PAYE overpayments, underpayments and intrusions

This week has seen a media-whipped furore over the inadequacies of the PAYE system and I am not going to expand on what others have said. If you want a sensible summary of the position then please look here.

There are a couple of worrying things which go beyond the “failure” of HMRC's PAYE system. It has to be remembered that Dave Hartnett, the Permanent Secretary for Tax, who has taken a lot of flak for a slightly undiplomatic comment on BBC's Money Box is not a politician but a Civil Servant. If he were politician he would perhaps be more careful, but anyway he would gave been out of office with the change in Government if he had been simply in the pocket of Alastair Darling and more significantly, Gordon Brown. Of course in the longer term there might be a conflict with the new administration, but Mr. Hartnett has been in the higher echelons of HMRC for a while now.

The point is that the cumbersome PAYE system is not perfect. It is better than it was in providing information and that is how the discrepancies in tax collected have come to light. HMRC has been forced to make many spending cuts over the last few years, which can't have helped. These were mainly driven by Gordon Brown as Mr. Hartnett told a number of tax practitioners on the one occasion a couple of years ago when I had a chance to talk to him. If the system were perfect we would not be having a new consultation which is now in play to see how it can be overhauled.

Mr. Hartnett can be careless with his words as he was on the radio and perhaps when talking to us tax advisers a couple of years ago. He may be overly suspicious of motives behind questions as he seemed a little paranoid about the supposed involvement of all tax advisers in tax avoidance when he addressed the meeting I was at.

That does not mean that his privacy should be treated as a target by the media Yes, he is in charge of an important Government department, and should be more media-savvy. However, he didn't get to the top because he was no good. He was a successful Inspector of Taxes and was involved in a number of high profile cases on the Revenue's behalf. He is at the top because he is good and not because he is a politician.

I knew he lived in Hertfordshire because he told our group. I have no interest in his house or what cars his family owns. He is not a footballer or rock star who feeds off media interest and is seen as fair game for exposés (if anyone should be?). What he has, he has earned, but it is none of our business, and nor is it the business of a possibly fictional neighbour of his, quoted in a Sunday newspaper story.

Dodging the Excise Men – encouraging a tax evasion society

In my business we frown upon tax evasion. It is our duty to uphold the law through helping our clients in their self assessment of their income, profits and their company accounts. We have to tread a firmer line than Joe or Jo Public, though unrepresented taxpayers may make mistakes in the Revenue's favour as well as their own. It is my experience that they do.

This week we have seen further hikes in taxation, principally through National Insurance and more obviously the return to 17.5% VAT. Personal Allowances are frozen for next year, so there will be some increase in the tax take through fiscal drag if there is any inflation in the interim. We will have to see. The Government has to balance the books having borrowed and spent so much on the banks and on the reduction in VAT this past year, the latter with no perceivable effect on the economy as many of us predicted in November 2008. It has to be paid for, and the full horror of the eventual deficit has yet to be revealed, and will only be known after the election next May, when either the Tories will be biting the bullet amidst squeals, or New (Old) Labour will have to come clean.

In the past, the higher the level of taxation, the less actual tax take. The lower the rates, the higher the honesty level and the better the tax take. This was seen notably in the tax-cutting eighties in the UK and especially under Reaganomics in America when the IRS profited greatly from lower rates of taxation.

People are going to be much less willing to pay their legal dues and HM Revenue & Customs do not have the resources to enforce payment through more investigation. I am not sure they even have enough resources (people) good enough to deal with the Liechtenstein Disclosure Facility. If you want a steady flow of anything including tax, you need a reliable channel. If you hike up tax, especially with HMRC's technical staff pared to the bone it is like trying to collect rainwater in a cup. In a deluge your cup will overflow. Most of it will escape. You need a measured channel and that means a more prosperous economy with a population willing to pay tax rather than driving more people into dishonesty to feed their families.

I think we will inevitably see a return to more dodgy dealing, and it will become popular like the public support for smugglers against the Excise Men in the eighteenth and nineteenth centuries. You will get more questions in shops such as “Do you want a receipt because I will have to charge VAT? Can you give me cash?.” and we know into whose back pocket those notes will go. The trouble is the tax which should have been paid by the trader will be coming out of your and my back pockets instead. How can we have got back to the bad old days?

© Jon Stow 2009


References

Smugglers and Excise Men
Liechtenstein Disclosure Facility

Amateur tax management and why businesses need professional tax advice

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

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

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

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

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

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

© Jon Stow 2009

Even cleverer HMRC phishing scam

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

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

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

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

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

HM Revenue and Customs"

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

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

More information here

Be careful out there.

HMRC's stealth taxation through technology

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

“Company Tax Returns and XBRL

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

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

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

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

© Jon Stow 2009

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HMRC and customer service

I wrote recently about Government and in particular HMRC disenfranchising the non-technical population. It is a sad situation, and it means that some perfectly intelligent people and in particular those of an older age group, or perhaps those who work with their hands have to employ people like me to do tasks with which they could have coped if dealing in paper.

Because there is almost no one in HMRC with whom the ordinary population can speak who actually knows anything about tax, taxpayers just have to grub along or pay someone else. It gets worse as demonstrated by a visit I made to an older couple this week. Their problem was that another elderly relative had died and they had been left to administer the estate. They had been sent a Form R27 which, for the uninitiated, is a Return of income for the previous 6th April up to the date of death of the deceased, and which is completed by the Executors or Administrators of an Estate. The couple had filled in the form but missed out completing two sections. An Assistant Officer at HMRC had sent it back with the two sections marked with red crosses and asked the worthy couple to complete the details required. Of course they dud not have a clue which is why they had telephoned me.

Now in the good old days these Executors could have taken their papers and the form to the Tax Office and had help completing the form on the spot. Nowadays, even if they could find the person who penned the red crosses, he probably would not have had a clue either, which is why after a couple of months he returned the form with such an unhelpful letter.

I reckoned the repayment due to the estate was less than £100, but the couple had not collected all the information needed to fill in the R27. I dictated letters to the organisations concerned, which the wife took down in shorthand, and said that when they had received replies they would be able to complete the form and send it off. If they were still unsure they should call me.

I came away feeling unable to bill for my 45 minutes plus the short drive. I had done the tedious Money Laundering check because that is obligatory but by the time I had done an engagement letter, written the letters myself and dealt with HMRC I would have done far more work and costs would have far exceeded the refund due to the very small estate. Effectively I had to treat it as charity work.

HMRC calls taxpayers customers, but customer service has become an alien concept. When I was a young tax junior you could track down anyone in the Revenue and get things sorted out over the telephone, which is no longer possible with the call centres.

Why should I have to do for nothing something HMRC cannot be bothered to do because it has changed itself into an even less friendly organisation than BT or my bank? Yes, those who cannot afford to pay for representation can go to TaxAid, but why should they have to, and though I am happy to help out, I think we tax advisers and agents are taken for granted and not afforded proper respect by HMRC. However, if they treat their customers like that, what do I expect?

© Jon Stow 2009

Stirring the pot

I watched with interest the interview on the Accountancy Age website with Dave Hartnett, Permanent Secretary for Tax about the New Disclosure Opportunity (NDO). To quote HMRC,

“the NDO will allow people with unpaid taxes linked to offshore accounts or assets to settle their tax liabilities at a favourable penalty rate. It will run from the 1st Sept 2009 until 12 March 2010.

If you have unpaid tax linked to an offshore account or asset to declare, to benefit from the terms of NDO you will need to notify us AND disclose (tell us the details, calculate the amount due and make a full payment) within a set time limit.”

There will be a specific lowered rate of penalty for those coming forward under the scheme. It is not an amnesty in that tax, interest and penalties will have to be paid; it is simply that the penalty will be fixed at 10% unless people had a letter from HM Revenue & Customs under the original Disclosure Opportunity and passed it up, in which case the penalty will be 20%.

The original opportunity for those with undeclared and taxable offshore income to come forward was in 2007. This followed legal action through which British banks holding their customers' money offshore were effectively obliged to disclose details of the relevant accounts as they have done for many years in respect of UK based accounts. HMRC wrote to the bank customers they thought might have undeclared accounts. This time round, HMRC will write to many more people since they have information from many more banks.

In the interview, Mr. Hartnett admitted that he had no idea of the number of people would come forward or the amount of money which would be recovered. This was an honest reply. We only gleaned that he thought it would be more than under the previous scheme. Pressed on the criticism that the earlier campaign was under-publicised he said that around £1M would probably be spent in advertising and initiatives. I wish HMRC luck with this trawl and will have no sympathy with those continue to evade tax. I will be happy to assist anyone who wishes to come clean.

The NDO is not the only trawl in which HMRC is currently engaged. Many possibly non-tax payers or marginal taxpayers will have received letters in the last couple of weeks asking whether they should still be receiving their bank interest without deduction of tax.

Those recipients I know about actually receive their interest net of tax (and pretty paltry interest it is at current rates), but although some have been happy just to refer the printed note to me, one very elderly lady became convinced HMRC were after her and would take away her pension. That second reaction was extreme, but I cannot help thinking that the distress caused be this second mailshot to people on low incomes will far outweigh the concern of the generally much wealthier recipients of the NDO letter. I am not sure anyone in HMRC will have thought about that and I am sceptical that any significant tax will be raised by this mailshot to the poor and elderly.

© Jon Stow 2009

A week of curiosities and a valuable reminder

It has been a strange week. On Monday I went to see a client to collect his tax papers, only to find that they were in a locked cabinet to which only his wife had the key, and she was out. It was a short meeting as a result, and I did wonder why my client had not telephoned to save me the journey.

Two less eventful days ensued, and I went to my monthly local meeting of tax practitioners on Thursday. “Tell me, everyone” I said, “what do you guys do in the way of marketing?” Six faces looked back at me blankly. “Marketing? We don’t do marketing. We don’t need to because we always have enough to do.”

I was amazed, and actually even felt a little foolish for a moment. After all, I spend quite a lot of time marketing. I have one local targeted ad, and apart from that I work on my website, my blogs, the social networking sites, Twitter and face-to-face networking. All this results in work coming in, which compensates for the occasional client of mine who finds it necessary to dispense with my services. There is always some attrition. When people leave me it never seems to be because they have gone off my firm or its service. People move and like someone local to look after their tax affairs, or they sell up everything and move abroad.

How do my colleagues not have net losses of clients? It can only be because they are longer established than me (a mere seven years) and get plenty of referrals without looking for work, or they are good at client stickiness and find it easy to keep their revenue from each increasing year on year. I admire that, and am even envious though I worry about their complacency. Apparently any sort of networking is alien to their natures. I enjoy it and it gets me out, gives me a chance to feel useful in connecting people, gets me work and avoids the loneliness of some small business owners.

I went back to the office to puzzle over an email from a client’s wife. “I haven’t time to send you my husband’s papers so that you can do his tax return as we are going on holiday for the whole of August and we need his refund by September”. Now, hang on, she lives a long way from my office and I cannot easily take the ferry to do my customary house visit, but we have broadband and live in an electronic age; hence the email. Said lady then goes on to ask me how to fill in the Return by requesting a technical calculation for last year. I answered her question of course, and wish her the best of British with the Foreign and Non-resident pages which are hardly logical even to us professionals (we always seem to have to do work-arounds to get them to make sense). I have not had a response to my somewhat injured one, but am not holding my breath. Needless to say I advised her that if she sent me the information she could have emailed copies of the Return and accounts for approval easily by the end of July. It would be inconvenient but I will always try to be flexible to meet my clients’ needs. I am not holding my breath, though.

Late on Thursday, I saw another new client for the first time. It turned out his previous adviser had died, and no one seemed to be running the practice now. I think the accountant was unqualified but nevertheless may have been very good at what he did. The client had obviously found his service good. In these tragic circumstances it is a reminder that we should always allow for someone to take over the reins of our business if we become sick or die suddenly as this guy did as a result of an accident. We owe it to our clients and also to our families as it is better to have a saleable business as a going concern than a business which is as dead as the owner.

If not lessons, I feel I have had some useful reminders. I must check that my nominated successor is still happy to run my practice in the event of my incapacity as I have directed. I will call her to check.

Out with the old…

Like most other people in my business, nearly all things in my office are done online. The tax returns have to be submitted by FBI (file by internet); we can read the Revenue manuals online, download their booklets, read the professional magazines and have website communities of fellow professionals. In other words, we have access to every possible resource of information without resorting to the printed word. Then, if we need something printed, then we print it ourselves,

Many readers of this piece will recognise this; some will be fellow tax professionals and others will have found their business lives completely changed or based from the start on information technology.

This leaves me with a problem though. I have sets of the bibles of UK direct tax, Simon’s Taxes, and of the more recent indirect tax regime, De Voil. They constitute a very large number of loose leaf volumes of many pages in plastic covers and they have not been updated for six or seven years. Actually I had them as hand-me-downs when I started out on my own. They were surplus to requirements from an office that was closing. I could not have afforded to pay for the updates, and although some case law commentaries might still be relevant, the legislation has changed so much especially with the on-the-hoof goal-post moving of recent times. I hope that is not a surfeit of metaphors.



The books have to go. I need the space and have to think what to do. Are they of any interest to anyone? Shall I take them down the tip, take the pages out of the covers and recycle the component parts. Can I sell them on EBay – six years out of date? I guess the tip is odds-on favourite. Any offers – free to a good home?

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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What's cooking with HMRC, MPs and networking?

It was interesting to meet HMRC representatives at the Essex Branch CIOT/ATT meeting last week, and they seemed a pleasant and friendly bunch. However, of the contingent of six (v attendance of only about 25 members) a couple had come all the way from Yorkshire to Chelmsford. I could not quite see how this was cost-effective.

I took the trouble to make notes, but cannot see on re-reading them that I really learned very much. One lady was able to assure us that they were working hard to improve the website, including the deplorable search function (generally it is better to tell Google to search the HMRC site) and to tell us that we practitioners had been re-labeled as “tax agents and advisers”, an unexpected re-branding from outside. Maybe they will stop calling their hapless taxpayers “customers” but the customer word was repeated during the meeting a number of times so any move from upstairs has not reached the grass roots.

I did get some reassurance that HMRC is still interested in the small fry compliance failures such as letting income, casual earnings and bank interest (historical interest at present in more ways than one) and that they were still keen on rounding up reluctant customers. This sort of work is welcomed by me for one, and I do not see why anyone should get away with not paying tax which should be due. I am all for tax planning and saving clients tax, but am definitely not in favour of tax evasion planning!

I sent out my tax newsletter out this week. The Budget was not very nice; in fact rather depressing, though I did avoid it by being away. Still, there was no escape from the email and I am thoroughly up to speed. I have little hope that the Finance Bill will be scrutinised any more than others in recent years. Frankly, there was little help for small business and and it seems unlikely that MPs even understand anything about trusts and the proposed 50% tax rate from next April. Still, they have the exposure of their expenses to worry about. Frankly, even many of their “justifiable” expenses paid by the Exchequer would be taxable in an ordinary mortal's hands. They are like anyone else entitled to indulge in property dealing, but please, not with my money. No names, no pack drill, but some of the shenanigans I have heard of these past few days might be treated as trading liable to income tax rather than capital gains exempt due to flipping properties within the private residence rules. Some of this might be beyond HMRC now in terms of enquiry windows depending on how it was all reported to HMRC at the time.

In May we are definitely into the new season of tax returns etc.. I do like to meet face-to-face as many clients as possible at least once a year. The two I met with last week are really both some of the nicest people I know and they cheered me up. I learned a while back not to work with clients with whom I felt the relationship was difficult because there is much less pressure if we like our clients and they like us.

I am always on the look out for more nice clients and am trying a couple of new marketing strategies including some positive networking with as much giving as possible. I will let you know how I get on. Maybe barbecue networking will catch on in the long hot summer the Met Office is forecasting?

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Render unto Caesar...

One of the problems we tax advisers have is in dealing with people, generally as prospects, who simply don't want to pay any tax at all. Somehow, the current climate of cracking down on tax avoidance (legal) as well as tax evasion (illegal) seems to have passed by these people. Usually they go further: “Why should this Government get their hands on this money? I did not vote for them. They won't spend it wisely. It is immoral how much they try to take.” Now many of us have these sentiments, but those of us who are law-abiding and understand the law (which is the overwhelming majority) grin and bear it and pay our taxes.

There are ways of tax avoidance, and these days I find myself felling uncomfortable with aggressive contrived schemes, none of which I have recommended in recent years. Of course there are tax shelters we can all use, such as various types of pensions, ISAs, National Savings Certificates and Premium Bonds, to name but a few of the obvious approved devices. Let me know and I will find you a good IFA.

Every now and again though, these people of the alternative persuasion turn up. They may be ageing hippies come into money, or ageing hippies or anarchists who suddenly have an expectation of money, although no doubt they condemned the rich and their wealth when younger. Now some money might be about to fall into their hands, inherited from their careful parents, or from some capitalist scheme in which they are involved, or from damages they expect to get through the blame culture because they feel wronged, and suddenly it is a different game. The name of the game is greed, avarice, call it what you will, and their twenty-year-old selves would have been shocked if they knew what they would become.

I talk these prospects through their options, which for UK-based people with UK-based family histories are fairly restricted, they get all upset at not being able to keep all their money, and they spurn my preliminary advice because it is not what they want to hear. I never hear from them again, and to be quite frank that is a great relief.

“Render unto Caesar the things which are Caesar’s, and unto God the things that are God’s”

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Online issues and January procrastinators

I do not normally use the HMRC online software to do Tax Returns as third party is much less hassle. However, I did have occasion to try it recently and found that in dealing with lettings where there is a loss in the year and a loss brought forward the HMRC system is unable to aggregate them and carry them forward. When I telephoned the helpline and finally got through I was told it was a known issue and I should make a diary note of losses brought forward for 2008-09.
 
I would have thought that this loss scenario would be the most common given the highish interest rates on mortgages that prevailed to the end of 2007-08. It is extraordinary that this issue has not been sorted out. I decided the safest approach was to make a white space note about it.

I have just taken a call from a new enquirer. He sold his company twelve months ago for a lot of money, received a termination pay off as well, has a lot of paperwork to go with it and can I quote a fee for working out his tax position without having seen any detail anyway? Can I do his Tax Return for 2007-08 by Saturday week?

Well, no I cannot quote other than the high fee I told him to err on the safe side. Would you ask a painter to quote to decorate your house if he hadn't been to it? Could we do it anyway in the time when we haven't seen any of the paperwork in detail and other clients are in front of him? We're happy to do it in February and in the context of £100 fines it seems more important to get it right given the amounts involved rather than lose sleep over a late-filing penalty. Anyway, what kept him so long?

I am sure our marketing friends would think I missed a trick somewhere and sales people would think I should have "closed", but what with the shortage of telephone boxes to change in I am not sure what I could promise if the Return had to be done by the end of the month. I believe I did the right thing and am not going to lose any sleep over it.

Back to work with the other January late runners and thank goodness for my more considerate clients!

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.

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A hard taxing week, Horatio!

Readers of this column know that I am not a great fan of the Government’s economic and taxation policies, so may well be expecting me to take another swing at the Chancellor and his organ-grinder boss. However it is true to say that my disappointment at the content of the Pre-budget Report given last Monday by Mr. Darling is not because I would oppose any of his policies on principle, but because I truly believe that the measures announced are not the right ones, and that they are again treatment of the symptoms of the economic malaise, and not of the underlying cause or disease.

There were announcements of increases in benefits such as Child Tax Credit from January instead of April, and additional earlier payments to State Pensioners, and this type of thing does put money into the economy, though it will very likely have to go towards higher fuel costs compared with this time last year, and help pay off any overspend at Christmas. However, the disappointing reality is that many people are very hard up and pretty much all the increase in benefits is likely to be mopped up.

Of course there is the very tight squeeze on credit following on from the banking crisis, and I am not going to rehearse the background to this other that to say it might have been a lot less serious if the Northern Rock crisis had been addressed properly in September 2007 when it came to a head, and not at the beginning of 2008. There is however a shortage of money to spend, which is why I am confused as to the thinking behind cutting the main VAT rate from 17.5% to 15%, albeit in time for Christmas, with a guaranteed rise in Employers’ and Employees’ National Insurance from 2011. Naturally the latter rise will raise billions towards the borrowing the Government has embarked on to spend its way out of this mess but to me it highlights muddled thinking.

We all agree that there is not enough money being spent to keep the economy going and keep people in work. However, surely the cut in VAT on what will be largely imported consumer goods relates to voluntary expenditure which people anyway are reluctant to make. It might save a few retail jobs in Currys (though DSG are not doing so well) but what people really need to spend money on is food and fuel. Food is zero-rated for VAT purposes and domestic fuel and electricity keeps the 5% rate. I suppose the thinking is that people will spend money on those things because they have no choice, but the logic behind increasing the duty on vehicle fuel to compensate for the VAT cut makes not much sense even in a twisted green world. What it will do is increase the price of food because it will be an extra expense on the food retailers who could recover the input VAT but not the fuel duty.

The decrease in VAT on the imported items will be offset by the higher import costs because of the decline of the pound as a result of the economic downturn, so in cutting the VAT rate, Mr. Darling bears more than a passing resemblance to Don Quixote. Not a pretty sight!.

What scares me is the terrible price we are going to pay. The VAT cut will be very expensive for the Exchequer, and will be one reason why the NIC rate is going to go up in a couple of years if Mr. Darling has his way. The fact is that tax does have to go up, but as NIC is such an easy tax to manipulate I am at a loss to understand why it has not been used as a tool now.

If instead of cutting VAT, Mr. Darling had cut NIC at least for next April that would have given most employees and immediate boost and if Employers NIC had been cut that would have been a help to the cash flow of small businesses who are still the backbone of the economy, even if the Chancellor does not understand them. Oh, yes, losses can be relieved back three years now for tax purposes, but many small businesses cannot sustain losses for long in this climate and any sole trader with significant losses would most likely be stacking shelves in Tesco (not that isn’t an honourable job) rather than soldier on with negative money for any length of time.

The trouble is that for small business it is on the whole jam tomorrow. Small companies have to make the losses and wait for repayments down the line; it does not help them now. Never mind, the corporation tax rate for any small company making a profit next year is staying at 21% in April rather than rising to 22% as had been intended; a year’s reprieve. Now, only a couple of years ago the rate was 19% and I have never read any justification, official or otherwise, for the increase in the small companies’ corporation tax rate. Increases in allowances for plant etc. are generous this year and the ongoing rates are also reduced, but they assume that companies have money to spend. If they do, they had best spend the money on marketing, because there are opportunities still if business owners remain positive.

I just wish that the Chancellor and his cohorts had thought about the real world, not cutting taxes on imported goods that may be out of our price range now anyway. You cannot pull money out of people’s pockets to spend it on what they don’t need if the money isn’t there. We need early concerted action to cut the cost of all our mortgages (surely the banks want to retain control over their destiny rather than succumb to what John Prescott called Old Labour policy c 1947) because that is what is needed to help revive the economy. Otherwise the whole “cash injection” looks misdirected. An NIC cut would have been so useful, and more immediate than the VAT effect (if any) even if it could not happen until April.

I guess the lesson is that it is more important to be doing something positive than to jump about appearing to be doing something. I say this more in sorrow than in anger, because I would love the Government’s strategy to work for all our sakes. I just fear that we will pay the price without ever seeing the goods.

© Jon Stow 2008
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