Credit where credit’s due - HMRC v Annabel's

HM Revenue & Customs has claimed that it has struck a blow for lower-paid workers in the form of restaurant and nightclub staff. As many of you will know, there is a common system in restaurants where tips are collected whether through cash or as additions to credit card billing and allocated to a member of staff, the troncmaster, who is responsible for delivering shares of these gratuities to his or her colleagues. Normally the person who has the distribution responsibility deducts PAYE as appropriate which is dealt with separately from the normal wages. Yes, some cash tips go straight into pockets, but that’s another story.

Probably in common with many establishments, it turned out that Annabel’s, the well-known London nightclub, was paying its workers less than the National Minimum Wage (NMW) on the grounds that when seen in conjunction with the tips paid by the troncmaster the total earnings exceeded the NMW.

HMRC took a dim view of this and issued enforcement notices against which the employers appealed, claiming that the monies received in total by the employees satisfied the minimum amount specified under the NMW regulations. The Employment Tribunal and subsequently the Court of Appeal agreed with HMRC that the minimum wage had not been paid by the employers and they were in breach of the rules, and thus restaurant and nightclub workers must be paid the NMW before taking into account tips.

This is indeed a landmark decision which will benefit many thousands of workers who will now get at least the National Minimum Wage plus tips, even if it means that restaurant bills will be going up to cover the shortfall in monies taken. HMRC deserves credit for clamping down.

Should we feel sorry for the Annabel’s employees who have been so exploited in the past? Probably not, because at such a high class establishment the punters tip very generously and word is most Annabel’s staff are higher rate taxpayers already.

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New tax amnesty and old habits

We are starting to hear a little more about the new tax amnesty in the UK, called by HM Revenue & Customs the “New Disclosure Opportunity (NDO),” which follows on from the 2007 amnesty. Now we know that since the original amnesty, which followed on from HMRC’s victory in the Courts over the UK banks defending unsuccessfully their Channel Island branch customers, HMRC has come by a lot more information. Indeed I can infer from what I have heard on the grapevine that the acquisition of information concerning the Lichtenstein accounts has borne fruit, and will continue to do so. Therefore I think that the NDO is aimed at this particular tranche of (non) taxpayers and may be the reason for the bullish £2Bn tax take punted in the Daily Telegraph report.

I guess my advice to the miscreants would be to grab the 10% fixed penalty (plus interest on late-paid tax) while they can; of course my advice is always to come clean because at least in theory, the more tax the fraudulent evaders have to pay, the less the tax burden for the rest of us (I wish). To my mind, failure to pay thousands or millions in tax which is properly due to the Exchequer is little different from robbing a bank or stealing millions in gold bullion.

There are those who have been caught already between amnesties, which is bad luck or just desserts for not having come forward the first time. There really will be no excuse for lying low in the next amnesty, and to be honest (me, not them) they would be well advised to talk to their tax advisers, accountants or lawyers now in readiness to make complete disclosures. If they do not, or if the disclosures are incomplete then it may well mean jail time (being British and pedantic I would like to say “gaol time”). Still, it might be hard to persuade die-hard evaders to put their hands up.

I am not taking the Revenue’s side so much as the side of truth and honesty. That said, if anyone wants to speak to me with a view to their coming clean on their undeclared income and gains, I will be pleased to represent them in dealing with HMRC as long as I am satisfied they wish to make a full disclosure. Naturally I offer a very discreet and totally confidential service.

Doing the decent thing

Sometimes in my line of work we have to lift our heads from what we are doing and take a step back. Are we really doing the right thing? Today I was asked to quote for dealing with the accounts and tax return of what purported to be a business. The owner was concerned at the level of fee he was paying his present accountant for the preparation of the annual accounts and tax returns.

Having had a look at the work involved, I quoted a fee that was apparently much the same as the amount charged by the present adviser. In a sense I was pleased that my nose for what was fair was in line with the market. My USP is that I give more for the money in terms of value, because not only do I carry out the compliance at a fair price, but I am always available to clients on the telephone, giving proactive advice and help my clients be more efficient.

In this case I was concerned that I was being asked to quote for a low turnover business which consistently makes losses and has done for years. There was no other income available against which to set off the losses, for reasons I will not go into. HMRC, if they would ever think about it, would say that this was not a true business but a hobby, and that the losses should not be tax deductible elsewhere.

I said to my prospect that I thought the “business” really was a hobby, and that it would save a great deal in accountancy and tax compliance costs if the present agents were to ask HMRC to agree that the activity was a loss-making hobby and that tax returns and accounts would not be required in the future. Of course I gave away the chance to bid for the work, and probably the present incumbent will lose the business, but I think they should have given it up anyway rather than churning through a pointless process for a regular annual income. I am not saying they were unethical; just not thinking about what they were doing. What do you think?

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Has common courtesy had its day?

I try not to make this a whingeing blog. For that reason, if I complain about our dear friends at HM Revenue & Customs, it is the system, bureaucracy and stilted thinking that annoys me, not the staff who have to carry out the wishes of their masters. I cannot recall in recent years ever having had a difficult conversation with a Revenue employee, other than in the rare context that the person was not prepared to strike the best deal I had hoped for concerning a client under enquiry. Certainly there have never been angry exchanges.

Having put the record straight about the dear Revenue, I have to say that most of the time I have good relations with all my clients, my subcontractors and my suppliers (well, except the bank which is still vicious with its charges; however, since we never speak, I am not sure it constitutes a relationship). With regard to clients, if I feel uncomfortable with our communications I try to get to the bottom of it, and if we are still not getting on, I ask them to use someone else. That has been a very rare situation in the seven year life of my business, partly because one develops a feeling about a prospect before signing him or her up, and sometimes it is better just to suggest they go elsewhere.

Well, this past month two incidents have got me going. The first involves a quite major (for me) client whom I gained through a referral. The company needed some remedial tax work in order to claim some extra tax back from HMRC. I re-did two pretty complex Corporation Tax Returns which had originally been submitted by a Big Four firm. I have found out that after the FD needed help with an accounting matter (which I did know about) and asked a local firm to look at it, they have now done all the tax work for this year for my client without even asking for professional clearance. I am pretty upset, and whilst I do not know whether the firm in question just did not understand that my firm was the registered agent in succession to the Big Four firm, whether they just went for it, or the client is to blame, one way or another between them they have contrived to keep me out of the loop and de facto I have lost the job. I had tried to keep up by repeatedly asking the client about progress towards providing the information I needed, but I have been the furthest from anyone's mind. I should have been told that my services were being summarily dispensed with. The now ex-client is to his credit very apologetic and evidently embarrassed, and is a nice guy, but I am still left high and dry.

A month or so back, I had a response to my one and only paper ad which appears monthly, and went to see the prospect, who told me that he felt remote from his current adviser who never spoke to him. We had a good meeting, he gave me copies of his last Tax Return and accounts to take away, and signed an authority for me to act on his behalf in dealing with HMRC. I asked him to let his current accountant / adviser know of his decision before I wrote to that firm for professional clearance. I heard nothing more for a number of weeks, but on telephoning today I am told that not only was he staying with the current firm, but they had already done his latest accounts and Tax Return. He was going to tell me, but hadn't got round to it. He hoped I didn't mind.

Now, I do accept that my firm is not the only one out there, but the elements that go with my work for clients include great service, regular communication (I do not ever charge for telephone calls and am always happy to speak to a client) and where possible at least one face-to-face meeting a year. I charge nothing extra for this because I think clients should always have the Waitrose quality rather than cheap and cheerful, or worse, cheap and surly.

I always hope and dare to expect that clients will treat me as I treat them, and if they have a confession to make that they are “seeing someone else”, I will get it early rather than stumbling upon them in fond embrace. Is that too much to ask?

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Taxpayers as customers and the service they receive

I, in common with most other taxpayers, resent being called a customer of HM Revenue & Customs, when there really is no choice of supplier. We are captives of the system and we cannot take our business elsewhere. This is an old saw, but if we are customers, we have to ask what we are getting in terms of service; value for what we pay is another matter, and one of a political nature.

HMRC, or at least the Inland Revenue as they were called, did once upon a time provide a service to individual taxpayers, prior to Self Assessment. Of course many people feared the tax man as they thought, even though going back a long time the majority of staff were women as now. However, with minor errors in Tax Returns or even quite major but obviously unintentional incorrect completion of Returns, one could expect a letter suggesting a correct interpretation, or very often a telephone call from the Tax Office along the lines of “Have you forgotten your bank interest? Drop us a line with the figures and we will make an adjustment.”

Now it is true to say that there was a lot wrong with the old system. There was a tradition of issuing estimated assessments every year against which the taxpayer or the adviser would appeal as a matter of routine, but this was largely a question of regulating the flow of tax payments as routinely one would offer a payment on account. It was a daft system latterly (that is prior to 1996-97) but it was a system that was many years out of date. The estimated assessment routine became more fashionable in the latter stages before Self Assessment as the Revenue realised that they had to get money in. When I started in tax, one rarely saw an assessment issued unless a Tax Return had been put in, and there was little incentive for the more laissez faire taxpayers to do so. Why put in a tax return and have to pay tax, cutting into one's holiday money for St. Trop?

So, something had to be done, and though there had been tightening up of interest charges for late payment of tax, there really needed to be a system of making people submit tax returns and fining them if they didn't, as other jurisdictions already did. I think the Revenue had looked at America's Internal Revenue Service and thought they were along the right lines.

Anyway, the major change was to make people responsible for calculating their own tax liabilities, and with the wholesale introduction of a new computer system they had an automatic checking facility and automated fines and levies of interest charges. The major triumph at the time was to start massive cost cutting (this is one thing we cannot blame the current Government for) by getting rid of more qualified staff who actually knew about tax in favour of computers and call centre staff. Not all of this happened at the same time; there has been and will continue to be for a while yet an ongoing process of closing tax offices in favour of call centres and reducing the numbers of personnel who actually understand tax issues.

As the onus is now on the “customer” to calculate his or her tax due, this means that many who originally filled in the figures and waited for an assessment now have to either employ someone to prepare the accounts and tax return or wade into the online service and hope the figures they put in are the correct ones, especially if they are based on prepared accounts.

I earn my living to quite an extent by preparing Tax Returns and accounts for people who are not confident or know they are not competent to do it themselves. Obviously I am not complaining about this, but I think it is unfortunate that the amateur has to wade through so much information to manage without help. The Tax Return Guide is helpful with the basics, but cannot educate anyone in all the tax rules that we professionals have to know, and that is fundamentally unfair. It means that the individual taxpayers largely have to pay someone else to do what the Civil Service used to do on their behalf.

It is not as though information is very easy to find on the HMRC website. Although at a tax professionals' meeting with HMRC we were told that the website was being made much easier to use, I had to use Google to find on the HMRC website what their own search facility could not: that 5.75 million tax returns were filed online for 2008-09 by the deadline of 31st January 2009. I suspect a good proportion of those filed were by agents such as my firm. There were many glitches using HMRC's own online program, such as an inability to bring forward trading or lettings losses from a previous year. There was a work-around involving writing a note to oneself for next year. I did one Return using HMRC's own software, and had I not been a professional I would have been driven to distraction and probably given up.

The point of writing this piece is not to say that we should go back to the bad old days of estimated assessments, and the confusing-for-many previous year basis of taxing trading and untaxed sources. It is just that over ten years down the line of Self Assessment there is still so much work to be done in terms of improving the system and getting an HMRC website that is fit for purpose. Yes, the information is mostly there and the site is vast, but if a tax and internet geek like me cannot whistle up the content I need in short order, what hope is there for someone who has little tax knowledge, because that person will not even know what he or she is looking for? HMRC need to look at the news websites such as the BBC and CNN to see how the categories can be drilled down better into general headings, with menus underneath, sub menus and so on, so that amateurs (and journalists trying to check the ins and outs of MPs' expenses or whatever) can find what they are looking for.

Why has it taken so long to make the system work, and how much longer is it going to take? When is the “customer” going to benefit from doing all the work on the Government's behalf? Is not the taxpayer in reality more of a part-time contractor or employee engaged by the Treasury?

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Blearsy-eyed!

We read here that Hazel Blears is to pay £13,332 on the sale of a second home. How is she going to do this? Presumably her accountants or tax advisers got the documentation right so that she successfully avoided a liability by making the appropriate election. The only way she can get HMRC to accept the money is by saying she made an error or worse, deliberately misled them. She will not be happy if they charge interest and penalties in addition to the CGT.

Perhaps she thinks the way to pay this voluntary tax is to just send a cheque. If HMRC cannot match the amount paid against a current liability, they will want to just send the money back. Remember that following the change in treatment of offshore income received by non-domiciled residents in UK, advisers on US tax told their UK resident clients that they should pay their tax due in the UK on US and worldwide income received in the period 6th April to 31st December 2008 before the end of December 2008 so as to have it matched with and set off against US tax due for 2008. The problem with this was that UK tax would not have become due before 31st January 2010, and HMRC's reaction was to try to repay the tax, thus defeating the object. Does Hazel know something we don't, or is this just political expediency without worrying about the consequences? I can guess, but answers on a post card please.

Update 14th May

Hazel Blears might have read my blog yesterday! I heard on BBC radio this morning that because HMRC would not be able to accept a cheque if they could not allocate it to a known liability (given that she has done nothing that she was not legally permitted to do), an official from HMRC was summoned to Westminster last night to accept the £13,332 on behalf of the Public Purse. I think it might have been better used if paid to a charity for the homeless. This is gesture politics at its worst, and really, you couldn't make it up, could you?

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Property flipping and knee jerk reactions

I must admit that the publicity about some Members of Parliament with two or more residences changing their designated main residence to one they are about to sell has me a little concerned because of all the publicity around it, and because of the public's ire. The principal residence capital gains exemption is there for good reason, and whilst as with any rule it might be possible to exploit it to one's advantage, the main purpose of electing as to which is the main residence is actually to prevent hardship or difficulty. Often people acquire a second property through the necessity, perhaps related to a job or through inheritance, and electing as to which property is the main residence avoids unnecessary debate with HM Revenue & Customs at a later date. If a large family home were to be treated inadvertently as the second property, then upon moving, a large tax bill might prevent the purchase of a suitable replacement with similar and adequate accommodation. There has to be a rule determining which property attracts the exemption. Of course the system might be manipulated, but it is not a “loophole” as many commentators have described it.

If it is thought that MPs or ordinary taxpayers are taking serious liberties with what amounts to serial property dealing, then HMRC can look at the background and might believe that they are participating in an “adventure in the nature of a trade”, the profits of which would be liable to income tax, so it is not sensible or true to say that the tax man or tax woman does not have some powers to clamp down. With all the publicity MPs have received, those who have abused the system more seriously may certainly expect to receive letters from HMRC, who read the newspapers like anyone else. I should be concerned if there were some sort of knee-jerk clampdown emanating from Gordon Brown or Alistair Darling which might catch and be unfair to the innocent taxpayer.

Any system can be used or exploited. Readers of this piece might be interested to read about the late Frankie Howerd's ex-partner using the new Civil Partnership legislation to avoid Inheritance Tax and pass his estate tax free to their “son”. It is very ingenious, but just because rules can be exploited and manipulated by the clever or even the unscrupulous does not mean that they are wrong in principal or have to be scrapped in favour of some onerous and unfair regime which is detrimental to the greater “innocent” population.

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