obama, (although he announced yesterday that he would veto the Bill). If it were to pass however this would not be first time that US legislators have introduced punitive taxes on behavior that lawmakers find objectionable.

Might the Chancellor's Budget on 22 April contain a similar provision affecting the recipients of bonuses by banks now 'owned' by the taxpayer? If so it would need to deny 90% tax relief for any tax sheltering attempted by the recipients (eg: by way of contributions to their pension schemes).

I suspect that even if such a proposal was announced it would only be another headline grabber. Haven't most of the bonuses in question already been paid? It's almost inconceivable that any penal tax rate would be backdated to the current tax year so would only affect bonuses paid after Budget day.

Will anyone 'pursue relentlessly' MPs who bend their expenses rules?

Tony McNulty MP is being criticised for claiming the 'Additional Costs Allowance' in circumstances that seem to involve 'bending the rules'.

Only a short note on this as I addressed the key points in two previous blog posts:

11/2/08 - Is it one rule for MPs and another rule for the rest of us? I drew an analogy between the way that MPs defend criticism of their expense claims by noting that they only do what is allowed by their (own) rules. If they don't break the law why should they be criticised? Hmmm.

16/3/09 - How far can you bend the rules? I noted that the draft HMRC Charter refers to an expectation that "You can expect HMRC to... Pursue relentlessly those that break or bend the rules". I noted that this was ambiguous as there is no clear agreement as to when 'bending' the rules becomes unacceptable; also that it is breaking the law rather than breaking HMRC rules that should be focus of such activity.

Surely it cannot be reasonable to apply distinct standards to MPs and their rules as compared with taxpayers and the tax rules that apply to all of us?

Sir Fred Goodwin's tax worries - right or wrong?

As pressure mounts on Sir Fred Goodwin to give up or give back some of the monies he is due to receive from RBS, the question arises as to what would be the tax consequences?

We are all taxable on the monies paid to us by our employers and pension providers. Assume you then choose to give some of that money back to your employer or to anyone anyone, what are the tax consequences?

Gift Aid is the only facility of which I am aware that provides tax relief for money that you voluntarily give away. So, unless Sir Fred Goodwin was to give 'back' some of his earnings and pensions to a registered charity (using the Gift Aid system) he would not secure any tax relief. And despite RBS current situation it is certainly NOT a registered charity.

This is an important consideration. Let me be clear that I am NOT defending the sums Sir Fred has received and is due to receive. I did note that that when first challenged he made clear that he would not "voluntarily accept a reduction in a pension entitlement" that had accrued over many years including prior to his joining RBS.

I took this to mean that if a legitimate legal challenge were made that he would accede to this. Not that he would have a choice then of course. It is also clear from more recent reports that he is aware that unless he is legally deprived of some of the monies involved his tax bill would remain unchanged.

Assume, for simplicity's sake that if you earned £10m you would have to pay £4.1m tax. You would only be able to give 'back' £5.9m without being out of pocket. The pressure on Sir Fred is to give back the gross amount (£10m in this example) in which case he would then be £4.1m out of pocket.

I have since seen it suggested that a concern over the tax bill is the reason why Sir Fred is unwilling to repay the lump sum that he received from his pension fund. He is quoted as saying that he would pay back the lump sum so long as he can get an assurance that the tax man won't come after him. He is concerned that tax would - in theory - still be due on the £2.7m payment, even if the money has been handed back. Whatever we might think about the sums payable to Sir Fred I must admit to some sympathy with this view. What about you?