Amateur tax management and why businesses need professional tax advice

I had a telephone call this week from a chap who said “I am phoning because I want to start a company”. My immediate reaction after thanking him for the call was to ask why he needed a company, if he meant a limited company. This is because from the tax point of view it is not necessarily a good idea to have a company, and there needs to be a commercial reason if profits are going to be limited initially or there might be trading losses which would be useful to an individual who is a current taxpayer-employee, or has recently been one.

It turned out that there was a commercial reason for having a company. The guy is going to do outsourced work for a Government department which insists on contracting its labour through a company. That in itself is laughable in an era in which HMRC has tried to crack down on such arrangements through IR35, attacked umbrella company arrangements, and whined, actually quite unreasonably, about “false self-employment” in the construction industry. One wonders whether the different branches of Government in Whitehall ever speak to each other.

My caller earned himself some “Brownie points” in my book by actually asking a professional adviser. So often people do not when they should, and I am not talking about the pensioners I mentioned in my previous piece, who frankly should not have to seek professional help.

As I said, my caller had a commercial reason for incorporating which was good to know. He had asked for help. However, many people spurn professional advice and just go ahead. A few months ago I came across an instance where two ladies had gone into business. They had formed a company but were struggling to get their business concept off the ground. I could understand why they wanted limited liability. However they had given personal guarantees in respect of borrowings so were not protected from their largest creditors. I felt that with early substantial losses and both having decent full time jobs as well, they could have done with having their losses set off against their personal income, so surely should have formed a partnership, though not necessarily a limited liability partnership where losses may be harder to relieve. They were right to consider commercial reasons first but those commercial reasons should include protecting cash flow through proper management of tax losses

There are lots of people who need help but will not pay to save tax, which will far outweigh the professional fees. Even this year's Finance Act (2009) and the loss carry-back provisions are a minefield, with incorrect loss claims likely to be quite costly for someone who does not understand the pitfalls. There are other tax reasons not to incorporate quite apart from the issue of early trading losses. If the business owner wants maximum tax relief on an expensive car, again he or she should consider operating as a sole trader or through a partnership. In the end, it is essential and cheaper to obtain professional tax advice. Of course I would say that, but then I am in a position to know.

One thing I had drummed into me on sales courses is that prospects don't know what they don't know. In tax or anything else, it is our job to help them, and it's for their own good, not to line our pockets.

© Jon Stow 2009

Tax disenfranchisement

It was reported this last week that 1.5 million UK pensioners are paying too much tax which is because too much is being deducted from their occupational and private pensions and from any employment earnings they have. Once upon a time of course, most pensioners with taxable income of any sort had to complete tax returns. Since the introduction of Self Assessment in 1996-97 and increased automation and exchange of information as well as significant job cuts in what has become HM Revenue & Customs, far fewer people have to complete tax returns. In itself this is sensible, because why should people have to worry about form filling if it is not necessary, and can be dispensed with? However, if we have a more “automatic” system, it should work and be seen to work. This means that if age allowances are due then they should be allocated, and it should be easier for the public to talk to the Tax Office about their issues.

I believe information should be supplied to every household in the land explaining the system of personal allowances and how direct taxation works at its most basic level, but in reality, the only time most of us get any proper information about the workings of our liabilities to tax is if we actually have to complete tax returns ourselves. For the rest who just have periodical Notices of Coding, HMRC is simply explaining why they are doing what they are doing, and leaving out information which they perceive as irrelevant but which may not be.

Of course, the public may talk to someone at an HMRC call centre if they think they have problems or are being taxed incorrectly, but they need to know they have a problem first. Some no doubt complain about high taxes without knowing that they are being overcharged. This of course takes me back to the point a made a few months ago about “progress” disenfranchising the non-technical population.

© Jon Stow 2009

BBC: 1.5m pensioners 'overpaying tax'

Even cleverer HMRC phishing scam

There is a new phishing scam going round in the form of an email that purports to come from HM Revenue & Customs. This is just to warn you not to click on the link in any such email you receive. HM Revenue & Customs will never email a taxpayer concerning a tax refund or any other matter.

Part of the text of the current "phishing" scam email is as follows:

"Taxpayer ID: (a "reference")
Tax Type: INCOME TAX
Issue: Unreported/Underreported Income (Fraud Application)

Please review your tax statement on HM Revenue and Customs (HMRC) website (click on the link below):

review tax statement for taxpayer id: (a long code)

HM Revenue and Customs"

I received such an email this morning into my spam folder.

There are similar emails purporting to be from the IRS to US taxpayers. The IRS would never send an email of this type either.

More information here

Be careful out there.

HMRC's stealth taxation through technology

The Revenue is introducing a new requirement to force agents to submit company accounts on-line in XBRL format from April 2011. Let me quote from their website:

“Company Tax Returns and XBRL

XBRL stands for Extensible Business Reporting Language, which is an international standard designed for business financial reporting.
At the moment accounts and other attachments to online CT600 returns can be sent in PDF format. From April 2011 (and for all CT600 returns due after 31 March 2011) we expect that all CT600 returns will have to be sent online, and will have to include attachments using the XBRL format.
You don't have to wait till 2011 to change to XBRL, and we recommend you consider doing so before it becomes mandatory. Later in 2009-10 HMRC intends to introduce a CT filing product which uses XBRL (this will be aimed at smaller, unrepresented companies), and to introduce a new main CT Online service. Other software developers have introduced or are working on products which use XBRL.”

I find this very news disappointing, especially with the short time-scale. I assume that behind this is an intention to make company accounts more accessible to staff within HM Revenue & Customs, and will help their cost-cutting. The justification is the report by Lord Carter on HMRC on-line services amongst other things. Lord Carter had to revise his proposals on individual taxpayers' Self Assessment deadlines following a furore back in 2006 that they were impractical. It would be useful if we could have just a little more time to make the change.

Self Assessment itself was introduced as a cost-cutting exercise, though it increased the cost burden of compliance for taxpayers.

The effect of the new requirement for XBRL format is to transfer further costs to taxpayers. The increase in software costs for tax agents will either have to be passed on to clients or the agents will have to bear them. No doubt the specialist tax software providers will have their developers working furiously to be ready for 2011 and they will need to charge the end user. Unfortunately the change will amount to a stealth tax even on those businesses which are not in profit. I believe in value billing, but increased overheads in software costs do not provide value for the agent or the end-user business. It is very difficult to provide the best value to clients whilst having to dance to the Treasury's discordant tune.

© Jon Stow 2009

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More in sorrow than in anger - Jobcentre bully

I heard something this week in the course of business that really upset me, and it has spared you, until I get around to it, a commentary on what activity might constitute trading and what might not.

I saw one of my clients this week to collect her books and those of her husband as they are both self-employed. Mrs. Y works with children. Times have been hard and generally people do not want to pay for luxuries and extras even for their children; hence Mr & Mrs Y as I shall call them have both been struggling and Mr Y had been unable to find any new assignments for a period. Fortunately his attributes have now landed him a decent engagement.

During the period of famine in the household my clients went to the Jobcentre Plus in the locality to apply for Jobseekers Allowance for Mr Y and for Housing Benefit since they have a mortgage to pay in addition to Council Tax etc. Mrs Y was required to produce her last accounts, prepared by my firm. The Jobcentre person looked down the profit and loss, or I should say, income and a lot of expenditure. She said “Of course I have to take these with a pinch of salt. Accountants produce figures to most suit the client. I cannot take into account some of these expenses” and she struck out the rent Mrs Y pays for her workspace used once a week in which to teach her pupils. This is the biggest expense, of course. Mrs Y told me she was shocked. Of course she was. When she related the story, I said “Why ever didn't you call me to ask me to speak to this person?” Mrs Y said that she felt the whole experience of dealing with the Jobcentre person was so humiliating that she did not want to prolong it by taking the matter up. She was clearly even now, months after this interview, quite shaken up.

Well, as I said, I am upset. Firstly, my client has been treated very badly by an intimidating and ignorant public servant. I know (because after a time in our business you get a nose for “dodginess” in people) that Mr & Mrs Y are completely honest, straight and decent people who do not deserve this treatment. Then again, I feel insulted on behalf of all tax advisers and accountants. The accounts were true and fair and every item was accounted for, backed by advices and receipts including obviously the rent arbitrarily “disallowed” by the aggressive woman in the Jobcentre, and of course all reconciled to my client's bank statements, paying in books and cheque stubs. I hardly need to spell it out except that I still cannot get over the attitude of the person.

In the end, despite my righteous anger at the aspersions cast at me, the worst aspect is that my clients have been deprived of benefit that is properly due to them as good taxpayers all these years. This sort of thing may be going on up and down the country for all I know. I wish my clients would make a complaint and I would back them all the way, but they would rather stay away from nasty officialdom, and I cannot say I blame them.

© Jon Stow 2009