The Chancellor's attack on landlords

In July 2015 Chancellor George Osborne announced the withdrawal of higher rate tax relief on mortgages of residential landlords. Those higher rate taxpayers with higher gearing in terms of finance have had their business models badly damaged or indeed destroyed as by 2020 they could be paying tax when actually suffering losses in real terms.  There have been a number of tax projections to prove this. At the very least, the returns on their investments will be very low.

If individuals own multiple properties, one cannot say that life is simple, and that people just lie back and enjoy the return of income. The reality is that there is considerable investment in time, plus worry concerning risk as few tenants are perfect and some are positively headaches. At the same time it is inevitable that repairs to properties must be made as and when needed, redecoration is necessary, and damage has to be repaired between tenancies.

The latest attack on residential landlords announced by Mr Osborne in November 2015 is a 3% addition levy of Stamp Duty Land Tax (SDLT) on property not purchased for the owner’s own permanent occupation. This takes effect in April 2016. This is probably intended as a deterrent to would-be landlords and those wishing to expand their portfolio. It is dressed as giving first-time buyers a chance to own. However it ignores the premise that everyone needs a place to live, whether owners or renters.

At the bottom end of the market, for example in the Southend area (I have to declare an interest), the small flats in town would not be the initial target of first-time buyers. The reality is that landlords are providing what amounts to social housing, and for their return on investment have considerable risk in terms of the types of tenant. 

In our own case the tenant of a flat downstairs from ours caused a fire with a Christmas candle. We lost our tenant of course as our flat was damaged, and incurred extra costs over the insurance recovery and legal requirements in paying for extra safeguards in case of another fire.

Then we took a tenant of the Southend Council homeless list, and within six weeks he trashed the flat and left, having turned on the shower tap and leaving the hose to pour water onto the floor. By the time we found out probably three days afterwards, the damage to our flat was considerable, it was uninhabitable for six months due to damp, and the refurbished downstairs flat we did not own was destroyed again.

We residential landlords take a risk, and frankly for the money there is no easy ride. Two years after the last event we are still carrying forward losses from that time; yet we feel that we are doing good by providing for a genuine need for our investment with what amounts to social housing. Yes of course we hope to make a capital profit one day. Why shouldn’t we, given the risks we have taken on?

Of course the country needs more houses, but George Osborne’s target of 400,000 by 2020 looks very inadequate to meet the requirement. Net migration to the UK in the year to June 2015 was 336,000 so in five years there might be another 1.5 million people. They are not all going to buy the houses that do not exist yet and will not in 2020. They are largely going to be renters. Where will they live? They need private residential landlords whether those with one or two properties, or fifteen.

If the Chancellor were honest about the new measures quite simply being tax-raising to fund the deficit rather dressing them as social engineering, we could understand to a degree why he had made these announcements. However, they will be damaging to the social fabric of society in ways that seem to have been overlooked, and amount to a very backward step in managing the housing crisis.

Landlords and the restriction for mortgage interest relief

In response to signing the petition to the Government concerning the decision to deny higher rate tax relief on mortgage interest paid by landlords, I and every other signatory have received the following email. I will let you read it and comment further down.

Government response

“Hi Jon Stow,

The Government has responded to the petition you signed – “Reverse the planned tax relief restriction on ‘individual’ landlords”.

Government responded:

The Government is committed to a fair tax system so is restricting relief on landlord property finance costs to the basic rate of tax, reducing the generosity for wealthier landlords.
The Government is committed to a fair tax system so is restricting tax relief landlords can claim on property finance costs to the basic rate of income tax.

Landlords are currently able to offset their mortgage interest and other finance costs against their property income, reducing their tax liability. This relief is not available for ordinary homebuyers and not available to those investing in other assets such as shares. Currently the landlords with the largest incomes benefit the most, receiving relief at their marginal tax rates of 40% or 45%.

By restricting finance cost relief available to the basic rate of income tax (20%) all finance costs incurred by individual landlords will be treated the same by the tax system. This recognises the benefits to the economy that investment in property can bring but ensures the landlords with the largest incomes will no longer benefit from higher rates of tax relief.

By unifying the treatment of finance costs for all individual landlords, the Government is reducing the distortion between property investment and investment in other assets, and reducing the advantage landlords may have in the property market over ordinary homebuyers.

Less than 1 in 5 (18%) of individual landlords are expected to pay more tax as a result of this measure. Taking account of the other measures from the Summer Budget, the Office of Budget Responsibility (OBR) have not adjusted their forecast for house prices. The OBR expect the impact on the housing market will be small. Furthermore, this change is being introduced gradually from April 2017 over 4 years. This will give landlords time to plan for and adjust to these changes.”

The reality

Not every landlord will be affected by the change, but a substantial number will be. It will be especially difficult for long-term landlords with multiple properties and with a higher gearing in terms of mortgages. As property inflation has progressed, many will have re-mortgaged in order to buy further properties. In many cases, such a model will not be viable, because there will be no profit left.

I can sense that some will say sarcastically that their heart bleeds for the poor landlord who no longer receives net income from their properties. Yet the landlords affected will be in a trap. How can they divest themselves of their portfolio in short order, and in this context, two, three or four years is not long? If they do sell up of course the Government will reap a reward in terms of large amounts of capital gains tax, but it is hard to see substantial benefit to the housing market in terms of more property available to first-time buyers. Purely in terms of numbers it is unfair and will put some landlords out of business.

Of course if the property portfolio is held through a company, mortgage interest relief will not be restricted. Yet comparatively few portfolios are overall, especially with the higher mortgage gearing, and that is for commercial reasons. Mortgage lenders do not like lending to companies because they have less security. In the past I have dealt with a client who had property portfolios worth in excess of £3M with borrowing of nearly £2.5M. He would not be able to carry on.

You might have noted that I mentioned putting landlords “out of business”. The response from HM Government talks about property investment, but HMRC does see rental activities as a business in some contexts. In a business, one expects to deduct in full all one's revenue costs. Is there a slippery slope which will bring more commercial activities to lose full relief for finance costs?

Property “investment” is not like holding a portfolio of shares or multiple ISAs or money on deposit. There is a risk as with stock market investments, but anyone who has been a landlord will tell you that there is a lot more involvement as a landlord, even if you use a letting agent. It can be very hands-on.

Suppose the tenant causes a fire or a flood and you have to deal with the insurance company, attend the site on multiple occasions to see the insurance assessor, get builders' estimates, supervise the builders, and get the letting up and running again. It can take many months, be pretty full-time, and very stressful. Believe me, I have been there, fire and flood. It definitely feels like running a business. The time commitment is often very substantial.

The Government and HMRC on their behalf are being disingenuous. It suits them to make a tax-grab from people whose effectively full-time work is from their letting business, and who are often providing a real service to local authorities in dealing with their displaced people requiring housing.

It would not be a “fair tax system” for those whose property businesses will be destroyed.

I believe the new rules will be a costly mistake; costly for the landlords, but also for those who need a roof over their heads but will never be able to afford to buy.

HMRC systems not joined up

Three months ago I registered a new client for Self Assessment as she had purchased a buy-to-let property which gave rise to a decent profit in 2014-15.

Two days ago she and I received a Form P800 reconciling her PAYE income and giving rise to a refund of over £800. This was on the same day my client had emailed her spreadsheet of lettings income and expenses.

I telephoned HMRC to suggest they did not send the tax refund as ultimately it would not be due to my client. I was told that it was already in the post, and as it turned out my client had the cheque today. We have agreed she will bank it and pay back the money under Self Assessment. We cannot trust HMRC not to lose the cheque if we sent it back, and anyway it would be months before they dealt with it.

I did ask the HMRC agent why they would make a refund on PAYE when they had been advised the client had another income source and had registered to do a Tax Return. Since the agent would not have the knowledge to be able to answer and because her command of English was poor, the question was effectively rhetorical.

The answer is probably that, as per usual, there is a lack of joined-up thinking going into HMRC systems and programming. Oh, it is all so frustrating.

Professional firm targeted by fraudsters

Recently I heard a worrying tale from a partner in a firm of accountants, who shall of course remain anonymous.

Apparently fraudsters had hacked into their computer network and submitted entirely bogus personal Tax Returns on behalf of actual clients of the firm. All these false Returns resulted in substantial tax repayments which were directed to bank accounts controlled by the crooks.

HMRC had spotted the frauds, although I am not sure how much money was wrongly paid to the villains.

It is a lesson to all of us not to be complacent about Trojan horses and clicking on links in dodgy emails (which is apparently what let these guys in). If we are caught out it could be hugely damaging to our firms' reputations, and result in the loss of the clients whose privacy has been violated. Also, we would be patsies in allowing the tax to be stolen from the Treasury, which is the same as if it was taken from our collective selves.

Unintended consequences

One of my clients called me in a panic. She had received a "threatening notice" from HMRC saying that she would be fined £100 for not sending in her Tax Return. Actually, I submitted her return for 2014-15 on 11th May 2015.

Hers is always one of the first I do each year. Why? Because she is ninety-five years old and does not like anything hanging over her.

Obviously I was very puzzled about the threatening letter. It turns out this was her Notice to File a return. Normally one would expect these to be posted in April, but due to the HMRC contract with Royal Mail they are still trickling through; hence my client's was received on 1st July.

Not everyone can immediately understand that some letters from Officialdom are due to inefficiency and incompetence, and therefore some people take these letters seriously, especially vulnerable people.

Surely we can hope that next year all Notices to File are sent out in April and that taxpayers receiving them will not feel threatened? My ninety-five year-old was in a tail-spin and could scarcely catch her breath. Government contracts with Royal Mail should not cause such distress.

Working Tax Credit and working hours ploys

I am no expert on Working Tax Credit (WTC), and I know that many who were on Incapacity Benefit and even Disability Living Allowance have been pronounced “fit to work”, some say unfairly, in the last two or three years.

Word on the street is that you can get your sixteen or thirty hours work to be entitled to WTC by being self-employed selling through Kleeneze catalogues, or maybe selling lottery tickets for charities. How you can prove your working hours from that, I don’t know, but maybe neither HMRC nor DWP care.

Are my sources correct? Have you heard anything about this? Does it matter?

State Pensions, PAYE and unfairness

Not all the taxpayers I look after have high incomes. From time to time I help pensioners and others whose means are quite small.

It may surprise many, but there are some people whose only taxable income is from the UK State Pension. Quite often it is enhanced by the additional State Pension, previously known as the State Earnings Related Pension Scheme (SERPS) and the State Second Pension. This does not mean that those pensioners are living the high life. Their total income might well be no more than £11,000 or £12,000 a year, but that is more than the current Age Allowance of £10,500, frozen by the Chancellor, George Osborne. That means that those pensioners have a tax liability.

Quite a few new pensioners with higher State Pensions are unaware that they have a liability to tax. In fact many are unaware that State Pensions are taxable at all. In the past year or so, I have come across such individuals who have suddenly found themselves with unexpected tax demands and on one occasion a demand for four years’ tax all at once.

I took on the poor chap who had paid HMRC for four years’ tax, and found that actually he owed nothing because HMRC had overlooked his entitlement to the Married Couples Allowance. This actually eliminated his supposed liabilities, but he died before I got the tax back. His widow received the payment.

However, there are others who are receiving tax demands on their State (and only) Pensions out of the blue, and still do have a tax liability. Surely it would be less painful to bring taxable state benefits into PAYE and ensure that no one receives any unexpected shocks? After all, these are by definition people on low incomes, and it cannot be expected that they will have any savings out of which they pay tax. Generally they spend what they receive at that income level, and who can blame them?

Better still, why not exempt from tax any amounts of State Pension in excess of the Age Allowance or Personal Allowance as applicable. After all, these pensioners have done their bit.

What do you think?

Fair Tax and the real world

There has been a lot of talk about Fair Tax and self-appointed parties have even persuaded an august professional institute to buy into their plan. It sounds a bit like clothing manufacturers getting the Woolmark (remember that) for a fee of course. The Woolmark was a guarantee of Merino wool. A Fair Tax Mark would be no guarantee of anything.

The question is, what level of tax is fair? We are talking about corporation (company) tax of course. All the criticism, mainly aimed at multinational companies, is about the level of corporation tax they pay. Now it is true that they might have more flexibility than smaller businesses to arrange to pay a lower level of corporation tax in the UK by transferring profit to other jurisdictions. 

At the same time, there are rules on transfer pricing which apply to large companies and in which HMRC take a keen interest. All businesses need to reinvest, and to encourage this there are quite generous allowances against tax that can be claimed (because the Treasury wants them to) which means that taxable profit might be lower than accounting profit.

However, I do not want to get too technical. I will leave that to others. The government is reducing the main rate of corporation tax to 20% on taxable profit for all companies, large and small, from 1^st April 2015. The previous administration was also intent on reducing the rate, and that is because Government perceives that with a low tax regime on profits, overseas businesses will want to invest more in the UK. It all makes sense to me.

My next point is one already made by Ben Saunders who has helpfully extracted from HMRC's accounts for 2012-13 the following figures which show that corporation tax is only the fourth largest revenue raiser anyway:

1. Income tax – £150.9bn
2. National Insurance – £101.7bn
3. VAT – £101bn
4. Corporation tax – £39.2bn

Do read Ben's piece, in which he points out that in the UK, most businesses are not companies anyway.

So the Government does not regard raising money through corporation tax as their biggest priority, and there is a reason for this quite apart from the question of competing for business against foreign competition. That reason is that corporation tax is not the only tax that companies pay.

Who actually pays all the income tax recovered under PAYE from company employees? It is the companies that employ them. Who pays the National Insurance? The employees think they pay their share, because it in on their payslips, but actually it comes out of company bank accounts.

Therefore it is ridiculous to have a measure of one tax to be regarded as “fair” and to ignore all the other tax revenue generated.

We can take this one step further. Large companies as well as small ones and other businesses contribute to raising the level of employment. In fact in the UK there are more people employed than there have ever been before. If people are employed they are drawing far less in benefits and therefore saving the Treasury even more money which they would have to cough up if those employees had no work and were sitting at home.

Do not talk to me about Fair Tax. The economy is very complicated, and the tax regime as a whole is a sort of steering mechanism. It is crude and sometimes not very responsive, but to extract one element is disingenuous, particularly where that element of potential low tax on profits is an important attraction for investment.

Margaret Hodge and the British Inquisition

I had not intended to write about the House of Commons Public Accounts Committee’s (PAC) “investigation” into tax avoidance etc. as many more august tax writers than I have already had their shot. However, I have been asking myself how they could have got it all so badly wrong, and why.

We know that there are political tax lobbyists out there who have received funding from unions. There have been various stories in the newspapers about individuals who have been involved in aggressive tax avoidance schemes, such as Jimmy Carr. Somehow with the campaigners driving the politicians there has been a shift towards questioning why multi-national famous-name companies such as Starbucks and Amazon do not pay much corporation tax in the UK and assuming there is some evil plot.

The PAC has had representatives of multi-nationals and of the Big Four accountants before them to ask questions on this issue, but sadly they have not come to sensible conclusions because they start from the premise that the international businesses are dishonestly avoiding paying their dues to HMRC. Many witnesses have tried to explain that firstly, the general premise is not provable and in almost all cases not even likely, and secondly that corporation tax paid is not a measure of a business's contribution to the economy.

All the witnesses have been interrupted constantly when answering questions. The Committee members, and in particular the Chair, Margaret Hodge, have tried to insist on their own view being accepted by arguing with the witnesses rather than allowing them to reply fully. The whole attitude brings to my mind the treatment of Galileo by the Inquisition in Rome in 1633, when he tried to explain that the Earth went round (orbited as we would say) the Sun, and not the other way round. Because the Vatican doctrine said this could not be true, no one was prepared to look at the evidence presented. So it is with the PAC and their attitude to supposed tax avoidance by large companies.

If in any investigation we assume the result before we investigate, we will inevitably bias our conclusion, and probably come up with the wrong one. That is true in tax, in economic matters, and in science.

Please bear with me, but Robert Millikan, one hundred years ago, biased his results in measuring the charge of an electron because he had a wrong value for the viscosity of air. Actually he was not far wrong, but he tended to discard results which did not support his figures. The shame is that no doubt for psychological reasons other scientists following afterwards and getting different results tended to do the same, discarding results which were “off” rather than properly challenging Millikan's conclusions and measurement.

Proper scientific research should involve reproducing any experiment on which you intend to build under the same conditions, and then developing your own experiments and investigations from there to make sure there is a consistency. That is intellectual rigour, something to which the PAC does not adhere.

We understand that the PAC members are not briefed. They do not have people to help them with their questions. Yet it is apparent that they do not do much research themselves. That was very obvious with the recent questioning of witnesses about the nature of Duchy of Cornwall, its income and tax status. There is quite a lot one can find out about the Duchy in two minutes with Google (I put that to the test), yet it seemed the PAC members had not got that far. They asked their questions apparently from a starting point of total ignorance, but at the same time their interrogation had that implicit bias that someone must be dodging tax.

I am not going to get into the complexities of international taxation beyond saying that Starbucks can pay royalties to their Netherlands business and claim a tax deduction in the UK. There is international cooperation on transfer pricing, and no one had been doing anything wrong. It is perverse that Starbucks have now “volunteered” to pay corporation tax by deferring claims for allowances to which they are fully entitled.

What the PAC does not understand is that fast-growing businesses tend not to pay much corporation tax. That is true of small businesses which might be my clients, or very large ones. The American giants such as Starbucks and Amazon have been familiar for a while and seemed to be everywhere, but they are now more everywhere than they were even a couple of years ago.

Why have they not been paying much corporation tax? Because they have had little or no taxable profit; because they have been investing all their “spare” money in opening new premises, buying plant and paying new employees – yes, new employees. All that investment is tax-deductible, as it should be.

Large corporates who have no taxable profit liable to corporation tax still generate substantial amounts to the Exchequer. They pay VAT on their sales less inputs, they pay business rates, they pay the payroll taxes for their employees, and they pay import duties.

They boost employment by taking on workers and by driving income to their logistics suppliers, the ones who deliver to them and the ones who deliver their stuff to you and me. The suppliers need to employ more people too.

So the small area upon which the PAC concentrates concerning tax on accounts profits has nothing to do with the real contribution of large companies employing people not only paying their taxes, but saving the State from having to pay them benefits if they were instead unemployed.

Taxation is according to the law, and should not be based on moral blackmail or Aunt Sally games run by people who should know better.

Of course it is not good explaining any of that to Margaret Hodge. She has made up her mind, and the actual reality does not suit the grandstanding she is trying to make at the end of her political career.

Footnote: In the Wikipedia page about Millikan there is a reference to the physicist Richard Feynman's book of anecdotes, Surely You are Joking, Mr. Feynman!. Affilate link at the bottom. I thoroughly recommend this book, which is great fun. It is a glimpse of the life of this amazing man. If you do not wish to use an affiliate link in purchasing, here is a non-affiliate one.

HMRC cannot do joined-up writing

As anyone who reads this blog will appreciate, I correspond regularly with HMRC. If I am dealing with an issue other than an enquiry into a taxpayer's affairs, when normally one officer will run the case, HMRC's correspondence is literally all over the place.

Not all issues can be dealt with over the telephone, because HMRC's Self Assessment call centre agents are limited in their power to help with anything beyond a PAYE Coding or a payment allocation etc.. If I have to make a complaint on behalf of a client or simply highlight some issue which HMRC are clearly getting wrong, I have to write. The trouble is that each time I write a letter on a particular issue, I get a reply from a different person in HMRC.

I believe that part of the difficulty must be a drive for “efficiency” in this new digital age. Most initial correspondence has to go to a PO box in Cardiff (you might get to write to a couple of other PO boxes when you get a reply) and I believe they scan and email my letter to some anonymous office who knows where. If I am lucky I get a reply within anything from a couple of weeks to three months. If I then respond my next letter might be scanned and sent to someone else to reply, perhaps someone in another part of the country.

Because HMRC officers are not trusted to think for themselves, or are not qualified to, many of the replies are obvious “paste jobs” from standard text. They do not consider the thrust or particular nuance of the letter to which they are replying, and of course the second and third people to respond in correspondence will not know what their predecessors were thinking when they wrote their letters.

It is no good trying to send a follow-up letter before I have had a reply to the previous one, because that will be emailed somewhere else, even if I attach a copy of the earlier letter.

Sometimes I have had two replies to the same letter within a few weeks. On a recent occasion, a more favourable decision was made in the second than in the first, which is fine and they have committed themselves.

There is no continuity in the system. No one sees correspondence through, and if they did it would be dealt with more quickly and efficiently. As I have mentioned before, one letter to me was typed and never sent to me by HMRC. Often, letters I receive from HMRC are unsigned, and I wonder whether the officer who drafted the letter has checked it, or if anyone has read it through in their absence, given that sometimes mistakes are only noticed in hard copy.

I suppose the problems are that there are insufficient technical staff of a decent standard within HMRC, and that digital technology had led to misguided senior managers believing that any of their officers can deal with correspondence without a case file, even a virtual one.

The current system wastes my time and your time if you are a tax professional, and it wastes HMRC's time and resources in not getting matters dealt with more quickly and efficiently.

It is another exasperating example proving Hutber's Law: “Improvement means deterioration”. What do you think?

HMRC and credit where credit's due – eventually

I am very pleased to report that HMRC have allowed my longest standing claim under ESC A19 after five letters, eighteen months, and just before going to the Adjudicator. My previous report on the case was here and I do think it only right to thank Keith Gordon for his campaign and in particular his article in Taxation in October 2012 which provided more ammunition for the fight.

Of course it should not have been a fight. Not all cases have the same merit, but given that my client visited HMRC after her husband's death specifically to make sure that her pensions would be taxed at source correctly, it should have been a simple matter for HMRC to agree to the claim. Of course they did not, but let us be fair and say that they saw the light at last, and be grateful.

In some ways the pleasure I get from this win is more than a case I had a while back when HMRC backed off in an enquiry from unreasonably demanding £250K plus from a client I had just taken on. It is a great feeling to see off an injustice.

HMRC, the stick and the carrot

Can HMRC's aggressive stance towards individual taxpayers be counterproductive?

Frustrated of Essex

It is no secret, especially not on this blog, that I have been frustrated by HMRC's attitude towards those who found out at a late stage that tax had been under-recovered from their pensions etc. and they had a significant tax bill. Even though HMRC has had the power under ESC A19 to “forgive” the tax paid, in the last couple of years they have steadfastly refused claims and appeal which would have been accepted prior to 2011.

We know that HMRC is under extreme pressure to collect as much as possible. I understand that, and let me be clear, I think everyone should pay their fair share according to the law. I wrote last July:

“I would like to see all dishonest tax-dodgers caught. The so-called black economy consisting of people who offer to re-lay your drive or clean your house soffits and fascias for cash and all the other “cash-in-hand” people who knock on your door cost the country billions in lost tax.”

It is just that in some areas, HMRC, and maybe Government, have lost track of what might be fair with regard to honest taxpayers, those who out themselves from the black economy, and others whose tax affairs are in arrears and they seek to get themselves up to date.

My own patch

In my own practice, there are areas of taxation I do not enjoy, do not regard as my strengths, and which I pass to others. No one can gain the experience to be strong in all areas of tax because there just isn't time, whether one is a practitioner in private practice like me, or an employee.

I have two or three favourite areas or niches of tax that I do specialise in. One of those is in helping”delinquent” taxpayers, which usually means those who have not paid tax recently, to get themselves up to date and to negotiate a decent settlement with HMRC.

Those who have been “caught” by HMRC are in worse position from the point of view of the penalty regime than those who come forward voluntarily. That is understandable, but I can still help them in agreeing their back-tax, interest and penalties and getting a settlement with HMRC.

A puzzle

Those making voluntary disclosures should be entitled to better treatment with lower penalties. What has worried me recently is that in one case, where the individual simply did not have the means to pay all his tax (of course his fault) HMRC preferred to make him bankrupt with a lower tax recovery than if they had agreed his offer of payment of a quite significantly greater amount over three years. HMRC preferred less jam today than the more jam they might have had tomorrow, and by making anyone bankrupt they have to join the queue with the other creditors. I thought this was pretty silly.

Late return penalties

Another issue is the new daily penalties regime introduced by HMRC from 2010-11, and I quote them;

“Following a review of HM Revenue and Customs powers new legislation was introduced. Under Schedule 55 Finance Act 2009 the way in which HMRC applies its late filing penalties saw major changes particularly in respect of raising Daily Penalties. This change only applied to Tax returns for 2010-11 onwards with the previous legislation and guidance remaining for 2009-10 and earlier.

Where a customer has not filed a Tax return 3 months from the return due date Daily penalties will start to accrue for a period up to 90 days at a rate of £10.00 per day, the rate is fixed and can not be changed (except by legislation) and in the majority of cases this will be an automatic process. There is no longer a requirement to apply to the Tribunal to charge a Daily Penalty or for a “fixed £100 penalty” to have been charged before applying it. A Revenue Determination can be considered at any time during the period of which a Tax return remains outstanding but it is not a requirement before a Daily Penalty is applied.”

Note the irony of calling someone a customer and then in the same sentence imposing daily penalties.

Disincentive

My concern is that the daily penalties may be a disincentive to comply in some circumstances. Someone more itinerant “self-employed” might, if the penalty notice catches up with them, be less inclined to let HMRC know where they are. Also, not everyone who works in the UK was born here or even has strong ties to the UK. Many, in the face of threats, will melt away whence they came, or to some other jurisdiction. Of course the individual amounts of tax lost each time might be small, but in a fluid situation of cross-border working, I think the penalty regime may be a disincentive to comply, especially if the first a worker knows of her or his obligations is the penalty notice rather than the original notice to complete a tax return.

Particularly with the taxation of individuals I believe HMRC should take a more pragmatic approach to collecting tax, by which I mean adopting methods to collect more through negotiation, rather than less tax through preferring the stick over the carrot.

Of course everyone should meet their tax obligations under the law. Punishing especially those who have come clean or have just got behind with their tax affairs, at the expense of lowering the overall tax take, seems rather foolish.

Common sense?

I believe there is a case for removing most of the penalties imposed for late submission of Returns once they are submitted, with perhaps HMRC raising their interest rate charge for late-paid tax. I also think more common sense should be applied where an individual simply cannot meet their tax obligations. I would not want to encourage anyone to dodge their responsibilities; rather I would hope they should face up to them with more encouragement.

How do you feel about HMRC's aggressive stance? Do you believe it is counterproductive?

Disingenuous HMRC

Last June I mentioned a lady on whose behalf I had made a claim under ESC A19. She had visited the local office of HMRC, back when they had one, to ensure that her tax would be dealt with correctly following the recent death of her husband. Her claim for relief from a quite considerable amount of back tax owing as a result of HMRC's failure to act following her visit was turned down.

On behalf of my client at the end of May 2012 I appealed against the decision. At this stage it was by making a formal complaint given that the relief requested is actually discretionary as far as HMRC is concerned.

I had heard nothing from HMRC by September so I telephoned and was advised that the matter had been “brought forward” which is Civil Service speak for not actually having done anything but not yet lost the file or record. I called subsequently without getting news of further progress, and again after the January tax return rush was over. I was then told by the call centre that I would get a call back from the relevant office within five working days.

I did get a call back within two days from a Complaints Officer. The conversation went something like this:

Complaints Officer (CO) “We replied to your letter of 30^th May last July. Did you not receive it?”

Me: “No.”

CO: I think it was probably never sent. I will fax you a copy. You won't be surprised to learn that your request for relief (under ESC A19) has been turned down again”.

Me: “Why was I told in September that the record had been brought forward if a letter had been sent?”

CO: “Because your client has complained to her MP so we kept it open.”

So I received the faxed letter with the date “July 2012” but no actual day typed or written in, so it is fair to assume that the letter was indeed never sent and that Royal Mail are not to blame.

The reasons the further request for relief have been turned down include that the end-of-year pension providers' PAYE Returns submitted in May each year do not count as information HMRC could reasonably have used although they “appreciate how tempting it is to assume these immediately become available for ESC A19's purposes.” Well, blow me, if someone send me an email, letter or fax that I actually receive (unlike HMRC's letter) I have the information and it is my fault if I neglect to do anything with it.

The seven-month-old letter goes on to stress that the information they receive allows them up to four years to review the tax position. Well, we know that. It's the law. It has nothing to do with whether HMRC acted properly and whether they should give up the tax they did not collect in accordance with a long-established concession and precedent.

They at least concede that my client is not a liar and accept she did visit the tax office after her husband died. However according to HMRC she could not apparently have “reasonably believed” her tax affairs were in order following the issue of an incorrect coding. That assumes she would have had some knowledge of tax (something HMRC unreasonably wishes to impute on all taxpayers in a recent consultation on the concession) and that her understanding was not skewed in the trauma of bereavement.

My client and I are not leaving it there and we will return to the fray. We have further grounds for complaint in their not sending the letter and not mentioning it over the telephone two months after it had been typed and left on file, unsigned. Of course the whole letter is complete and utter nonsense arguing in the face of what would have been a simple case of allowing the relief if a request had been made in 2010 or earlier.

There is no doubt that HMRC has sent round a memo instructing that all claims be turned down on whatever grounds. Their correspondence is disingenuous and frankly, they might as well abolish the concession altogether rather than just change it, if they are intending to turn down all future claims.

HMRC need not be afraid of one bad write-up in the Daily Mail if they even get one. After all, the politicians and the public have too much fun bashing the multi-nationals for sensible tax planning, and for whatever reason this tax abuse of small taxpayers who are mostly pensioners is being largely ignored by the media. It seems that politicians who count in this matter are not going to help.

Isn't it all a disgrace?

The thought police and the right amount of tax

Secret denunciations against anyone who will conceal favors and services or will collude to hide the true revenue from them. (Photo credit: Berthold Werner via Wikipedia)

Being shot at

 

These days it is really tough being a tax professional in the UK. There is hardly a day goes by without some media frenzy about supposed immoral tax avoidance, and we get all the blame as the villains of the piece. Many of us might be forgiven for being confused by all the hot air and smoke and mirrors into forgetting what tax avoidance is, so if you have, please remind yourself here.

The Jimmy Carr affair was the worst flare-up this year with the “comedian” being lambasted for wanting to pay less tax on his surprisingly high income. Yet in truth while only 26% of the population think tax avoidance is morally acceptable as against 64% who don't, 42% would probably employ someone to help them avoid tax as against 29% who wouldn't. On the face of it there are double standards among those asked, but perhaps not if we think about this a bit more.

I do not advise my clients on tax avoidance. If they engage in a scheme provided by someone else, that scheme will not have been recommended by me. I would likely brief the client on the risks of an HMRC enquiry and that the scheme might not work and that the client will very likely have to wait a long time to find out if it does.

What I do offer my clients is ways of paying the least amounts of tax under the current law as intended by Parliament. That is as morally acceptable as telling someone petrol is cheaper at one service station than it is at another, isn’t it?

Oppressive Culture 

 

The current climate or political culture, supported joyfully by the media, is that people and especially businesses should pay as much tax as possible. This now extends to international or multinational companies being expected by the press to pay tax when they have not made any money in the UK. Normally if one has no profit (i.e. no net income) one should not have to pay tax, but apparently it is thought that Facebook and Starbucks should, just because they are big and make profits elsewhere.

In a tax forum a well known tax commentator likened our tax system to the East German model, and it seems that some learned judges have been intimidated by the political climate into reaching decisions which favoured HMRC, but seemed strange. I had better not say more because there would be nothing worse than being sued by a lawyer.

Just the same, there is no public political dissent from the notions that not only should we not indulge in tax avoidance schemes, but that reasonable tax planning with contractors working through personal service companies is somehow morally beyond the pale. That is notwithstanding that so many Government agencies have insisted on contractors working through companies to avoid their obligations as employers on the human resources side, including giving notice, redundancy, providing pensions, as well as avoiding paying Employer's National Insurance on their tight budgets.

The new Communism

 

So the three main political parties all sing from the same hymn sheet, and anyone in politics brave enough to disagree would be instantly lambasted and attacked by the media, with the Treasury and Opposition spokespeople getting on their high horses. They would be joined by the usual suspects, purporting to represent the best interests of the workers on whose behalf they claim to speak.

Sadly, what has happened somehow over the last dozen years is that the State has instilled this belief amongst so many that there are others who are up to something, somehow fiddling their taxes down. Because so many people have suffered in the economic downturn, this belief is whipped up by politicians and their willing media by envy (it sells newspapers).

So in many ways our capitalist state has become like an old Communist State. I recommend this if you can spare ten minutes more of your time. Privately no one really believes everything they are told but publicly they are afraid to speak out simply to say that the picture painted is totally false.

From the public opinion poll mentioned above, we might infer that some of the 64% who say that tax avoidance is unacceptable say it because the thought police would get them, but privately admit they might do it themselves given the chance. Somehow, those of us who advise on tax but do not do tax avoidance have just the same been tarred with the same brush as the tax avoidance promoters.

We are innocent, OK?

 

The tax avoidance “industry” is a relatively small and accounts for £5 billion out of the £32 billion tax gap estimated by HMRC. That is not small beer even at less than one-sixth of the tax “lost” but very few tax professionals are involved in tax avoidance anyway. We are not wicked for assisting our clients through the diabolical bureaucratic tax maze that has been created. We help our clients get on with their lives and their businesses, to help stimulate the economy and help get the country out of the mess created on the watch of many of the current leading politicians.

Are we allowed to be heard outside our own cloisters?

HMRC wasting our money on trivial matters

Posting paper

These two cases nearly slipped by without my noticing, but really we have to wonder why HMRC do not use their resources rather better.

In Eamas Consulting LLP v HMTC 4.4.12 TC 02009 a partnership received a paper Tax Return for 2007-08 in April 2008. HMRC issued a penalty notice in February 2009 indicating they had not received it back. The partnership said they had submitted a nil return as soon as they had received it, and indeed paper Self Assessment Returns had been submitted on behalf of the two partners also in April 2008.

The lead partner then requested a duplicate paper Return, which was eventually both received and completed in August 2009 also showing “nil” partnership income, but by which time a second penalty notice had been issued as the July deadline had passed.

There were telephone calls with HMRC and letters written to different offices which no doubt caused confusion. Anyway, the partnership appealed on the grounds that a Return had been submitted in April 2008 and HMRC should be able to find the original Return, even though the partnership could not find a copy.

A second First Tier Tribunal (referred from the Upper Tribunal) found that on the balance of probability the partnership had submitted the original Partnership Return in April 2008 since the Returns of the individual partners, with nil profits from the partnership, were submitted then. The appeals against the penalty notices were allowed.

What a waste of money with HMRC staff going to three tribunal hearings, when a little common sense would have saved everyone time and worry!

In Kathleen Lomas v HMRC TC 02010 the older lady taxpayer received a letter on 10^th January 2011 telling her that she needed to complete a Self assessment Tax Return for the year ended 5^th April 2010. She called HMRC and was sent a paper Tax Return which she sent back, duly completed on 17^th January 2011.  This Return was "captured" by HMRC's system on 27th January. The lady had an underpayment of £270.84 which she paid in March 2011, the day after she returned from abroad, having been away since 18^th January.

The lady had upon her return found a penalty notice because she had not submitted the Return on-line, the deadline for paper returns having been 31^st October 2010, two and a half months before she was sent the paper return for completion.

The taxpayer appealed against the penalty notice and the First Tier Tribunal found that HMRC had waived the requirement for e-filing by issuing a paper return in January. Again, common sense should have prevailed, and only did when the case reached the FTT. Judge Geraint Jones Q.C. said “The appellant is a lady who, it is accepted, has no blemish on her tax return or tax payment record over the last 40 years. There is no reason whatsoever to doubt her veracity.”

In neither case was there any great precedent being set. “Reasonable Excuse” allows HMRC to cancel penalty notices. Once upon a time, more junior staff of HMRC, or perhaps historically in the Inland Revenue, could exercise their discretion and cancel charges which seemed unreasonable. Since these cases went to the Tribunals, it seems that even very senior staff of HMRC have no power to make sensible decisions or they are incapable of doing so.

It does not inspire confidence in HMRC's ability to extract “the right amount of tax” from the taxpaying public whether errant or otherwise when they apparently show such incompetence in dealing with trivial matters and waste our resources at the same time. What do you think?