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

Exorcising ghosts

Whilst on the subject of Hamlet's father's ghost, in my post “As ye sow” on 13th of this month, I mentioned the spectre of income shifting legislation and was worried that it might be sneaked in whilst we were looking at the drastic measures being introduced to save the country from ruin. No, it's not funny.

In the PBR we were told:

"The Government firmly believes it is unfair to allow a minority of individuals to benefit financially from shifting part of their income to someone else who is subject to a lower rate of tax, known as income shifting. The Government has consulted on this issue but, given the current economic challenges, the Government is deferring action and will not bring forward legislation at Finance Bill 2009. The Government will instead keep this issue under review." 


I explained a year ago how fundamentally inequitable such measures would be – see here.
My sources tell me that the Treasury and HM Revenue & Customs think that implementation of any such legislation is impractical and too expensive to administer. Phew, what a relief! I hope it's true.

www.jonstow.com

As ye sow...

It is always difficult to write in advance of the Pre-Budget Report, though we understand that it will be happening shortly. In some past years the PBR has been in October, but the Government would say it has had other things on its mind; in other words the “credit crunch” and the apparent impending recession. Of course, it depends on what business you are in as to whether you think there is a recession now, and the effects will bite on different people and businesses at different times. However, clearly the collective spending power of the nation will be affected.

The delay in the PBR is we assume because the Government is thinking about what measures it can take to address an immediate problem. Normally the twice yearly Budgets we have got used to take a longer term view. In the meantime we have been left with the spectacle of the Bank of England desperately cutting lending rates in an attempt to kick start the economy or at least relieve beleaguered mortgage holders (most of us) and ironically stimulate the housing market. Of course this points to a good part of the problem. Anyway, the Bank says it is cutting rates as it has most recently with a 1.5% reduction because it has calculated that inflation will fall below 2% anyway, whilst we understand that the economy may shrink by half a per cent a least in the next year; maybe more depending who you believe.

It is nice that the Bank has remembered that it was supposed to be using the interest rate tool as a way of controlling general inflation. In recent years it has wound the rate up in order, it said, to control house price inflation specifically, whereas before about four or five years ago it seemed to look at the general inflation rate, which is what we understood was important. Indeed it was important, and therein lies part of the damage that has been done. The general lending rates for business are what has caused a good deal of damage to the economy underneath whilst the Bank has been looking at house prices, and now, surprise, surprise, businesses are struggling. Apart from the construction industry and retail sales fueled by easy credit, those of us out in the real world know that the business environment has been slow for about three years because of the lack of genuine spending money in the economy..

The Bank of England, in increasing interest rates over the last couple of years has of course been treating the symptoms of the disease, house price inflation and consumer spending, rather than curing the disease, which has been the ridiculously easy credit available. Of course mortgage lending regulation had been hived off to the Financial Services Authority, an impotent and useless quango as we know form their failure to regulate properly the pensions industry, but even so one would have thought there might have been some dialogue. Of course it would not have saved the US sub-prime market from coming to grief, but we might have been much less badly off in the UK if people had not been defaulting on mortgages they could not afford and never should have been given in the first place.

So where does this take us on the tax front? Business does not react well to jam tomorrow, so any new stimulus to spend money such as a hoist in capital allowances will not help in the short term, any more than a cut in corporation tax for small businesses (or delaying the current locked-in increase to 22 %) would help us now. The Government has already painted itself into a corner even with the current level of borrowing. Remember also the fiasco requiring the Chancellor to increase the individual personal allowance for 2008-09 to compensate basic rate taxpayers for the loss of the 10% rate band? Will this have to be locked in for future years at further cost to the Treasury and us when the chickens come home to roost and the borrowings have to be repaid?

A quick stimulus to the economy has to put money in people's pockets now. Anything of this ilk will be very costly indeed. What would be most effective would be a cut in Employer's National Insurance because this would help business now. Schemes such as the Conservatives' idea of cash to business to employ the longer-term unemployed might to a degree be self-funding but even this will have a delayed effect.

Anyway, the Government and Gordon Brown are now reaping what they and the Bank of England have sown. In the end, we shall all have to pay. What really worries me is that MPs and the financial press will take their eyes off the ball when it comes to the Pre-Budget Report and the Chancellor will sneak in something nasty, such as a revised attack on family businesses with the income-shifting proposals we saw this time last year as a reaction to the Revenue defeat in the Arctic Systems case. Such a thing would hardly lift the mood and sentiment in small businesses, but the Treasury hitherto has not understood the reality on the ground, and is unlikely to now in the light of a “painting over the cracks” Mini-Budget.

© Jon Stow 2008

Income shifting: the Government’s paper published in December 2007.

The document “Income Shifting: a consultation of draft legislation”

is the Government’s response to the defeat of HM Revenue& Customs in the Arctic Systems case, Jones v Garnett, which concerned a “husband and wife” company where the wife received a substantial distribution of profit as dividend by virtue of the share in the company for which she had subscribed. The Revenue had sought to assess the husband on the wife’s share of the income under settlements legislation dating from the 1930s.

Despite the so-called consultation period, this is another example of legislation on the hoof, which is likely to be bad legislation, difficult to understand for tax payers, difficult to interpret for advisers because of the grey areas likely to be thrown up and pretty impossible for HMRC to police. I can see many enquiries initiated on scant evidence, vast amount of taxpayers’ money being wasted, and lots of professional fees incurred without much increase in the tax uptake by HMRC.

Firstly, the consultation period is all too short and ends on 28^th February 2008 only shortly before the next Budget and at best a couple of months before publication of the 2008 Finance Bill. At least one recent consultation, that before last year’s “interventions” contacting taxpayers over the telephone or in writing concerning supposed problems in their Returns indicated that HMRC had already made up its mind and that engaging the professions, CCAB or otherwise, was in reality a sham. This is of course as a result of politically driven policy and reflects the attitude of Ministers and their political appointees. I do not wish this to be seen as another example of Revenue-bashing. It just seems to me that in being expected to implement ill thought out legislation and indeed to understand their duties at all in this respect, the HMRC on the ground are almost as much victims of policy as the vast majority of basically honest small business owners and their poor advisers, and it does show how out of touch our political masters are.

The document avoids mention of married couples, families or civil partnerships as specific targets, whereas surely these are the classes of individuals at which the new legislation is aimed. This is quite extraordinary in my view.

We cannot expect that there will be much reasoned opposition when the Finance Bill is discussed. Debate is often curtailed and MPs’ eyes probably glaze over when tax is mentioned, except in the context of headline tax rates, which we know disguise the true burden of taxation (vide the FA 2007 cut in the basic rate of income tax from 2008-09, which essentially will make no difference at all to the majority of individual taxpayers with the loss of the starting rate of 10%; indeed there are some who will be worse off).

In the context of lack of reasoned debate, one suspects that few politicians will get past page 4 of “Income Shifting: a consultation of draft legislation” where Box 1.1: Examples of income shifting” (the only one illustrating the circumstances of a married couple) suggests that Nina, by paying all her profit through dividends to herself rather than half to Charlie, her non-working husband, has avoided paying income tax of £6,039, and if she had been a sole trader she would have paid £15,414 for 2007-08. Well, yes, but the example fails to mention that the company would still have paid 20% corporation tax, viz. £12,000 tax however the profits had been distributed as dividends.

Whilst I am of course cherry-picking the nonsense here, this example is in the introduction, and is disingenuous – yes, it is spin and disguises the reality, which is that £12,000 tax has been paid as opposed to nothing, which this example appears to suggest.

In Part 3 of the document there are a number of examples of what will be deemed income shifting as well as some that will not. Of course this is far beyond where the politicians will read. One can see the logic of some (in Treasury terms anyway and assuming that they are starting from a reasonable premise just for a moment), but there are worrying misunderstandings about the way life works and indeed the way families work (OK, an out-dated concept).

Example B (P.24) says:

B.74 This example illustrates a scenario that would be covered by the income-shifting legislation. Despite each partner providing equal labour for the business, a tax advantage is obtained through a division of income between the partners that does not reflect what they would be entitled to in a normal commercial arrangement. This is because of the differing levels of capital they have introduced to the business.

B.75 Individual 1 and individual 2 form a partnership and start trading as a local grocery. Individual 1 introduces £200,000 of capital into the business, which is used to acquire the shop premises and stock. Individual 1 and individual 2 both work full time in the business and develop it together. Neither individual 1 nor individual 2 bring any special skills into the business. Trading profits for the year are £80,000, which are split between individual 1 and individual 2 equally (i.e. each partner receives £40,000).

B.76 The new legislation would apply in this case because income has been shifted. The profit share received by individual 1 and individual 2 do not reflect the balance of labour and capital put into the business. The arrangement whereby individual 2 is entitled to an equal share of the profits and a return on capital of the business even though individual 2 has not contributed any capital appears to be non-commercial. Individual 1 has forgone income that individual 1 may have otherwise received in relation to the capital contribution (i.e. a return on individual 1’s capital).

I hope you will forgive any stereotyping in the next paragraph or so, but suppose Mr. Patel is given £200,000 by his father. He works in a grocer’s shop for a while, where he meets Mrs Patel to be, the daughter of the owner. They get married, and Mr. Patel uses his £200K to by a decent corner shop business. They have some acumen which they have acquired selling goods for others, but neither has a special skill which could be defined, beyond an eye for business. They run their shop as a partnership, sharing the profits equally; after all they both work hard and the shop is open from 7AM selling newspapers, sweets and the dreaded tobacco products until 11 at night when they might sell a little alcohol.

Is it really fair that because Mr. Patel originally bought the shop and business with his money, he should be taxed on a larger share of the profit than his wife? After all, they work so hard and probably could not manage individually with the long hours and having during slack periods to pay someone at least the minimum wage. Again, is this fair? HMRC thinks it is. I don’t.

Mrs. Giles-Hunter inherits a farm from her father. She has been running the farm for some time effectively as an employee before her father’s death, but it is very large and a great deal of work. At the Young Farmer’s Ball she met a young man named Hunter, who is experienced in farming, but being the second son will not inherit his father’s farm. They get married, and move into Mrs. Giles-Hunter’s farmhouse, and they run her farm together with a formal partnership agreement. They both have equal skill as farmers through experience, they increase their profits (no mean feat these days) and they share the fruits (the profits) equally. Because it is Mrs. Giles-Hunter’s farm and for legal reasons she cannot give half of the land to her husband, should a larger share of income be attributed to her because essentially the business is based on her capital?

Are we really going to deny families proper reward for their joint endeavours, which are in many instances what bind them together as a unit? My last example might cause some difficulties under the current rules and of course one might try to separate the land from the buildings, machinery and goodwill for the exercise, but to try to assess one person unequally when the other works equally hard seems nonsensical and out of touch.

The paper says that the income shifting legislation does not mean that businesses will have to maintain additional records, yet from the farm to the corner shop, one might think that timesheets would have to be completed to show the amount of work contributed by individual partners or directors. Without them there may be a large problem in that HMRC enquiries especially for the less well represented deem taxpayers guilty until proved innocent. Of course HMRC largely relies on professional advisers to do the self-assessment job for them, notwithstanding the relative contempt shown for these advisers and their conduct in the higher echelons of HMRC (and I have pretty much heard this attitude from the horse’s mouth).

In reality professional advisers will be better placed to implement the new rules then HMRC, which will continue to bark up many wrong trees, and one really has to wonder whether their projected tax yields even if true will show the Treasury any profit given the costs of recovery if HMRC has any significant involvement through the enquiry system. The general cost assessment contains a number of arbitrary statements without justification of the basis. There is of course no talk of redistributing the presumed increased yield amongst other cash-strapped taxpayers.

The new raft of legislation will not be based on “fairness”, and “the right amount of tax”, two favourite Treasury mantras, or on preserving family unity and values. Rather we see old-fashioned paranoia exhibited by out of touch Civil Servants and politicians who have forgotten that what drives Britain, “the nation of shopkeepers” is a continuing sense of talent and entrepreneurship which is overlooked in the current climate of low taxes for big business only, and the Stalinist attempt to regulate the lives of every individual who dares to have expectations of rewards for their efforts.

Adam Smith would be sorry to discover that the Government is no longer influenced by shopkeepers. Indeed it has rather taken against them.

© Jon Stow 2007