Be responsible and pay your tax

Last Spring I wrote a piece entitled “Render unto Caesar...” which pretty much sets out my view concerning tax avoidance and those who are reluctant to pay tax. For the record I reiterate that I have no objection to people taking sensible uncomplicated steps to pay less tax. That is no different from choosing to fill your car with petrol, diesel or gas at a particular establishment which charges a little less than the one down the road. Daily essentials everyone buys on price because the value is the same. Complicated and artificial tax avoidance schemes really have no place in a responsible society.

There is a moral case to pay a fair share of tax. We may not like a particular Government but we all use the infrastructure, the roads, education, the health service and so on, and we should cough up according to our fair share. There are occasional refuseniks who choose to withhold a portion e.g. of their perceived share of the defence budget, quoting moral grounds, and they may at least appear principled if foolhardy in making a futile stand against the system, though at least gaining publicity for their cause.

What really gets my goat is those who dodge the system, take cash so that it does not go through their books and appear in their accounts (“save the VAT, mate?”) and those who fiddle in other ways, such as inflating their business expenses. None of these people are clients of us professional practitioners of course, because if we sign them up they are in the system they wish to avoid, and subject to our scrutiny.

Just the same, it is certain that there are still many tax dodgers and if any are reading this, let me tell you that if you have dodged £5,000 of tax you have stolen it from the Government and from us taxpayers and it is no different from stealing £5,000 from the state-owned Post Office. The punishment on getting caught may not be the same, but perhaps it should be? It is money taken from our back pockets.

The financial penalties for tax evasion have been raised subject to various targeted initiatives in particular areas. Should we see more custodial sentences? How can more dishonest tax evaders be caught given the limited resources of HMRC? What do you think?

© Jon Stow 2010

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

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.

As ye sow...

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

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

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

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

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

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

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

© Jon Stow 2008

The lighter side

I would not want people to think that I spend the whole time moaning about the government’s fiscal policy. The trouble is that I started this blog at the time when there had been announced a number of ill-considered policies. But, hey, let’s not say it is all doom and gloom.

As a tax practitioner I have to say that HM Revenue & Customs’ online filing system has been working well this year, at least for Self Assessment Tax Returns. I do not use the online filing for other purposes sufficiently to judge. I think that the user interface for HMRC’s own software is a lot improved and easier to understand, though I use commercial software for Self Assessment. That system uses FTP (I think that is what it is called) and when I started with it a couple of years ago it was very fussy and would reject returns for silly reasons such as characters it objected to. However, as I said, it all works well now, so well done to HMRC for this.

Then again, one has to laugh at some clients who deliver their papers over the Christmas period and expect feedback before the New Year. Yes, of course we poor souls have to work over the holiday, but that is on behalf of clients who delivered their papers at the end of November and early December. If only life were that easy. Receive each set of tax return papers, spend five minutes putting it all together and preparing a return, bill the client and go back to sleep. Actually we work rather hard and aim to give the clients a great service which is value for money, but we cannot manage too many quick changes in telephone boxes. I cannot even think offhand where there is a convenient telephone box in our area.

What I hope for 2008 is that we will have a new era of cooperation with HMRC to get the compliance done, and that there will a better understanding of tax agents’ issues on the part of HMRC (which might develop eventually from the “Working Together” programme) and that we can on our part stop blaming HMRC for everything and lay it on their political masters if we must. It would be nice if HMRC did not call taxpayers “customers” when they cannot take their business elsewhere. Dave, are you listening?

In the meantime, I must get back to working miracles for my clients and doing everything yesterday (it would be great if we could process all the information before we received it) and hope we advisers get a bit more appreciation. I appreciate others when they go beyond their duties. I would thank some staff in HMRC if one were allowed to know their full names as one often isn’t, but there have been one or two, even a few recently who were very helpful. At least they are all very polite (but then so am I).

Happy New Year to all HMRC staff, to anyone who happens to find this blog, and of course to all Rabbit’s friends and relations.

© Jon Stow 2007

Domicile puzzles

Then again, what are we to make of the so-called reforms relating to the taxation of non-domiciled residents in the UK? This was one of the policies the Government has pinched from the Tories following the policy announcements at the Conservative Party conference. The Tory proposal proved that the Government does not have the monopoly on misguided (did I hear you say daft?) policies. So why borrow this one except to trump the Opposition?

During its ten years in office the Government has discussed several times changing the rules concerning non-domiciled persons, which in simple terms are those whose background or family history might suggest their natural homeland is not one of the countries comprising the United Kingdom. For a more detailed explanation see here. A study was made in 2005 and there was a consultation, but we had started to suppose that the Treasury saw the whole issue as a political hot potato.

Briefly, unlike domiciled resident individuals who are liable to UK tax on their worldwide income and capital gains, non-dom residents have up to now been taxable on their UK income of course but not their overseas income and gains except to the extent of the amounts actually remitted to the UK. It had been the view of many that if taxation of worldwide income and gains were extended to non-doms many of our richer guests including oil billionaires would take themselves and their spending power elsewhere; hence there had been no amendment to the rules since the first review was announced way back in 1949.

The new rules effectively bring most non-domiciled residents into a regime of being taxed on worldwide income unless they pay annually to HM Revenue & Customs £30,000 plus whatever tax is due on remittances as before. Of course the super-rich will go for this unless they see this as an unprincipled betrayal and leave the country. Those who will be hit are the non-doms of moderate income who have brought their labour and investment to the UK, perhaps employing people in their factory, workshop or restaurant; those who hope to retire in their homeland or elsewhere. Of course there are long-term resident (seventeen years plus) non-doms who already knew that if they died within the UK their worldwide estates would be liable to inheritance tax.

The Government talks a lot about fairness. One might say that it is not fair that some taxpayers of a particular class pay less tax than others with similar income. Is it fair that the very wealthy can buy off HMRC with a £30K bribe or paying annual protection money? Is the Treasury reduced to acting like the Mafia or an East End gang? Worse, is this not another example of the total lack of coherent fiscal policy? What on earth is going on?

© Jon Stow 2007

Dickering Darling delays amending capital gains reforms

What are we to make of Alistair Darling's delay in the announcement of any amendments to his proposals on capital gains tax “reform”? He told the Commons on Thursday that he was postponing any decision on change until the New Year.

In my view, commentators tend to hang too much on what might be motive. There was, I am sure, genuine concern from the Chancellor and the Government that they had put their foot in it and made a serious misjudgement, and I am sure that that Treasury Civil Servants will have felt the wrath of their political masters over this matter. There was of course quite a “Clever Dick” or maybe “Clever Alistair” element in the Pre-Budget Report last October, which was a real “rabbits out of the hat” performance of the type we usually associate with the Budget itself. Of course, many Budget tricks have little impact and are designed for show. Unfortunately in many ways, the particular announcements made in October do have genuine impact and we all know a couple were designed to trump the policies announced by the Conservatives at their conference.

The reform of the position concerning treatment of non-domiciled taxpayers (or non-taxpayers) is not very intelligent any more than was the Tory proposal, but I will return to that another time. The Inheritance Tax change also borrowed from the Tories is hardly a give-away except in the sense that it will save some legal fees related to will making.

But back to capital gains tax. The Government proposals sweep away a raft of complications in calculation of gains, some of which have been in place since 1965, and yes, they will be simpler to administer or for taxpayers and their advisers to calculate gains. However, it is hard to see why the taper relief for business assets is being replaced by a flat rate, therefore increasing the effective rate of tax for most sellers of such assets from 10% to the 18% flat rate, an increase in tax of 80%, while at the same time reducing tax on investment gains from between 30% and 40% to the 18% flat rate. It is fine for investors, of course, but seems to involve little insight in an understanding of the realities of the change on the part of the Treasury. Why 18% anyway, which is a strange rate? Maybe someone was fond of the construction industry income tax flat rate for subcontractors which was in force until April this year, and wanted to keep the number on the tax tables somewhere.

Of course, many buy to let and other property investors will be delighted with an 18% rate. Investment in property has been booming under the current Government since the late nineties. My own theory as to the reason (partly because it was my wife's and my reason) is that this is the result of:

1. the disastrous consequences for the pension industry and people's pension funds of the removal of the dividend tax credit refunds (Gordon Brown's first Budget in 1997)

2. the other pension disasters brought on by subsequent funding problems for many pension schemes,

3. the regulatory failures such as Equitable Life (where many lost some tens of thousands) which whilst it was not entirely the Treasury's fault, it played its part.

So I believe that the popularity of property investment amongst the less wealthy is as a result of Government policy. Now, with interest rates so high, many are subsidising their mortgages to a degree, and few are making any income profit on lettings where they borrowed anything like the maximum. Income losses are the norm, though many will hang on (those who can afford it) for their hoped for capital gain down the line. The trouble might be those who cannot afford to pay the mortgages and will try to cut and run. That could cause the whole market to lose confidence, which has the potential for disaster.

So, back to the capital gains issue as it affects small business owners who may wish to sell, and the prospect of paying 18% tax after 5^th April 2008 rather than 10% on their gains. Why the delay in announcing changes? Well, I am sure it is nothing more sinister than the Treasury not knowing what it is doing. People say”why is Government policy so against small businesses?”. Well, I don't think the Government is against small businesses. It simply has no policy, or at least no long-term thought-through policy with regard to small business in general.

I also think that ideas tend to come from different places.. The 18% capital gains tax trick comes from the Treasury Civil Servants (I speculate) who do not understand the old system and were anxious to have something they could understand, though they did not appreciate the consequences of their changes. The income-shifting document on which I commented last week is much more driven by HM Revenue and Customs, anxious to make up for the Arctic Systems defeat and to prove that their leadership knows what it is doing. This is coupled with HMRC's deep suspicion of small businesses, which it feels are mostly on the fiddle. Having had brief exchanges earlier this year with a certain someone who has had a recent promotion in the upper echelons of HMRC following the tax credit data loss debacle, I have the distinct impression that this suspicion is extended to the small businesses' tax advisers too. We were told we should be more helpful. In the good old days we tax practitioners worked in partnership with the Revenue to get things right (all right, there were some naughty schemes for the very rich, but most small businesses were a long way from being able to take advantage). Oh, the days when we could talk to someone in the Revenue who had a file, someone who would telephone to clear up a query, when it was all so much less confrontational!

We tax advisers should not all be tarred with the same brush, and neither should business owners in general.

What to do about business asset capital gains tax? I would have had a new acquisition base point of 5^th April 1998 and abolished taper relief except for business assets, and I would be surprised if the cost to the Treasury would have been all that much, though I accept that part of the motive for the change announced was a tax raising exercise. Probably we will get some sort of retirement relief, maybe £100,000 exempt and then 18% flat rate. If we just have a £100K lower rate band that will be a stupid fudge which will not win the Government any friends (and it needs friends).

I just hope that whether under this Government or a future administration HMRC and the Treasury policy makers and planners do put together a coherent strategy for managing business taxation, and that Ministers take responsibility for their actions and for their failures. Here is an irony: Paul Gray as Chairman of HM Revenue & Customs did fall on his sword over the lost CDs crisis, even though this was not his personal responsibility. He deserves great credit for that, and I would love to see honour, principle, competence and vision, rather than suspicion, drive fiscal policy.

© Jon Stow 2007