Monday, 22 September 2014

Working Tax Credit and working hours ploys

I am no expert on Working Tax Credit (WTC), and I know that many who were on Incapacity Benefit and even Disability Living Allowance have been pronounced “fit to work”, some say unfairly, in the last two or three years.
Word on the street is that you can get your sixteen or thirty hours work to be entitled to WTC by being self-employed selling through Kleeneze catalogues, or maybe selling lottery tickets for charities. How you can prove your working hours from that, I don’t know, but maybe neither HMRC nor DWP care.

Are my sources correct? Have you heard anything about this? Does it matter?

Monday, 8 September 2014

State Pensions, PAYE and unfairness

Not all the taxpayers I look after have high incomes. From time to time I help pensioners and others whose means are quite small.

It may surprise many, but there are some people whose only taxable income is from the UK State Pension. Quite often it is enhanced by the additional State Pension, previously known as the State Earnings Related Pension Scheme (SERPS) and the State Second Pension. This does not mean that those pensioners are living the high life. Their total income might well be no more than £11,000 or £12,000 a year, but that is more than the current Age Allowance of £10,500, frozen by the Chancellor, George Osborne. That means that those pensioners have a tax liability.

Quite a few new pensioners with higher State Pensions are unaware that they have a liability to tax. In fact many are unaware that State Pensions are taxable at all. In the past year or so, I have come across such individuals who have suddenly found themselves with unexpected tax demands and on one occasion a demand for four years’ tax all at once.

I took on the poor chap who had paid HMRC for four years’ tax, and found that actually he owed nothing because HMRC had overlooked his entitlement to the Married Couples Allowance. This actually eliminated his supposed liabilities, but he died before I got the tax back. His widow received the payment.

However, there are others who are receiving tax demands on their State (and only) Pensions out of the blue, and still do have a tax liability. Surely it would be less painful to bring taxable state benefits into PAYE and ensure that no one receives any unexpected shocks? After all, these are by definition people on low incomes, and it cannot be expected that they will have any savings out of which they pay tax. Generally they spend what they receive at that income level, and who can blame them?

Better still, why not exempt from tax any amounts of State Pension in excess of the Age Allowance or Personal Allowance as applicable. After all, these pensioners have done their bit.

What do you think?

Friday, 7 March 2014

Fair Tax and the real world

There has been a lot of talk about Fair Tax and self-appointed parties have even persuaded an august professional institute to buy into their plan. It sounds a bit like clothing manufacturers getting the Woolmark (remember that) for a fee of course. The Woolmark was a guarantee of Merino wool. A Fair Tax Mark would be no guarantee of anything.

The question is, what level of tax is fair? We are talking about corporation (company) tax of course. All the criticism, mainly aimed at multinational companies, is about the level of corporation tax they pay. Now it is true that they might have more flexibility than smaller businesses to arrange to pay a lower level of corporation tax in the UK by transferring profit to other jurisdictions. 

At the same time, there are rules on transfer pricing which apply to large companies and in which HMRC take a keen interest. All businesses need to reinvest, and to encourage this there are quite generous allowances against tax that can be claimed (because the Treasury wants them to) which means that taxable profit might be lower than accounting profit.

However, I do not want to get too technical. I will leave that to others. The government is reducing the main rate of corporation tax to 20% on taxable profit for all companies, large and small, from 1st April 2015. The previous administration was also intent on reducing the rate, and that is because Government perceives that with a low tax regime on profits, overseas businesses will want to invest more in the UK. It all makes sense to me.

My next point is one already made by Ben Saunders who has helpfully extracted from HMRC's accounts for 2012-13 the following figures which show that corporation tax is only the fourth largest revenue raiser anyway:
  1. Income tax – £150.9bn
  2. National Insurance – £101.7bn
  3. VAT – £101bn
  4. Corporation tax – £39.2bn
Do read Ben's piece, in which he points out that in the UK, most businesses are not companies anyway.

So the Government does not regard raising money through corporation tax as their biggest priority, and there is a reason for this quite apart from the question of competing for business against foreign competition. That reason is that corporation tax is not the only tax that companies pay.

Who actually pays all the income tax recovered under PAYE from company employees? It is the companies that employ them. Who pays the National Insurance? The employees think they pay their share, because it in on their payslips, but actually it comes out of company bank accounts.

Therefore it is ridiculous to have a measure of one tax to be regarded as “fair” and to ignore all the other tax revenue generated.

We can take this one step further. Large companies as well as small ones and other businesses contribute to raising the level of employment. In fact in the UK there are more people employed than there have ever been before. If people are employed they are drawing far less in benefits and therefore saving the Treasury even more money which they would have to cough up if those employees had no work and were sitting at home.

Do not talk to me about Fair Tax. The economy is very complicated, and the tax regime as a whole is a sort of steering mechanism. It is crude and sometimes not very responsive, but to extract one element is disingenuous, particularly where that element of potential low tax on profits is an important attraction for investment.
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Wednesday, 24 July 2013

Margaret Hodge and the British Inquisition

I had not intended to write about the House of Commons Public Accounts Committee’s (PAC) “investigation” into tax avoidance etc. as many more august tax writers than I have already had their shot. However, I have been asking myself how they could have got it all so badly wrong, and why.

We know that there are political tax lobbyists out there who have received funding from unions. There have been various stories in the newspapers about individuals who have been involved in aggressive tax avoidance schemes, such as Jimmy Carr. Somehow with the campaigners driving the politicians there has been a shift towards questioning why multi-national famous-name companies such as Starbucks and Amazon do not pay much corporation tax in the UK and assuming there is some evil plot.

The PAC has had representatives of multi-nationals and of the Big Four accountants before them to ask questions on this issue, but sadly they have not come to sensible conclusions because they start from the premise that the international businesses are dishonestly avoiding paying their dues to HMRC. Many witnesses have tried to explain that firstly, the general premise is not provable and in almost all cases not even likely, and secondly that corporation tax paid is not a measure of a business's contribution to the economy.

All the witnesses have been interrupted constantly when answering questions. The Committee members, and in particular the Chair, Margaret Hodge, have tried to insist on their own view being accepted by arguing with the witnesses rather than allowing them to reply fully. The whole attitude brings to my mind the treatment of Galileo by the Inquisition in Rome in 1633, when he tried to explain that the Earth went round (orbited as we would say) the Sun, and not the other way round. Because the Vatican doctrine said this could not be true, no one was prepared to look at the evidence presented. So it is with the PAC and their attitude to supposed tax avoidance by large companies.

If in any investigation we assume the result before we investigate, we will inevitably bias our conclusion, and probably come up with the wrong one. That is true in tax, in economic matters, and in science.

Please bear with me, but Robert Millikan, one hundred years ago, biased his results in measuring the charge of an electron because he had a wrong value for the viscosity of air. Actually he was not far wrong, but he tended to discard results which did not support his figures. The shame is that no doubt for psychological reasons other scientists following afterwards and getting different results tended to do the same, discarding results which were “off” rather than properly challenging Millikan's conclusions and measurement.

Proper scientific research should involve reproducing any experiment on which you intend to build under the same conditions, and then developing your own experiments and investigations from there to make sure there is a consistency. That is intellectual rigour, something to which the PAC does not adhere.

We understand that the PAC members are not briefed. They do not have people to help them with their questions. Yet it is apparent that they do not do much research themselves. That was very obvious with the recent questioning of witnesses about the nature of Duchy of Cornwall, its income and tax status. There is quite a lot one can find out about the Duchy in two minutes with Google (I put that to the test), yet it seemed the PAC members had not got that far. They asked their questions apparently from a starting point of total ignorance, but at the same time their interrogation had that implicit bias that someone must be dodging tax.

I am not going to get into the complexities of international taxation beyond saying that Starbucks can pay royalties to their Netherlands business and claim a tax deduction in the UK. There is international cooperation on transfer pricing, and no one had been doing anything wrong. It is perverse that Starbucks have now “volunteered” to pay corporation tax by deferring claims for allowances to which they are fully entitled.

What the PAC does not understand is that fast-growing businesses tend not to pay much corporation tax. That is true of small businesses which might be my clients, or very large ones. The American giants such as Starbucks and Amazon have been familiar for a while and seemed to be everywhere, but they are now more everywhere than they were even a couple of years ago.

Why have they not been paying much corporation tax? Because they have had little or no taxable profit; because they have been investing all their “spare” money in opening new premises, buying plant and paying new employees – yes, new employees. All that investment is tax-deductible, as it should be.

Large corporates who have no taxable profit liable to corporation tax still generate substantial amounts to the Exchequer. They pay VAT on their sales less inputs, they pay business rates, they pay the payroll taxes for their employees, and they pay import duties.

They boost employment by taking on workers and by driving income to their logistics suppliers, the ones who deliver to them and the ones who deliver their stuff to you and me. The suppliers need to employ more people too.

So the small area upon which the PAC concentrates concerning tax on accounts profits has nothing to do with the real contribution of large companies employing people not only paying their taxes, but saving the State from having to pay them benefits if they were instead unemployed.

Taxation is according to the law, and should not be based on moral blackmail or Aunt Sally games run by people who should know better.

Of course it is not good explaining any of that to Margaret Hodge. She has made up her mind, and the actual reality does not suit the grandstanding she is trying to make at the end of her political career.

Footnote: In the Wikipedia page about Millikan there is a reference to the physicist Richard Feynman's book of anecdotes, Surely You are Joking, Mr. Feynman!. Affilate link at the bottom. I thoroughly recommend this book, which is great fun. It is a glimpse of the life of this amazing man. If you do not wish to use an affiliate link in purchasing, here is a non-affiliate one.

Wednesday, 17 July 2013

HMRC cannot do joined-up writing

As anyone who reads this blog will appreciate, I correspond regularly with HMRC. If I am dealing with an issue other than an enquiry into a taxpayer's affairs, when normally one officer will run the case, HMRC's correspondence is literally all over the place.

Not all issues can be dealt with over the telephone, because HMRC's Self Assessment call centre agents are limited in their power to help with anything beyond a PAYE Coding or a payment allocation etc.. If I have to make a complaint on behalf of a client or simply highlight some issue which HMRC are clearly getting wrong, I have to write. The trouble is that each time I write a letter on a particular issue, I get a reply from a different person in HMRC.

I believe that part of the difficulty must be a drive for “efficiency” in this new digital age. Most initial correspondence has to go to a PO box in Cardiff (you might get to write to a couple of other PO boxes when you get a reply) and I believe they scan and email my letter to some anonymous office who knows where. If I am lucky I get a reply within anything from a couple of weeks to three months. If I then respond my next letter might be scanned and sent to someone else to reply, perhaps someone in another part of the country.

Because HMRC officers are not trusted to think for themselves, or are not qualified to, many of the replies are obvious “paste jobs” from standard text. They do not consider the thrust or particular nuance of the letter to which they are replying, and of course the second and third people to respond in correspondence will not know what their predecessors were thinking when they wrote their letters.

It is no good trying to send a follow-up letter before I have had a reply to the previous one, because that will be emailed somewhere else, even if I attach a copy of the earlier letter.

Sometimes I have had two replies to the same letter within a few weeks. On a recent occasion, a more favourable decision was made in the second than in the first, which is fine and they have committed themselves.

There is no continuity in the system. No one sees correspondence through, and if they did it would be dealt with more quickly and efficiently. As I have mentioned before, one letter to me was typed and never sent to me by HMRC. Often, letters I receive from HMRC are unsigned, and I wonder whether the officer who drafted the letter has checked it, or if anyone has read it through in their absence, given that sometimes mistakes are only noticed in hard copy.

I suppose the problems are that there are insufficient technical staff of a decent standard within HMRC, and that digital technology had led to misguided senior managers believing that any of their officers can deal with correspondence without a case file, even a virtual one.

The current system wastes my time and your time if you are a tax professional, and it wastes HMRC's time and resources in not getting matters dealt with more quickly and efficiently.

It is another exasperating example proving Hutber's Law: “Improvement means deterioration”. What do you think?

Monday, 15 July 2013

HMRC and credit where credit's due – eventually

I am very pleased to report that HMRC have allowed my longest standing claim under ESC A19 after five letters, eighteen months, and just before going to the Adjudicator. My previous report on the case was here and I do think it only right to thank Keith Gordon for his campaign and in particular his article in Taxation in October 2012 which provided more ammunition for the fight.

Of course it should not have been a fight. Not all cases have the same merit, but given that my client visited HMRC after her husband's death specifically to make sure that her pensions would be taxed at source correctly, it should have been a simple matter for HMRC to agree to the claim. Of course they did not, but let us be fair and say that they saw the light at last, and be grateful.

In some ways the pleasure I get from this win is more than a case I had a while back when HMRC backed off in an enquiry from unreasonably demanding £250K plus from a client I had just taken on. It is a great feeling to see off an injustice.

Wednesday, 19 June 2013

HMRC, the stick and the carrot

Can HMRC's aggressive stance towards individual taxpayers be counterproductive?

Frustrated of Essex

It is no secret, especially not on this blog, that I have been frustrated by HMRC's attitude towards those who found out at a late stage that tax had been under-recovered from their pensions etc. and they had a significant tax bill. Even though HMRC has had the power under ESC A19 to “forgive” the tax paid, in the last couple of years they have steadfastly refused claims and appeal which would have been accepted prior to 2011.

We know that HMRC is under extreme pressure to collect as much as possible. I understand that, and let me be clear, I think everyone should pay their fair share according to the law. I wrote last July:

“I would like to see all dishonest tax-dodgers caught. The so-called black economy consisting of people who offer to re-lay your drive or clean your house soffits and fascias for cash and all the other “cash-in-hand” people who knock on your door cost the country billions in lost tax.”

It is just that in some areas, HMRC, and maybe Government, have lost track of what might be fair with regard to honest taxpayers, those who out themselves from the black economy, and others whose tax affairs are in arrears and they seek to get themselves up to date.

My own patch

In my own practice, there are areas of taxation I do not enjoy, do not regard as my strengths, and which I pass to others. No one can gain the experience to be strong in all areas of tax because there just isn't time, whether one is a practitioner in private practice like me, or an employee.

I have two or three favourite areas or niches of tax that I do specialise in. One of those is in helping”delinquent” taxpayers, which usually means those who have not paid tax recently, to get themselves up to date and to negotiate a decent settlement with HMRC.

Those who have been “caught” by HMRC are in worse position from the point of view of the penalty regime than those who come forward voluntarily. That is understandable, but I can still help them in agreeing their back-tax, interest and penalties and getting a settlement with HMRC.

A puzzle

Those making voluntary disclosures should be entitled to better treatment with lower penalties. What has worried me recently is that in one case, where the individual simply did not have the means to pay all his tax (of course his fault) HMRC preferred to make him bankrupt with a lower tax recovery than if they had agreed his offer of payment of a quite significantly greater amount over three years. HMRC preferred less jam today than the more jam they might have had tomorrow, and by making anyone bankrupt they have to join the queue with the other creditors. I thought this was pretty silly.

Late return penalties

Another issue is the new daily penalties regime introduced by HMRC from 2010-11, and I quote them;

“Following a review of HM Revenue and Customs powers new legislation was introduced. Under Schedule 55 Finance Act 2009 the way in which HMRC applies its late filing penalties saw major changes particularly in respect of raising Daily Penalties. This change only applied to Tax returns for 2010-11 onwards with the previous legislation and guidance remaining for 2009-10 and earlier.
Where a customer has not filed a Tax return 3 months from the return due date Daily penalties will start to accrue for a period up to 90 days at a rate of £10.00 per day, the rate is fixed and can not be changed (except by legislation) and in the majority of cases this will be an automatic process. There is no longer a requirement to apply to the Tribunal to charge a Daily Penalty or for a “fixed £100 penalty” to have been charged before applying it. A Revenue Determination can be considered at any time during the period of which a Tax return remains outstanding but it is not a requirement before a Daily Penalty is applied.”

Note the irony of calling someone a customer and then in the same sentence imposing daily penalties.


My concern is that the daily penalties may be a disincentive to comply in some circumstances. Someone more itinerant “self-employed” might, if the penalty notice catches up with them, be less inclined to let HMRC know where they are. Also, not everyone who works in the UK was born here or even has strong ties to the UK. Many, in the face of threats, will melt away whence they came, or to some other jurisdiction. Of course the individual amounts of tax lost each time might be small, but in a fluid situation of cross-border working, I think the penalty regime may be a disincentive to comply, especially if the first a worker knows of her or his obligations is the penalty notice rather than the original notice to complete a tax return.

Particularly with the taxation of individuals I believe HMRC should take a more pragmatic approach to collecting tax, by which I mean adopting methods to collect more through negotiation, rather than less tax through preferring the stick over the carrot.

Of course everyone should meet their tax obligations under the law. Punishing especially those who have come clean or have just got behind with their tax affairs, at the expense of lowering the overall tax take, seems rather foolish.

Common sense?

I believe there is a case for removing most of the penalties imposed for late submission of Returns once they are submitted, with perhaps HMRC raising their interest rate charge for late-paid tax. I also think more common sense should be applied where an individual simply cannot meet their tax obligations. I would not want to encourage anyone to dodge their responsibilities; rather I would hope they should face up to them with more encouragement.

How do you feel about HMRC's aggressive stance? Do you believe it is counterproductive?
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