HMRC's review of Extra-Statutory Concession A19

Her Majesty's Revenue & Customs (HMRC) office, Wellington Place, Belfast, Northern Ireland, October 2010 (Photo credit: Wikipedia by Ardfern)

As you may know, HMRC is currently resisting all claims under Extra-Statutory Concession (ESC) A19, which for the uninitiated is a concessional treatment for taxpayers, usually unrepresented and who have not been required to submit tax returns, who find themselves with tax liabilities where PAYE codes have been issued incorrectly.

HMRC has issued a consultation document which is here. 

This is the response I am sending to HMRC. It is based on my own experience with no cribbing from anyone else.

Response begins:

5. Summary of Consultation Questions

Taxpayer responsibilities

5.1 Do you agree with the removal of 'reasonable belief' to be replaced with an objective test based around 'taxpayer responsibilities'?

No. Most taxpayers under PAYE are not tax specialists and have no need to employ agents since their affairs should be simple. Many claims under ESC A19 arise where individuals have two or more small occupational pensions. With modern software they are entitled to believe HMRC will get their tax liabilities right even if they have no concept of the automated system. A majority of such taxpayers will believe reasonably that their affairs are in order even if they are not.

HMRC responsibilities

5.2 Do you think that the introduction of HMRC responsibilities makes it clearer in regard to what information HMRC must act on? Has HMRC identified the correct responsibilities and/or are there others that should be included?

It is important that HMRC does take responsibility for taking action in relation to all information received and this should include all P14 and other end-of-year information. It is inexcusable that HMRC even resists currently claims under ESC A19 where it is clear they had relevant information as per Forms P14 received from employers and pension providers, which should have been deal with timeously.

'Exceptional Circumstances' test

5.3 Do you agree that the 'Exceptional Circumstances' section is now redundant and can be removed from ESC A19? If not, for what circumstances do you think it should be retained?

This question is slanted in itself. Low income taxpayers could endure serious hardship if information not properly used by HMRC involves notice of further liability less than 12 months after the relevant period or which had built up over two years.

Capital gains tax

5.4 Can you identify any issues with the removal of CGT from ESC A19? HMRC would be particularly interested to hear examples of where a recent request has been made in relation to CGT and ESC A19.

It is less likely that a claim would be necessary in relation to capital gains issues since most taxpayers should be aware of the tax.

Time limit for requesting HMRC looks at ESC A19

5.5 Do you agree with introducing a time limit for individuals to contact HMRC? Can you identify any issues with HMRC adopting this approach?

The time limit should be a fixed period of at least nine months after receiving Form P800, in the interest of fairness. To change the dates in HMRC's example:

“HMRC notifies Mrs Smith of an underpayment for the tax year 2015-16 by sending her a P800 Tax Calculation on 15^th March 2018. Mrs Smith considers it was HMRC’s failure to deal with information which led to the underpaid tax. Mrs Smith should contact HMRC: as soon as possible after receiving the P800, or, upon receiving her Tax Code Notice for 2018-19, but in any case, before 6 April 2018.”

This would leave Mrs Smith three weeks to notify HMRC of her claim, which would be unfair. Theoretically on HMRC's proposed change Mrs. Smith might have no real time to notify at all. Surely nine months is a fair and reasonable period to make a claim?

Other considerations

5.6 HMRC plans to issue supporting guidance alongside the revised wording. What format would be most appropriate for this? For example, online guidance, a Question and Answer document or updates in the PAYE Online Manual.

5.7 Are there any terms within the revised concession which you feel require further explanation or expansion?

On-line information should always be available, but a paper Question and Answer Document should be available for all taxpayers should they need it.

However HMRC has not demonstrated that there is any need to amend the current guidance on operation of ESC A19. Clearly the present Concession has been reinterpreted in HMRC's favour in the last two years with even very excellent and one would have thought irrefutable claims being denied, requiring taxpayers to make formal complaints.

HMRC should view the Concession not as a drain on Treasury revenue, but as it was formerly; to bring justice to taxpayers who can ill-afford late and unexpected tax demands when HMRC should have properly collected the tax at the time the relevant income was received.

End of response

I am very unhappy both about the proposed revision of ESC A19 and agree with Keith Gordon that there is no need for any change. If you have not done so already, please hurry to sign Keith's petition against the change. 

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• HMRC errors and the older taxpayer

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

Ulterior motives and deadline woes

Well, the deadline for submitting paper tax returns for 2007-08 has passed with Halloween, and with it the Government’s trick or treat. The trouble is that this messing around with deadlines really is a trick. We have until 31st January 2009 to submit Self Assessment Returns online, and the real reason for the earlier deadline for submitting paper ones is to force online submission to save costs. HM Revenue & Customs probably hoped that people would not get their acts and papers together by the end of October, and would be forced to investigate the online process, either doing it themselves if computer literate, or otherwise having to employ an agent. Then they will be locked in for the future to the online system.

Now, as an agent this will bring me more business, but the truth is that HMRC have got their cost cutting in early; they have already cut so many staff and are so short of resources that they take a long time to process paper returns. It is known that the Sefton office in Bootle is months behind in dealing with paper returns. Even where returns have been submitted for several back years following discoveries by HMRC of possible undeclared income, they are still taking weeks and months to compute liabilities. They used to be so hot on that, but trained staff who understand tax technicalities are in short supply in HMRC.

I feel very sorry for the staff that have to answer the phones. None of them knows anything about tax and consequently each has to take a lot of flak. We are not allowed to talk to those who actually understand and do real case work.

The deadline change for paper returns suggested by dear Lord Carter was just a ploy to get returns submitted online and get the Revenue computers to do all the work. Yes, it saves taxpayers money but it does not help the older taxpayers or those who are not used to computers; in the main it will cost them money to have their tax affairs sorted out.

Has the Government and HMRC been entirely honest about this?

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