sbnca news

New Balls, Darling?

2009-06-11T10:14:42+01:00

One of the more intriguing sidelines to the recent cabinet reshuffle was the suggestion that Gordon Brown wished to replace Alastair Darling at the Treasury with Ed Balls, but could not risk doing so in case Mr Darling resigned from the Cabinet, a story that Mr Brown of course flatly denied. Apart from casting doubt upon the degree of confidence inspired at #10 Downing Street by the occupant of #11 (the Prime Minister probably thinks, with considerable justification, that Mr Darling is a bad case of 'after the Lord Mayor's Show'), this story does inspire the thought that the Prime Minister may have been toying with the thought of appointing as Chancellor the one man whose surname makes for even better headlines than the current incumbent!

However, the purpose of ths blog is actually to recount a story I heard told some years ago by Ed Balls against Gordon Brown, which went as follows:

One Sunday morning, when Ed Balls was part of his Treasury team, Gordon Brown phoned Ed Balls about the Sunday Times list of 100 key policy makers, which had been published that day. The purpose of the call was to congratulate Ed Balls on being number 2 on the list. Gordon Brown went on to say that he had expected to be below Tony Blair ("this was before Iraq", said Ed Balls) but was disappointed to be below Margaret Beckett. "Gordon, who is number 1 on the list?" asked Ed Balls. "That's another funny thing" replied the Chancellor "it's Gerry Adams". "Gordon, the list is in alphabetical order" announced Ed Balls.

So this whole blog is just really an excuse to tell this particular anecdote!

Mark Simpson

11 June 2009

So how complex is our tax system, Darling?

2009-05-26T15:58:57+01:00

"Truth is stranger than fiction, but it is because Fiction is obliged to stick to possibilities; Truth isn't."
Mark Twain

Occasionally a news story will come to light that reminds us just how right Mark Twain was. A classic example is the news that Alastair Darling, among around half of his cabinet colleagues, not only had to pay an accountant to complete his tax return, but then claimed back the cost of the accountancy fees as a deductible expense.

So let's start with the marginally less amazing aspect of this, namely the fact that MPs can apparently legitimately reclaim the cost of professional fees associated with completion of their tax returns. I had never previously come across a case where an employee has successfully established such a claim for income tax purposes, or indeed would even have considered the remotest possibility of such a claim being successful. And yet I had understood that, in applying what passed for the expenses system for MPs, the employee income tax test of being incurred 'wholly, exclusively and necessarily in the performance of the duties' was applied. And indeed, this would be a very sensible approach, as otherwise MPs would end up potentially being taxed on large amounts of the expenses that they reclaimed.

However, the test has been applied in a very odd manner in the case of advice on tax returns. In what sense are professional fees expended on this basis incurred 'wholly, exclusively and necessarily in the performance of the duties'? I have sometimes had occasion to argue with the taxman over one aspect (normally the 'necessarily' test in practice), and have had doubts over some MPs expenses claims in respect of one or the other of the tests, but I cannot for the life of me see that fees for tax return completion meet any of the tests, let alone all of them.

Wholly

One does not complete a tax return in the performance of one's duties; rather it is a by-product of the performance of those duties that one needs to complete a tax return. So this test is clearly not met.

Exclusively

The principal reason for completing a tax return is to enable HM Revenue & Customs to satisfy themselves that the correct amount of tax has been paid. Given that MPs may well have other forms of income than their MPs' salary (rental income seems to have been a favourite here), the exclusivity argument falls at the first hurdle.

Necessarily

One might of course choose to complete one's own tax return, and not incur professional fees at all, and thus such expenditure can hardly be necessarily incurred in the performance of the duties.

In the performance of the duties

It is no part of the duties of an MP to complete a tax return, as stated above.

I think this analysis helps to explain why the claim of dozens of MPs that it was the system that was to blame for the current scandal, and not the administration of that system, simply does not hold water. To my mind the system was based on the soundest of principles, namely that MPs should only be able to reclaim those expenses that they would be legitimately entitled to claim for tax purposes as employees. I think that is an excellent system, and would have no problem with it had it been properly applied. The trouble is that it clearly has not been, and MPs have been allowed to claim many items that clearly do not meet this test, which is a notoriously restrictive one.

For this reason I would expect HM Revenue & Customs to have a field day in pursuing those MPs who have claimed items which are ineligible for a tax deduction, which may be why we are seeing a rush to repay some of the more controversial claims. But even in such cases, if the amount concerned exceeded £5,000 it seems to me that MPs have had beneficial loans from their employer, which would also have tax consequences.

Which brings me to Hazel Blears, whom I defended robustly when this story first broke, but who subsequently did something rather odd, which merits comment here. She announced that she was paying the capital gains tax that she had avoided by electing for her London property to be her main residence, and indeed I believe brandished the cheque in front of photographers. However, I don't see how she can do that. She had legitimately elected for the London property to be her main residence, and legitinmately claimed the resulting tax exemption. Thus I suspect that HMRC will send her cheque back, or credit it against her next tax liability, in which case she will not have paid the tax at all. Just a thought........

Of course the more amazing aspect is that the Chancellor, the man responsible for the design of the tax system, finds the tax return completion responsibility he places upon millions of taxpayers so demanding that he has to employ someone to complete his own tax return for him. So much for claims of simplification of the tax system. If you made this sort of thing up, no-one would believe you, which means, I guess, that Mark Twain was right all along.

Mark Simpson

26 May 2009

Don't Rain on My Parade - please engage brains at Town Halls

2009-05-21T11:30:26+01:00

I usually make a habit of only blogging about tax, but when an elected authority (or in this case two) does something really stupid I have to make an exception.

I like the location of our offices - they are the right side of Manchester for where I live, and I have a 6-lane motorway to drive the busy bit, and we are right next door to my beloved Lancashire County Cricket Club. However, next Thursday I may well wish that our offices were anywhere else in the world other than where they are, thanks to an incredibly short-sighted and frankly inexplicable decision by Manchester and Trafford Councils.

There was great controversy last season when Manchester United were refused a victory parade for winning the Champions League, following the carnage wreaked by Rangers fans in the city a couple of weeks earlier before, during and after the UEFA Cup Final. Whilst I hold no candle for Manchester United, that decision was wrong in my view; after all United fans were hardly likely to trash their own city (cue jokes about London, Belfast & Dublin) in the way that Rangers fans had. But I think the legacy of that misguided decision is now coming back to haunt us.

I can remember the 1999 parade, and the utter chaos that ensued in trying to escape from Salford, where I then worked. However, the arrangements for this appear to be designed to cause even greater chaos, and to have been made without any thought for businesses in the area at a time of considerable economic hardship. Let me explain.

The parade (should United win) is scheduled to take place in late afternoon on the Thursday after the final on Wednesday evening. There will be no parade if they lose. So for a start it is impossible to make any concrete plans to deal with the disruption, because we don't know whether there will be any. Not a good start, but it gets much worse.

The timing is frankly incredible. Our offices are more or less opposite Trafford Town Hall, a centrepiece of the celebrations. Not only does this mean that our offices will be effectively inaccessible at evening rush hour (due to road closures and sheer mass of people), meaning that our staff will be unable to get home by car, but it has also been arranged to coincide with a 20:20 cricket match at the other Old Trafford, so that thousands more people will be trying to get to pretty much exactly the same place for the 5.30 start of that match. On pure public safety grounds this is madness, and should never have been contemplated by the Councils, or indeed the police.

Most of our staff live north of Manchester, and will be faced with trying to get from Stretford through central Manchester and out to the north in the face of hundreds fo thousands of people doing the opposite. By car this appears likely to be utterly impossible, and the option of using the Metro is more than complicated by the fact that the line between St Peter's Square and Victoria is closed for maintenance work. So how do the leaders of the two councils concerned suggest our staff get home that evening please? Personally I 'merely' have the problem of getting from a speed networking event in Salford that I am organising (finishing about 5pm) via the office to a 7.30 meeting in Poynton, which looks likely to be equally impossible. Why should people going about their lawful business have their lives utterly disrupted in this way?

By all means have a parade, but why not at the weekend, when it will not disrupt business (I haven't even talked about the temptation for employees to sneak an afternoon off work to attend the parade) and would not clash with a popular cricket match? The fact that Manchester City Council was so embarrassed by its mistaken decision last year is no basis on which to make another wrong decision this year. In common with, I suspect, all non-MUFC supporting business people in the area, I will be ditching English patriotism and hoping that they lose next Wednesday. I think we are entitled to expect more thought and consideration from our elected local leaders, to whom I will be copying this post for their comments.

Mark Simpson

21 May 2009

MPs expenses - a project for HM Revenue & Customs

2009-05-18T12:30:23+01:00

There is another aspect to the MP's expenses issue which impacts upon tax, namely the tax position of those MPs who have made claims under the now thoroughly discredited current system.

MPs are 'our' employees, and are taxed as such. The rules regarding the deduction of employees' expenses for tax purposes are notoriously strict, requiring those expenses to be incurred "wholly, exclusively and necessarily in the performance of the duties of the employment". The employee must also be obliged to incur and pay the expense as the holder of the employment. Not only is the legislation strict, but so is HMRC's interpretation of it.

Among the items that are generally acceptable to HMRC as employee expenses are the following:

Transport costs for business travel (other than home to normal place of work)

Reasonable subsistence costs (food and accommodation whilst working away from home)

£5 per night for incidental expenses whilst working away from home

Business telephone calls

Professional subscriptions relevant to the employment (for instance, my Chartered Insititute of Taxation and Institute of Chartered Accountants in England and Wales subscriptions)

The 'wholly' and 'exclusively' elements of the test mirror the test for tax deduction for the self-employed, and HMRC even on occasion allow for an element of apportionment of expenditure, which should not of course strictly be possible. The real problem areas are 'necessarily' and 'in the performance of the duties', although the other two tests do also give rise to practical issues on occasion.

By and large the issues regarding MPs focus on property, so I will concentrate on the application of tax law to expenses connected with property. The position regarding hotel accommodation is fairly clear cut, in that where the duties of an employment require the taxpayer to spend nights away from home, expenditure on overnight accommodation is allowable. It appears to me that an MP has two regular places of work, being the House of Commons and his or her constituency, which slightly complicates the matter. In any case, staying in hotels does not (perhaps understandably) appear to be the preferred modus operandi for MPs.

Travel expenditure is interesting for employees who may (or may not) have two regular places of work. If they only have one regular place of work, the cost of commuting there from home is not allowable. If they have two, travel between them is allowable, but home to work travel is not. So I assume MPs would argue that they always travel from (say) Parliament to constituency office and vice versa, rather than to or from constituency home or London property. It would be interesting to test the veracity of any such claims, methinks. Or maybe they argue that constituency home is a place of work, which would solve a lot of problems in this respect.

Miantaining permanent residential accommodation in a second place of work is a less common approach to the issue of employees working away from home (usually on cost grounds) but I have seen it done, and experienced some interesting issues in obtaining agreement to deductibility of costs from HMRC. In particular I acted for a Thames Valley hair salon, which opened a London salon. This required hairdressers from Oxford to work, sometimes until extremely late, in London, and the company bought a flat in London for them to stay in when this happened. Sometimes the employees concerned were director / shareholders, and sometimes not.

The only basis on which I managed to persuade HMRC that the accommodation was not a benefit-in-kind for the directors of the company was placing the only key in the custody of the company secretary (unrelated to the directors), and requiring him to keep a detailed log of use of the property. Had we not jumped through this particular hoop, HMRC made it clear that they would have regarded the property as available for use by the directors, and would have assessed benefits-in-kind on them.

Whilst this is not quite the situation of MPs, I do wonder about the 'wholly, exclusively and necessarily in the performance of the duties' test, and its application to London homes and expenditure thereon (or for that matter to a constituency home if an MP claims on that). Certainly HMRC's usual approach to such an issue would be to say that the taxpayer chooses where he or she lives and works, and that if one place is distant from the other that is a matter for the taxpayer. However, I accept that MPs are in a fairly unusual position in this respect, as they do clearly have duties to perform in two separate locations.

Of course the purpose of the 'key' regime I set up for the hairdressers was to demonstrate that the directors were obtaining no private benefit from the London flat, but only using it when the hours and place of work dictated its use. That is clearly a much trickier argument for MPs to run with their London homes, as there is no restriction on their ability to use these as and when they wish; after all they own the property. It would be interesting to see whether MPs and their families still use their London properties when Parliament is not sitting; if they do then the deductible expense argument seems to me to become impossible to win, for the following reasons:

1. The property cannot be used wholly and exclusively in performance of the duties if it is used as a London base for family holidays etc.

2. The necessarily test is notoriously the most difficult one to satisfy, as the necessity has to be imposed by the duties. In this case, paradoxically, it may be the easiest to satisfy if you accept that MPs need a London base.

3. 'In the performance of the duties' is even trickier. As Lord Chancellor Viscount Cave said in a famous tax case; "A man must eat and sleep somewhere" and "nor does he, as a rule, eat or sleep in the course of performing his duties, but either before or after their performance." So there are fairly formidable obstacles facing MPs here too.

Perhaps the key case to understanding MPs tax position on second homes is that of the Irish bank manager who often had to visit London for work purposes, and joined two London clubs to obtain accommodation and facilities to perform his London duties at the lowest possible cost. The subscriptions were held to be allowable as expenses in employment, on the basis that they were paid to obtain what was necessary to the performance of the taxpayer's duties, any benefit to him being merely incidental. I assume it is on this basis that MPs hang their claim for tax exemption on property-related expenses payments.

Of course what is acceptable as a deductible expense for tax purposes and what is acceptable as a second home expense need not necessarily be the same, but my understanding of the House of Commons rules in this respect is that they are framed on the same basis. Thus there may well be some significant tax issues for MPs to deal with, particularly as HMRC may not take the same generous view as the Commons authorities on what is spent "wholly, exclusively and necessarily in the performance of the duties of the employment."

What is reasonable care? MPs expenses and the new tax penalty system

2009-05-14T15:56:00+01:00

Recent conversations with friends and colleagues have revealed that my previous post is way out of line with their views on the matter of MPs expenses, and that my view of what has become colloquially known as 'flipping' in the media, that it is an entirely legitimate form of tax mitigation, has been greeted with thinly disguised incredulity. Proof, then, that I don't choose my friends because we agree on things!

I still hold to my views on this matter, but an intriguing aspect of the expenses issue has occurred to me in the context of the new HM Revenue & Customs penalty regime for inaccuracies in tax returns, about which I have previously posted.

This new regime draws a distinction between taking reasonable care (no penalty) and carelessness (a potential penalty). In assessing carelessness, HMRC will take into account the capabilities and circumstances of the specific taxpayer. Because this is a new regime, there will no doubt be a bedding in period, during which taxayers and HMRC will, through a process of negotiation, create an informal framework for deciding where the dividing line falls between reasonable care and carelessness.

I had previously taken the view that, in assessing my capabilities as a taxpayer, HMRC would take the view that any errors on my tax return would by definition be careless, because I spend my life dealing with tax. And if they concluded that any inaccuracy was deliberate, they would try their damndest to lock me up for as long as possible, and quite right too. But now I'm not so sure............

After all, I am a mere taxation practitioner, not endowed with the necessary brainpower, stamina, vision and political nous to be a Member of Parliament. So clearly we would be within our rights to expect the highest possible standards of care from our MPs, wouldn't we?

Elliott Morley MP claimed mortgage interest payments for 18 months after his mortgage ended.

Andrew Mackay MP and Julie Kirkbride MP (husband and wife) claimed the full allowance for two London homes. Whilst I do not wish to pry into their domestic arrangements, that appears to be at least one too many, particularly as Mr Mackay is MP for Bracknell (37 miles from Westminster per the AA Route Planner), although Ms Kirkbride has the excuse of being MP for Bromsgrove.

Jack Straw MP, and Justice Minister, claimed for his full council tax payment despite the fact that he was entitled to, and received, a 50% discount.

I could go on, but I won't.

Now of course our MPs would surely never be careless with public money; indeed it is difficult to imagine many more heinous charges that could be levied at an elected representative (although John Stonehouse came up with a few, as did Neil Hamilton). And of course, as mentioned above, their capabilities and circumstances are such that the highest possible standards of care would be expected of them. So this sets an interesting precedent for dealings with HMRC's new penalty regime, does it not?

The first time that HMRC accuses on of my clients of carelessness I will happily run the above argument ; after all, what better yardstick of reasonable care in the conduct of public affairs could there be than our elected Parliamentary representatives? I think this could lead to some diverting discussions on the issue of care, and certainly my view of what constitutes reasonable care has been changed quite dramatically in favour of the taxpayer by the events of the past couple of weeks. After all, HMRC could not justify imputing a higher level of care to we mere mortals than would apply to MPs, could they?

So perhaps taxpayers who are found to have submitted inaccurate returns should be grateful to those in the House of Commons who, by their practical example, have so clearly defined the low standards of care to be expected even from those who hold the highest elected office in this country. Just think how much lower those standards must be for the man in the street, or indeed on the Clapham omnibus. And think how much fun I am going to have pointing that out to HMRC.

Mark Simpson

14 May 2009

MPs' tax planning - a grumpy old man speaks

2009-05-12T14:29:23+01:00

The political events of the last week or so have now convinced me that I am indeed a grumpy old man, at the ripe old age of 47. And probably not for the reasons you might think.

I am going to concentrate on the case of Communities Minister Hazel Blears, because it raises tax issues, which in this example is the relatively tenuous basis on which to vent my spleen on the modern media.

Now at this stage I must declare an interest of sorts, in that during my years of working in Salford I got to know Hazel vaguely, meeting her on 3 or 4 occasions, and indeed on one occasion being photographed with her and our now Prime Minister. I was particularly impressed when she interrupted her role as Labour's 2001 North West election supremo, not only to open our business group's open day, but to spend at least 2 hours talking to every exhibitor, many of whom were not even her constituents. She also paid me my best ever back-handed compliment after a Question Time event in Salford, when she told me that I was "funnier than David Dimbleby". However, my political leanings do not incline me in her party's direction, so from that viewpoint I can claim to speak dispassionately.

Dealing with the specific before the particular, the great 'crime' of which Hazel appears to stand accused before the media is avoiding capital gains tax on the sale of her London property, presumably by electing for it to be her main residence for capital gains tax purposes. The implication is that this is the dastardly act of a minister intent on screwing the public purse for every penny she can get. I'm sorry, but this is rubbish.

Where a taxpayer has more than one residence, as Hazel had to have as a government minister and conscientious local MP, she has the right to elect which one is her main residence for capital gains tax purposes. Now I bow to no-one in my love for Salford as a city, but given the choice between claiming tax exemption on the future gain on a property in Salford or one in London, what rational human being would have done any differently to Hazel Blears? Certainly had I been her tax adviser I would have suggested that electing for the London property was the only rational thing to do.

At worst this is tax mitigation, and is not in my view a controversial piece of behaviour. Are we now saying that our MPs should deliberately maximise their tax liabilities, which seems to be the implication? Which leads me neatly on from specifics to my general rant.

"The advent of 24:7 media has been the worst thing ever to happen to journalistic standards in broadcast and written media." Discuss.

This may well be an urban myth, but I have heard it said that on one occasion before World War 2 the BBC cancelled its evening news programme because there was no news. Now of course that could not be allowed to happen, given the amount of media time and effort devoted to round the clock news generation and presentation. So when things get a little quiet on the news front, there is a terrible temptation to exaggerate the importance of relatively trivial events to fill time and space (a personal and family tragedy, yes, but Jade Goody's death, anyone? An event of national importance - I think not).

Which brings me neatly to MP's expenses and the Daily Telegraph. If this was really a matter of such earth-shattering importance they would have cleared the decks and printed all of the information at once. But because it is a cynical ploy to sell extra newspapers the 'revelations' are dragged out over days, and indeed weeks (probably reflecting the financial imperatives of how much they paid for the information in the first place). And the rest of the media jumps on the bandwagon so as not to be left behind, and eager to fill hours of broadcasting time with anything that purports to be news.

Rarely has such a non-story captured so much media attention. Read Gordon Brown's sister-in-law's recent Guardian column to see just how ridiculous all of this has become, as the media desperately tries to scrape together some sort of damning indictment of a major political figure, and it must be said utterly fails. And woe betide any poor soul (such as the PM's brother) who unwittingly finds himself embroiled in all this.

The charge which is of course levelled at MP's over all of this is that of hypocrisy; taking a 'holier than thou' approach to public integrity and condemning tax avoidance whilst themselves engaging in dubious practices. But where are these accusations coming from? How many journalists, presented with an expenses system such as that 'enjoyed' by MPs, would virtuously turn down the opportunities that such a system offered (let us remember that the vast majority of MPs appear to have done precisely that)? And who better to give us an informed view on tax avoidance than the majority of major media proprietors, to whose personal expertise on the subject I would happily bow? So who are the true hypocrites in this story?

Regular readers of this blog will know that I am far from holding a candle for our elected representatives, and there are no doubt those who have sought to take advantage of what is generally accepted to be a flawed system, albeit a small minority, even on the Telegraph's carefully chosen evidence. Among what group of 650 people "chosen at random from among the ranks of the unemployed", to quote David Lloyd George (now there was a politician who really WAS corrupt), would you not expect to find a few who sought to play the system?

But the real concern is that the absurd media over-reaction to this story threatens to tar all MPs with the same brush, which is potentially extremely dangerous for democracy. When Norman Tebbit suggests that we 'boycott' the major parties at the European Elections, we can well imagine in what euro-sceptic directions he might like our votes to go, And if people think that our current MPs are an unsavoury bunch, they might like to take a look at some of the characters who have been prominent in those particular fringe parties.

As the title of his book about the Australian media, David Salter coined the phrase "The Media We Deserve". All I can say is that if we in Britain get the media we deserve, we must have done something pretty damned awful.

Tax Planning after the 2009 Budget

2009-05-05T15:06:17+01:00

Below are a set of seminar notes prepared by me for a number of presentations over the next couple of months:

TAX PLANNING AFTER THE 2009 BUDGET

A PRESENTATION BY MARK SIMPSON, DIRECTOR OF TAX SAVING, SIMPSON BURGESS NASH, CHARTERED ACCOUNTANTS

“The avoidance of taxes is the only intellectual pursuit that carries any reward.”

John Maynard Keynes

A. Introduction

This presentation is about tax mitigation. It is not about:

Tax evasion

Illegal

New naming and shaming regime and new penalty regime to deter tax evaders

Offshore disclosure facility to entice them into the open

Tax avoidance

Legal

Uses highly artificial schemes to seek to obtain a tax advantage

Large fees

No guarantee of success

Disclosure regime and constant government blocking action

Two-pronged HMRC attack – on scheme in principle, and on implementation in detail.

Recipe for large scale HMRC enquiry

B. Tax mitigation

Simpler and more straightforward

Less controversial

No likelihood of detailed HMRC scrutiny

Still highly effective

I will talk about 12 ideas for tax mitigation, some based on Budget proposals and some left alone by the Budget, which by and large concentrated on blocking complex avoidance schemes.

All are straightforward and practical enough to consider; not all will be relevant to you, but some will be. None will cost a fortune to implement, and all can yield significant tax savings.

Income splitting

“I will have such revenges on you both,
That all the world shall -- I will do such things --
What they are, yet I know not: but they shall be
The terrors of the earth!”

King Lear Act 2 Scene 4

Such was the nature of the Government’s reaction, in the form of the comments of (my former schoolmate) the Exchequer Secretary to the Treasury Angela Eagle, to the House of Lords decision in the Arctic Systems case, which found that splitting income from a limited company between spouses by splitting the shareholdings was a valid tax mitigation exercise, even if the spouses did unequal amounts of work for the company.

The threat of counter action produced some unsatisfactory draft legislation, followed by a deferral of action for a year, followed in November by an indefinite deferral of action. This is no doubt a subject to which the Government will return, but not yet.

Thus any taxpayer who has a personal company and a spouse or civil partner has the opportunity to split income from the company with them by giving them shares, and voting dividends on those shares. Do not:

Try this with a partnership

Waive dividends on shares

Issue shares with only dividend rights

In the context of a future tax regime featuring a 50% income tax rate for income above £150,000, the loss of personal allowances on income above £100,000 and the denial of higher rate tax relief on pension contributions for those with income above £150,000, this possibility offers potentially large tax advantages for relevant taxpayers. We do not know for how much longer income splitting will remain possible, but whilst it does it is wise to explore its possibilities.

Incorporation

“It is an axiomatic principle of English company law that a company is an entity separate and distinct from its members, who are liable only to the extent that they have contributed to the company's capital: Salomon v Salomon [1897].”

Wikipedia

Much the same case can be made for incorporation as for income splitting as a tax mitigation measure. As the quote suggests, historically the attraction of incorporation was limited liability, but increasingly the tax system has pushed taxpayers in that direction also. Apart from specific reliefs such as research and development enhancement or tax credits and enhanced capital allowances on ‘green’ plant and machinery, the interaction of the corporation tax and income tax regimes makes trading through a company a very attractive proposition for a profitable business.

The crux of this matter is the ability for the director / shareholder of a small limited

company to control the level of his or her personal income, and also the nature of that income (salary or dividend). In combination with income splitting for example, this permits spouses to draw just over £80,000 per year from a company (profits permitting) with no personal tax or national insurance charge whatsoever, with credit given for benefits purposes as if NI had been paid. The 21% corporation tax charge on the underlying profits would be around £18,250, which is a saving of £14,750 on the income tax & NI liability that would otherwise be suffered by an individual sole trader with similar profits (£33,000).

Of course the ability to split, and to control, the level of income will only become more important when the proposed tax charges for 2010-11 and 2011-12 (see below) come into effect.

Companies also still carry the advantage of limited liability, but are required to file accounts and returns at Companies House.

Enhanced loss carry back

“If at first you don’t succeed, find out if the loser gets anything”

Bill Lyon

In normal circumstances, a trading loss can only be carried back one tax year, set off against current year income or carried forward against future profits of the same trade.

However, for a limited period, businesses are allowed to carry back up to £50,000 of losses for 3 years. For unincorporated businesses, accounting periods ending in tax years 2008-09 and 2009-10 are eligible. For companies, accounting periods ending between 24 November 2008 and 23 November 2010 are eligible.

Apart from the apparent anomaly of the recession covering different dates for incorporated and unincorporated businesses, there is also an oddity in that the Treasury press release announcing the introduction of the relief said that it would be particularly helpful for start-up businesses struggling in the recession. This is nonsense, as there is a better relief for losses in the first four years of a trade, involving 3-year carry back of an unlimited amount.

It is possible to change the accounting date of a business, and in order to take maximum advantage of enhanced loss carry back this may be necessary. In particular the preparation of accounts for short periods may enable part of a longer period that would not be eligible for the enhanced relief to be made eligible.

Possibly the most extreme planning to maximise the benefits of the new regime would be to incorporate an unincorporated business in early 2010 (prior to 6 April 2010). This would permit either a claim under the new regime or a terminal loss claim (unlimited carry back for losses of last 12 months of trade against previous 3 years’ profits) for the final period loss of the sole trade or partnership, and a potential claim for the new company if a short first period of accounts was chosen to end before 24 November 2010.

Cars and capital allowances

“Everything in life is somewhere else, and you get there in a car”

E B White

The regime for capital allowances on cars changed dramatically with effect from April 2009.

Features of the old regime

£3,000 annual allowance restriction on cars costing more than £12,000 (expensive cars) and separate pool for each expensive car.

Balancing allowances on sale of expensive cars.

25% writing down allowances, subject to above restriction.

No first year allowances

Private use restrictions on allowances, and separate pool for each private use car.

Formula to disallow a proportion of lease payments on cars with a value when new of over £12,000.

Features of the new regime

No annual allowance restriction on cars costing more than £12,000.

Expensive cars are pooled, so no balancing allowances (unless there is private use).

Writing down allowances at 20% (if CO2 emissions not more than 160 g/km) or otherwise at 10%.

No annual investment allowance or first year allowances

Private use restrictions on allowances, and separate pool for each private use car.

15% disallowance of lease payments for cars emitting more than 160g/km of CO2, otherwise no disallowance.

Implications

Private use becomes very important for cars to be sold after a relatively short period.

Can’t have private use of a company car / car provided as a benefit-in-kind.

Employee cannot get capital allowances on a car used for business travel, but can get tax-free mileage payments at 40p & 25p per mile.

A rare tax incentive for a non-corporate structure, as partner / sole trader cars will invariably have private use.

VAT rate rise

“Whilst these people may be students in accordance with the dictionary definition, it is by no means clear that they are students in the everyday meaning of the word”

Unnamed senior Customs & Excise official, in a letter to me about a client

The standard rate of VAT will return to 17.5% on 1 January 2010.

The government is acutely conscious of the risk of taxpayers accelerating tax points to take advantage of the 15% rate in respect of supplies not actually made until after 31 December 2009. This can be done by issuing a VAT invoice or taking payment for the supply in advance. Where the customer cannot recover the VAT being charged there would be an advantage to such an acceleration.

In three circumstances the government has introduced forestalling measures to deter the acceleration of tax points:

Where the parties are connected to each other

Where the supplier bears the cost of the accelerated amount between tax point and date of supply

Where the delay between tax point and actual date of supply is at least 6 months.

Where only the third would apply, invoicing in late December 2009 would give until late June 2010 to actually make the supply without any problems.

In fact the forestalling charge is only a 2.5% premium on the VAT charged, so this does not in fact make the situation any worse than charging 17.5% in the first place.

If you make continuous supplies of services, you can determine the tax point by raising an invoice, so the forestalling charge is unlikely to be a problem anyway.

6.      50% top rate of income tax and personal allowance withdrawal (from 6 April 2010)

“Unquestionably, there is progress. The average American now pays out twice as much in taxes as he formerly got in wages.”

H. L. Mencken

From 2010-11, those with income above £150,000 will pay a 50% top rate of income tax. Also, those with income in excess of £100,000 will lose their income tax personal allowance, at a rate of £1 for every £2 of income above £100,000.

I have dealt above with two of the likeliest effective measures of dealing with these changes, namely income splitting and incorporation. The latter is likely to be particularly attractive to highly profitable partnerships and sole trades.

Taxpayers may also choose to invest for growth rather than income, given a capital gains tax rate of 18% compared to a 50% top rate of income tax.

Taxpayers may also consider salary sacrifice arrangements for employer pension contributions or tax-efficient benefits (see below in each case).

Some have already threatened to emigrate, but may like to consider that HMRC are becoming much more difficult to convince that non-resident status has in fact been achieved.

7.      Furnished holiday lettings

“When I was kidnapped, my parents snapped into action. They rented out my room.”

Woody Allen

The favourable tax regime applicable to FHL’s includes the following:

Treatment of losses as trading losses

Ability to treat profits as earnings for pension contribution purposes

Capital allowances despite the fact that the let property is a dwelling house

Capital gains tax entrepreneurs’ relief and holdover relief

Inheritance tax business property relief? A recent court case has cast doubt on whether this was ever due on the majority of FHL properties, as it suggests that a significant level of services needs to be provided by the landlord to make the lettings eligible for relief.

Traditionally the reliefs have been limited to UK properties only. However, the government is concerned that this restriction breaches EU law, and thus for 2009-10 has extended the relief to cover all properties in the European Economic Area (the EU plus Iceland, Liechtenstein and Norway). However, from April 2010 the favourable regime will be terminated completely.

It has to be said that the reasons for abolishing the relief do not stack up. Every EEA country retains the right, under its tax treaty with the UK, to tax income from the letting of property within its borders, and to tax gains on the sale of such property. Thus the potential tax cost to the UK of extending the relief to cover the EEA would be minimal.

So what should the FHL owner do to prepare for the change in April 2010?

·        Accelerate any major works on the property to ensure that capital allowances are available on any plant and machinery installed, particularly given that there is a 100% Annual Investment Allowance available on the first £50,000 of such expenditure.

·        Similarly, incur any necessary repair etc. expenditure before the change of regime, in order to potentially generate losses (see below).

·        Possibly trigger a capital gains tax disposal (not to spouse or civil partner) to crystallise entrepreneurs’ relief (and thus tax at an effective rate below 10%) whilst the values of property are relatively low? This would give an enhanced base cost for future disposal. A trust could usefully be used in this respect.

·        Change the accounting date to ensure that maximum loss relief is obtained against general income, particularly given the enhanced carry back provisions.

·        Establish residence in the property to allow an election for main residence exemption in respect of the property. This can establish both a claim to main residence exemption for the last 3 years of ownership of the property (regardless of actual residence) and to letting relief, worth up to £40,000 per owner of the property.

·        Trigger a cessation of the business to use any available overlap relief for tax purposes. This might fit in neatly with a CGT disposal, but is only relevant if accounts are made up other than for the tax year.

Pension contributions

“If I'd known how old I was going to be

I'd have taken better care of myself”

Adolph Zukor, on approaching his hundredth birthday

From April 2011, those with taxable income over £150,000 per year will have tax relief on their pension contributions restricted to the basic rate of income tax.

Of more immediate concern are the forestalling rules that came into effect on Budget day. These introduce a tax charge designed to reduce the effective rate of income tax relief on pension contributions to 20%. These will apply to taxpayers who have income of more than £150,000 for the relevant tax year or either of the two previous tax years. They will only apply to taxpayers who make contributions in excess of £20,000 and in excess of their ‘normal ongoing, regular contributions’, which are broadly their year-on-year contributions for tax years prior to 2009-10.

The rules will apply to employer contributions as well as to employee contributions, and will also rule out salary sacrifice arrangements as a means of avoiding a tax charge.

Thus the scope for planning will be limited to those who had income below £150,000 for 2008/09 (and 2007/08 for 2009/10 contributions) but who anticipate having income above that level for 2009/10 and/or 2010/11. Use of techniques such as incorporation, income splitting or investing for growth can still be useful to such people as planning devices.

9.      Tax-efficient employment benefits-in-kind

“The brain is a wonderful organ; it starts working the moment you get up in the morning and does not stop until you get into the office.”

Robert Frost

The advent of additional tax liabilities for those with six figure incomes, and of higher rates of national insurance for employers and employees will no doubt concentrate minds on ways of deriving tax-free income from employment, such as the following:

·         Childcare vouchers. Provided the benefit is made available to all employees, vouchers to a value up to £55 per week can be provided to pay for (non-family provided) childcare for employees. This benefit is free of tax and national insurance, and thus provides a significant saving for employer and employee if it is given on a salary sacrifice basis. Care is required in respect of the impact of vouchers on tax credit claims and their continued availability during maternity leave.

·         Mobile phones. These can be provided free of tax and national insurance to selected employees, although it may be advisable to cap the level of bills that the employer will meet!

·         Medical check-ups. These can again be provided tax and national insurance-free to selected employees.

·         The cycle to work scheme allows the tax-free provision of cycles and cycle safety equipment by employers to employees – the facility must be made available to all employees. In theory the bicycle must be mainly for home to work use, but given that employers are not required to monitor the use of bicycles it is difficult to see how this can be enforced in practice.

·         The alternative to the above approach is for the employee to provide his or her own bicycle, for which they can be paid a tax and NI-free mileage rate of 20p per mile for business mileage, on a similar basis to the fixed profit car scheme rates of 40p and 25p per mile.

·         Before leaving the subject of bicycles, employers can also provide tax-free cyclists’ breakfasts to employees who cycle to work. We have thus far waited in vain for the introduction of joggers’ breakfasts and walkers’ breakfasts!

·         Pension contributions by employers are in general a tax-free benefit for employees, although the above regime for those with income in excess of £150,000 must now be taken into account in this respect, as well as the annual pensions allowance (currently £245,000).

·         Outplacement counselling provided to help employees to adjust to cessation of employment or to find a new job is a tax-free benefit. It is important to note that this can be provided on retirement as well as on redundancy etc.

·         Loans of up to £5,000 can be made tax and NI free to employees. This is a de minimis relief, so if the loan exceeds £5,000 the whole loan is subject to an income tax (and employers’ NI) charge, currently based on 4.75% per year of the amount lent. Care also needs to be taken about making loans to shareholders, as these can give rise to a different tax charge under the corporation tax regime.

10. Enhanced capital allowances

“We assume that everything's becoming more efficient, and in an immediate sense that's true; our lives are better in many ways. But that improvement has been gained through a massively inefficient use of natural resources.”

Paul Hawken

There are significant tax incentives for investment in energy-saving plant and machinery and in environmentally beneficial plant and machinery. These incentives take the form of a 100% first year capital allowance, unlimited in value and in addition to the £50,000 annual investment allowance.

The relief is only available to limited companies (another potential tax incentive for incorporation), and is a fairly highly specified relief, in the sense that it is given on the basis of particular criteria. The mechanisms for this are two official on-line lists of eligible product criteria:

The Energy Technology Product List (www.eca.gov.uk)

The Water Technology Product List (www.eca-water.gov.uk)

The major categories of product on these lists are as follows:

Energy Technology Product List

Boilers

Combined heat and power

Lighting

Motors and drives

Pipe-work insulation

Refrigeration

Air to water heat pumps for space heating

Radiant and warm air heaters

Compressed air equipment

Solar thermal systems

Automatic monitoring and targeting equipment

Air-to-air energy recovery equipment

Compact heat exchangers and heating

Ventilation and air conditioning zone controls

Uninterruptible power supplies

Water Technology Product List

Water meters

Flow controllers

Leakage detection equipment

Low flush toilets

Efficient taps

Rainwater harvesting equipment

Membrane filtration systems for wastewater treatment

Cleaning in place equipment

Efficient showers

Efficient washing machines

Small-scale slurry and sludge dewatering equipment

Vehicle wash waste reclaim units

Efficient industrial cleaning equipment

Waste management for mechanical seals

It is vital, given the specific nature of the reliefs, that detailed specifications are given to architects and contractors when designing and specifying new buildings, or renovating existing ones.

It is also now possible for loss-making companies to surrender enhanced capital allowances for a 19% cash tax credit in order to improve cash flow. The maximum tax credit receivable is the greater of:

£250,000;

and

the company’s PAYE and NI liability for the relevant accounting period.

11. Research and development expenditure

"Research is what I'm doing when I don't know what I'm doing."

Werner von Braun

"If we knew what it was we were doing, it would not be called research, would it ?"

Albert Einstein

R & D is defined as the extension of knowledge in the fields of science and technology, with a view to the resolution of scientific or technological uncertainty.

There are separate regimes for small and medium-sized enterprises and for large companies. Like ECA’s, R & D tax reliefs are available only to limited companies.

I will concentrate here on the SME regime. In order to be eligible R & D expenditure, costs must meet the above criteria and also the following:

·        The company incurring the expenditure must own the intellectual property to which that expenditure relates.

·        The expenditure must not be subsidised (e.g. by way of R & D grant).

·        The expenditure must be revenue expenditure.

·        The company must not be acting as a subcontractor.

·        The expenditure must be on staffing or external workers, software, consumable items or sub-contracted R & D.

Examples of cases I have successfully dealt with include:

On-line real-time gaming platforms

Improved movie camera design

Customisable e-commerce software

Bespoke Second Life application for a musician

among many others.

There are 3 types of relief available:

1.      Enhancement of pre-trading expenditure to 175% of actual, and treatment as a trading loss.

2.      Enhancement of trading expenditure to 175% of actual, allowable against trading profits.

3.      Surrender of 175% of actual expenditure for a 14% cash tax credit (effective rate of credit 24.5%). The tax credit cannot exceed the company’s PAYE & national insurance liability for the accounting period of the claim.

12. Enterprise Management Incentive Schemes

“The employer generally gets the employees he deserves.”

Walter Raleigh, Sr.

An EMIS is a tax-efficient share option scheme for key directors or employees, and is intended to tie them into the business and give them a stake in its success.

A director or employee who owns more than 30% of the company shares is ineligible to benefit from an EMIS.

The problem with ordinary share option schemes is that an income tax charge arises at the point that the option is exercised, even though that may well not be a point at which the employee receives any cash for the shares. The advantage of an EMIS is that this tax charge is deferred until the employee sells the shares, at which point he or she will pay 18% capital gains tax (or 10% if a 5%+ shareholder) instead of 40% income tax.

It is possible to set performance targets for the exercise of options, which must be capable of exercise within 10 years of grant. It is normal to provide for unexercised options to lapse if the employee leaves employment, and to provide that the employee must sell the shares if he or she leaves post-exercise.

Summary

There is still ample scope for tax mitigation to significantly reduce your tax bills and increase your disposable income. How much longer that will remain the case is open to question, but it is best to take advantage while you still can.

Budget 2009 and tax mitigation opportunities

2009-04-28T17:29:08+01:00

Much has been said about the optimistic nature of the Chancellor's growth forecasts in last week's Budget, but I detect a deeper malaise. Whatever one may have thought of Gordon Brown's tenure as Chancellor (increasingly looking like a Golden Age in retrospect, probably not least to him) there was a degree of intellectual rigour about his tax policy, which even a tendency to ill-advised tinkering could not entirely disguise.It was, at least to some extent, clear where tax policy was going.

This sense of a thought process underlying fiscal policy now appears to me to be entirely absent under Alistair Darling, the evidence including the following:

1. The backtrack on capital gains tax simplification under pressure from the small business lobby.

2. The farce surrounding the abolition of the 10% rate.

3. The backtrack on anti-income splitting legislation.

4. The 'buy your way out of tax for £30,000 per year' non-domicile regime.

5. The abolition of the favourable tax regime for furnished hokiday lettings.

6. The revenue-raising measures and the tax mitigation opportunities they create (see below).

I can only really see two threads running through the Darling era at #11 Downing Street, neither of which reflects entirely to his or the Treasury's credit. The first is a large element of political calculation, of which I think I can detect three distinct elements, shifting over time:

1. The earlier stages of the Darling Chancellorship were characterised by a tendency to seek at all costs to avoid upsetting large groups of taxpayers (also known as voters). Place numbers 1, 2 and 3 firmly in this category, as in each case the measure stood to increase the tax burden on those who are not necessarily the wealthiest among us (in particular #2) and on large numbers of people. After all, there is an election to try to win within just over a year at the latest.

2. The introduction of measures designed to make life awkward for HM Opposition, such as the 2010-11 higher rate income tax and personal allowance changes and the abolition of higher rate pension contribution relief. Whilst it is temporarily diverting to watch the Tories offend their core supporters, I am not enamoured of this as the basis of fiscal policy.

3. On my really cynical days I have characterised the 2009 Budget as a Budget to win the 2015 election. Here I envisage senior Labour figures giving up all hope of winning the 2010 election, and leaving the incoming government with a monumental economic mess to sort out, for which human nature says the electorate will blame them for failing to do come 2014 or 2015. This is perhaps an unkind way of saying that the Chancellor has no idea what to do, and is thus intent on appearing to do all sorts of things, without knowing if they will truly help.

The second thread is also rather cynical in its way, but perhaps rather more cunning. By leaving some of the following planning opportunities available, the Chancellor may calculate on encouraging people to accelerate income, and thus the payment of tax liabilities. That is the sort of thinking I can approve of, although whether it will work on a large enough scale is very doubtful.

You will by now have deduced that in my view there are significant opportunities to mitigate tax in respect of the Chancellor's main revenue-raising measures. In simple terms these are as follows:

1. Income splitting

It was all made rather easy here, although the government has only shelved this because of the recession, they tell us, and not because of the large numbers of voters who would be affected or the sheer difficulty of putting in place any effective legislation in this area. However, it has only been shelved, and it would be a brave person who assumed this will never rear its ugly head again. Thus maximising dividends within the basic rate band whilst the planning opportunities remain looks an attractive option, assuming the profits are available, of course.

2. Enhanced loss carry back

If one wishes for evidence of confused Treasury thinking, one can profitably look at this legislation. When it was originally introduced, the accompanying press notice said that this would be particularly helpful for start-up businesses caught up in the recession. It is in fact of no use at all for such businesses, because they have a better form of relief, unlimited in amount, applicable to losses in the first four years of trading. It might be advisable if Treasury press notices were actually written by someone who knew something about tax.

The other notable feature of the relief is that it appears to be predicated on the idea that the recession covers a different period depending on whether you are an incorporated or unincorporated business. Assuming annual accounting periods (see below), the recession for incorporated businesses will run from 25 November 2007 to 23 November 2010, and for unincorprated businesses from 7 April 2007 to 5 April 2010, those being the periods which could potentially make up an annual accounting period covered by the relief.

The latter is slightly extreme, but plenty of sole trades and partnerships have year end dates of 30 April (which maximises time lag between making profits and paying tax on them) and will thus be entitled to the relief for accounting periods beginning on 1 May 2007, when the word 'recession' was far from the lips of even the most pessimistic economist, as far as I can recall. This illustrates my point about intellectual rigour very graphically, I think.

In terms of planning for the relief, there appears to be nothing preventing a taxpayer from changing year end to ensure that a loss-making period falls within the above time limits. Thus a company with a December 2010 year end might see the attractions of making up 10 months accounts to 31 October 2010, or a partnership with a 30 April 2010 year end might decide to move to a fiscal year accounting period by making up accounts to 31 March or 5 April 2010.

Or of course it might incorporate to extend its 3 year loss carry back window by 7 months. If it did that it could extend its period for 3 year carry back from 1 May 2007 to (say) 31 October 2010, and also remove the £50,000 restriction on carry back of losses of the final period of partnership trading under the terminal loss provisions. So lots of planning to be done here, methinks.

3. Cars and capital allowances

Cars lose their value very fast, particularly if they are expensive. If you change your car regularly, you lose a lot of money on a regular basis. Under the old capital allowances regime you obtained relief for this, assuming the car cost more than £12,000, by way of a balancing allowance on the single asset expensive car pool in which the car was placed for capital allowances purposes. This was usually substantial, because the writing down allowances available on the car were limited to £3,000 per year.

However, under the new regime cars are placed into capital allowances pools, and thus no balancing allowances are available. If the company car needed a final nail in its coffin following the advent of the CO2 benefits regime and the hikes in car fuel scale charges, here it is folks.

Because, you see, company cars cannot have private use, and must therefore be pooled. Privately owned vehicles, however, almost certainly have an element of private use. Indeed, if your car exceptionally does not, I suggest you develop some. If a car has an element of private use, it still goes into a single asset pool, and you still get a balancing allowance on sale. Even better, you also do not suffer the £3,000 per year allowance restriction.

Unfortunately employees cannot claim capital allowances on cars used to drive business mileage in the course of their employment, but what they can do is claim tax free mileage payments of 40p per mile for the first 10,000 business miles and 25p per mile thereafter. So think again about company cars, and whether it would be better for employees to provide their own vehicles.

4. VAT time of supply forestalling rules

Attempts to anticipate the increase in the standard rate of VAT from 15% to 17.5%, due on 1 January 2010, will run the risk of attracting a 2.5% additional VAT charge. This forestalling charge will apply in 3 circumstances, each involving the issue of a VAT invoice or the payment for goods and services prior to 1 January 2010, where the supply will not take place until after that date:

1. Where the supply is between connected parties.

2. Where the supplier bears the cost of the delay (i.e. a VAT invoice is issued but payment is deferred until the supply takes place).;

3. Where the supply does not take place until 6 months or more after the issue of the invoice or the payment date.

Apart from making the slightly facile comment that anything up to 6 months is OK under 3, I will merely point out that those (such as accountants) making continuous supplies of services determine their own tax point by issuing periodic invoices. So when we bill all our work in progess on 31 December 2009, remember it's for your own good!

5. 50% higher income tax rate

There has been much whingeing and wrigning of hands about this, but note above all the voices saying that this will not raise much if any tax. This is not so much because there will be a massive exodus of rich taxpayers heading for the UK emergency exit but because those with income over £150,000 will often be in a position to determine, at least to some extent, what their level of taxable income is. This is particularly true of director / shareholders of unlisted or family companies, who can determine their own salary and dividend levels. And of course, as mentioned above, income splitting is alive and well, and likely to be of great interest to those facing a 50% income tax liability.

Highly profitable partnerships will presumably look with renewed interest at the benefits of incorporation, particularly where there are professional barriers to entry as a partner preventing income splitting, which would be unlikely to apply to shareholdings.

Taxpayers may also look to invest for growth (18% capital gains tax) rather than income (50% income tax), particularly with stocks and shares at low values.

6. Furnished holiday lettings

I am particularly angry about this change for two reasons. Firstly, with sterling at historically low levels, tourism is likely to be one of the relatively few industries likely to do well in the recession, both from UK residents priced out of foreign holidays and overseas residents attracted by the favourable exchange rate. So what does the government do but deter people from providing accommodation for the increased number of holidaymakers by removing the beneficial tax regime applicable to FHLs. This makes no sense whatsoever, but still on that basis makes more sense than the sensationally spurious reasons given for the abolition of the reliefs.

Usually the government has to be dragged kicking and screaming by the EU to amend our tax legislation to remove discrimination against other EU states and their citizens. However, in this case they volunteer to do so, which should immediately make us suspicious, on the grounds that the restriction of the FHL regime to UK properties only is a breach of the EU treaty. The implication is that the extension of the regime to non-UK properties will be a bonanza for landlords with foreign property, and that the favourable regime will therefore sadly have to be withdrawn.

Back I come to intellectual rigour, because this reasoning either suggests that the Treasury is collectively stupid, or even worse, that they think that the electorate is. This does not stand up to analysis for a second. Under every Tax Convention between the UK and other EU countries, the country in which real property (i.e. land and buildings) is situated retains the right to tax income and capital gains arising from that property. Thus the UK, where the landlord is UK resident, collects tax only to the extent that the UK tax bill is higher that the tax bill in the country where the property is situated. To characterise this as a major risk to the UK Exchequer is transparently dishonest, and is a veil for a penny-pinching measure which, as described above, puts at risk one of our few potential growth industries. In the face of some stiff competition, I think this is the most contemptible tax measure that this government has been responsible for.

7. Pension contributions

Finally in chronological order of implementation, I come to the restriction of tax relief on pension contributions for taxpayers earning over £150,000. Coming from a government which spends much of its time urging us to provide for our future retirement this might appear to be a bit rich, but then I suppose they need only mutter the words "Sir Fred Goodwin" (to speak of someone who is more than a bit rich) to get public opinion onside on this one.

This restriction, which takes the form of an effective restriction of tax relief to the 20% tax rate, applies to employee and employer contributions in excess of the higher of regular contributions level for 2008-09 and £20,000. In the case of employer contributions this will involve a 30% tax charge, on the basis that the top income tax rate will be 50% and the basic rate 20%.

In any case, if Alistair Darling is still Chancellor on 6 April 2011 something very strange will have happened politically in the interim, so I suspect it will be George Osborne's decision as to whether to proceed with this change (not a prospect that fills me with glee either - see previous posts).

Summary

I have finally run out of patience with this government's fiscal policy, which has become haphazard, opportunist and illogical. I fear that the current financial crisis is beyond their capacity to deal with, but then I have no confidence that the current Opposition could do much better a job, particularly with the current shadow Chancellor at the helm. Vince Cable for Chancellor in a government of national unity anyone?

Mark Simpson

28 April 2009

Penalty shoot outs - welcome to the world of tax

2009-04-27T12:04:20+01:00

They are exciting but nerve-racking, they leave at least one person feeling devastated, and they don't necessarily produce a fair result. However, they are probably the least bad way of resolving things. Yes, of course it's penalty negotiations with HM Revenue & Customs. Why, what did you think I was talking about?

Amidst all the economic doom and gloom, and arguments about the Chancellor's rose-tinted crystal ball, a new tax penalty regime slipped almost unnoticed into out lives for returns filed after 31 March 2009 in respect of tax periods beginning after 31 March 2008. This is a significant event for taxpayers, and is thus probably worth explaining in a little more detail.

The 'old' penalty regime was not particularly prescriptive, and tax inspectors and tax advisors developed a sort of rough modus operandi to cope with that lack of prescription. In general terms, fraudulent or negligent conduct resulting in an underpayment of tax was liabile to a fully mitigable penalty of 100% of the tax underpaid. An inspector would start his penalty calculation at 100%, and would reduce it in respect of three factors specific to the conduct of the enquiry:

Cooperation

Disclosure

Size and Gravity

There were guideline mitigation percentages for the inspector to apply in each case, which at the extreme offered the apparently exciting possibility of 110% mitigation, although I have yet to see a case in which HMRC pay a penalty to an errant taxpayer!

This had the advantage of flexibility, but the disadvantage that there was nothing particularly concrete to hang your hat on in negitiations over penalties, with the result that a degree of horse-trading inevitably occurred and compromise solutions were reached, probably equally unsatisfactory to all concerned. Nonetheless it was a system that just about worked provided all parties were pragmatic in their approach.

Now, however, we have a rather more prescriptive system, which will require the inspector to determine whether an inaccuracy in a tax return arises as a result of one of four types of action and/or state of mind of the taxpayer:

Reasonable

Careless

Deliberate but not concealed

Deliberate and concealed.

There are then maximum and minimum levels of penalty (as a percentage of tax under-stated) which the inspector can apply, as follows:

Type of inaccuracy

Maximum penalty

Minimum penalty – unprompted disclosure

Minimum penalty – prompted disclosure

Reasonable

0%

0%

0%

Careless

30%

0%

15%

Deliberate but not concealed

70%

20%

35%

Deliberate and concealed

100%

30%

50%

Now of course all of this begs lots of questions, which are as follows:

What is reasonable?

HMRC gives the following examples of reasonable taxpayer behaviour:

1. Taking a reasonably arguable view of a situation that is not subsequently upheld.

2. An arithmetical or transposition error that is not so large as to produce an obviously odd result in absolute terms or in the context of overall liability.

3. Following HMRC advice, on full discloure of the facts, that later proves to be wrong.

4. Acting on advice from a competent adviser, on full disclosure of the facts, that proves to be wrong.

5. Arrangements or systems exist that could reasonably be expected to produce an accurate calculation of tax due, but inaccuracies arise in processing items through the system which are not significant in relation to the overall tax liability for the period. In the tax context, 'significant' has typically meant not more than 20%.

What is careless?

This is defined as failure to take reasonable care, but I will try to be more helpful than that! It is akin to negligence, which has been defined in judicial terms as follows:

"Negligence is the omission to do something which a reasonable man, guided upon those considerations which ordinarily regulate the conduct of human affairs, would do, or doing something which a prudent and reasonable man would not do."

Careless is not deliberate. Repetition of errors may suggest a lack of care, but not necessarily. HMRC accepts that people make mistakes, even where reasonable care is taken. They will judge reasonable care in the context of the capabilities and circumstances of the particular taxpayer, so I'm not going to get away with any reasonable errors! HMRC will expect sufficient business records and systems to cope with the particular business's transactions.

Where a taxpayer is uncertain how to deal with a transaction, as suggested above they will be deemed to behave reasonably if they seek advice from HMRC or a competent professional and follow that adive, or if they disclose the nature and impact of their uncertainty clearly to HMRC when submitting a tax return.

What is deliberate?

This is not one of the more complex questions on this list, so I will not insult your intelligence by defining what is deliberate. It will be interesting to see in practice whether HMRC seeks to characterise extreme negligence by a taxpayer as deliberate, but I talk in greater detail below about the difficulties of classifying taxpayer behaviour.

What is concealment?

This is a much more interesting question, mianly because HMRC takes a remarkably liberal view of what concealment involves. I would be inclined to say that if someone deliberately submits an inaccurate return, knowing that it understates their liability, they are concealing that understatement simply by not showing the true picture. However, I suppose the problem with that, perhaps simplistic, view is that it does not give HMRC the opportunity to distinguish between the bad and the heinous in penalty terms, and thus concealment is a concept designed to separate those two categories.

Concealment involves the taxpayer making arrangements to conceal the inaccuracy which go beyond simply submitting an inaccurate return and hoping not to be investigated. Thus the creation and submission of false evidence in support of an inaccurate figure (e.g. false invoices) would be concealment in this context.

Another way of characterising the distinction might be to say that, typically, HMRC would almost certainly not consider prosecution of the taxpayer as a serious option in a case of deliberate but not concealed inaccuracy, whereas they would probably at least consider the prosecution option in a case of deliberate and concealed inaccuracy.

What is disclosure?

Apart from being a film starring Michael Douglas and Demi Moore, HMRC defines disclosure as having three elements, each of which is taken into account in considering the mitigation of a penalty from the maximum level toward the minimum level. The elements, and the extent to which they are considered in mitigation, are as follows:

Element of disclosure

Percentage weighting

Telling

30%

Helping

40%

Giving access

30%

I'll come back to how these are defined in a moment.

What is unprompted disclosure (and, by exclusion, prompted disclosure)?

This is very narrowly defined as disclosure at a time when that taxpayer had no reason to believe that HMRC have discovered or are about to discover an inaccuracy. Any other disclosure is prompted.

This is a tricky area. Under the old regime I have a case where a client voluntarily disclosed an offshore bank account, outside the timeframe for the Offshore Disclosure Facility, but equally at a time when there was no specific reason to believe that HMRC had discovered or were about to discover the account. HMRC are arguing that this is not a voluntary disclosure (for which read unprompted under the new regime) because of the general publicity about their drive on offshore bank accounts and the Offshore Disclosure Facility.

In that case, frankly, their argument is pretty weak, for two reasons. Firstly, all of the Offshore Disclosure Facility cases I saw where disclosures prompted by letters from banks, HMRC or both saying that HMRC had been looking at offshore accounts held by the taxpayer with the specific bank. Nothing of that nature had occurred in my client's case; he simply decided he wished to disclose the account. Secondly, the HMRC argument is akin to the police anouncing that they are having a crackdown on knife crime and then arresting someone who voluntarily brings a flick-knife to a police station on the basis that "you only did it because of our crackdown". But it does illustrate the potential difficulty of establishing unprompted disclosure.

What is telling?

This includes admitting the inaccuracy, disclosing it in full and explaining how it arose. The timing, nature and extent are critical to the mitigation of penalties. Timing involves not the lapse of time since the inaccuracy arose, but the comprehensive nature of the initial disclosure. Nature covers the reasons for the inaccuracy, and requires a degree of volunteering information rather than merely answering HMRC questions. Extent means that the whole of the inaccuracy must be disclosed to obtain full penalty mitigation.

What is helping?

Helping is positive and active assistance, volunteering information and giving reasonable help in quantifying the inaccuracy, by reference to the taxpayer's capabilities and circumstances. Again timing, nature and extent are critical.

Timing relates to timely provision of information. Nature realtes to the usefulness of the help in concluding the enquiry, and extent covers the whole period of the enquiry.

What is giving access?

This is allowing access to relevant documents relating to the inaccuracy. Again timing, nature and extent are important.

As regards timing, prompt provision of documents without recourse to HMRC information powers or reminders is important, as is keeping HMRC informed of the reasons for any unavoidable delays. Nature covers the reasonableness of access to documents and the provision of copies. Extent covers the disclosure of all relevant documents.

There is also the facility for HMRC to suspend penalties for carelessness, on the basis that, provided the taxpayer avoids repeating the errors giving rise to the penalty during the suspension period, it will be waived at the end of that period.

There is an appeal procedure covering all aspects of the regime as a safeguard for taxpayers.

It is also possible for company officers (directors, managers and company secretaries) to be personally penalised for deliberate inaccuracies in company returns where the inaccuracy arose as a result of the deliberate action of the officer concerned.

Thus we have a comprehensive regime, with much better definition of how penalties will be assessed and mitigated in practice. However, the concern I have is about the distinction that inspectors will have to make between the various classes of inaccuracy. It is difficult to impossible to put yourself inside the mind of someone else and decide what motivated them in taking or omitting to take a particular course of action, but that is what we are asking HMRC to do, with some fairly significant consequences at the margin between the categories. In a strange way the very woolly nature of the old regime was helpful in this respect, as it was not necessary to get hung up on taxpayer motivation, but merely to agree a reasonable penalty in the circumstances.

Clearly it will be necessary to see how the regime operates in practice before firming up conclusions about it, but in my view if it is operated sensibly by all concerned it should be a genuine improvement on what went before, and those responsible for devising it are to be commended on their work.

Mark Simpson

27 April 2009

10% is 10% - except when it isn't!

2009-04-27T09:56:13+01:00

I an indebted to a friend of mine for drawing the following to my attention as a prime example of the maxim that nothing in tax is simple.

30 years ago I had an economics 'A' level teacher. For reasons that will become obvious I will not name him, but suffice it to say that in our humble opinion he was not necessarily a very good economics teacher. He was inclined to come out with insightful comments such as '10% is 10%', which one felt might not prove to be a mark winner come exam time. Indeed, one of his other favourite comments was "it's not on the exam but it's all good stuff", which at least usually had the merit of being 50% right (I will leave you to work out which 50% that was).

However, you probably think he was on safe ground with his 10% statement. Well, following the Budget I can reveal that in fact he was wrong all the time, and that 10% is in fact 11.1% recurring. Intrigued? Read on ..................

We currently have a 40% higher rate of income tax and a 32.5% higher rate applying to dividends. Dividends are pretty much a law unto themselves in tax terms, but insofar as I can identify a logic to the way they are taxed, that logic is to end up with the taxpayer paying 25% higher rate tax on net dividends received. Please forgive me as I lapse into mathematics to demonstrate.

Net dividend received                        £900.00

Deemed 10% tax credit                      £100.00

'Gross' dividend for tax purposes      £1,000.00

Overall income tax charge (32.5%)      £325.00

Less: deemed tax credit                    £100.00

Higher rate income tax charge            £225.00

Higher rate charge as a percentage

of net dividend                                  25%

So when the Chancellor announces that the higher rate of income tax is going up by 10% for those earning £150,000 or more from 6 April 2010, that means that the effective higher rate of tax applicable to dividends is going to be 35% doesn't it? Well, no in fact, because the overall dividend rate is going to be 42,5%, as follows:

Net dividend received                        £900.00

Deemed 10% tax credit                      £100.00

Gross dividend for tax purposes         £1,000.00

Overall income tax charge (42.5%)       £425.00

Less deemed tax credit                      £100.00

Higher rate income tax charge             £325.00

Higher rate tax charge as a percentage

of net dividend                                  36.1% recurring

Is that what they call a stealth tax? I should say at this stage that precisely the same applies to most trusts in receipt of dividend income.

So why do I think this has happened? To be honest I think that the Treasury has forgotten why it set the previous rate at the slightly odd level of 32.5%, and has taken the simplistic approach of adding on 10% to the dividend rate because it has added 10% to the ordinary higher income tax rate. The new rate should be 41.5% on that basis, which would produce a 35% higher rate charge. Go on, try it and see.

It is good to know that the financial policy of this country is in the hands of a department that forgets why it did something in the first place. Does this remind anyone of the zero rate corporation tax farce?

Mark Simpson

27 April 2009

Type of inaccuracy	Maximum penalty	Minimum penalty – unprompted disclosure	Minimum penalty – prompted disclosure

Reasonable	0%	0%	0%
Careless	30%	0%	15%
Deliberate but not concealed	70%	20%	35%
Deliberate and concealed	100%	30%	50%

Element of disclosure	Percentage weighting

Telling	30%
Helping	40%
Giving access	30%