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?

HMRC postal delays and a re-think from me

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As you will know if you have been a regular reader of Taxing Times, about a month ago I copied all the postings up to date to my main business website, and you can see them here together with the new postings since the transfer. However, a guy can change his mind. I realised I did still want to continue to talk about the day-to-day running of my business and express my views perhaps a little more freely than might be appropriate on a company website, so I have decided that this blog will live on. At the same time, we have had the opportunity to introduce a new look and I hope you like it. Please do follow both blogs.

One of the problems that HMRC “customers” experience is getting their correspondence dealt with. Actually the real issue is the length of time HMRC may take to actually read what has been sent to them, As a practitioner, I know that some of my clients find it hard to believe how long things take. Some matters can be dealt with easily over the telephone, but anything involving the completion of a paper form can take absolutely ages.

HMRC admits that 7% of post relating to PAYE Coding issues is currently not dealt with three months after receipt. One particular consequence I have seen is that a client has now received three questionnaire forms P161 relating to a new private pension. I filled in the first one my client received promptly and it was signed and sent off. Meanwhile over three months HMRC's computers have churned out two more. I have explained to the client what is happening and have telephoned HMRC but that makes more work for me for which I will not be paid.

I keep my clients is the loop, but HMRC's delays in dealing with simple matters do stretch credibility. To be fair, they are open about these deficiencies and have kept us agents informed. I am not divulging some secret information from a Revenue mole.

Of course the problems are due to spending cuts; not the programme of cuts now proposed by the Coalition, but the cuts imposed by the previous Government. HMRC has far less qualified staff (people who know about tax who would command higher salaries) and relies on call centres for much of their interaction with the public. The operators are only trained in the basics and if they are presented with anything beyond those they have to send an email to an anonymous person in the relevant office and even we agents are not told who so it is harder for us to follow up if something isn't dealt with.

Do you experience delays dealing with HMRC? Is there any practice topic you would like me to cover?

© Jon Stow 2010

Late, late tax planning

The 2009 Pre-Budget Report in December signalled a significant number of tax increases in the UK designed to make up the significant Budget deficit following the banking crisis. For many or our clients there will be a significant impact on their finances.
-Income tax rates to rise and personal allowances to reduce for wealthier clients.
-Future changes to rates applicable for dividends, trusts and NICs.
-New 50% income tax band.

There are further complicated rules for pension relief restriction and the end of well-established tax breaks for furnished holiday lettings (currently enjoying business tax advantages). There is speculation about an increase in capital gains tax and I have heard different forecasts from various commentators.

We have about three weeks to do some quick planning which may mitigate in some part the higher tax payable on income receivable after 5th April 2010. It might be slightly less if restrictions are brought in with the 2010 Budget, for which we still await a date.

From 6 April 2010 there are higher rates of tax and fewer reliefs. Those earning in excess of £150,000 will be subject to a ‘super-tax’ of 50% on income over that threshold.

Furthermore, personal allowances will be restricted for those earning more than £100,000, at the rate of £1 for every £2 of income above that figure. As the current personal allowance is being frozen at £6,475 this means the full allowance will be extinguished at an income level of £112,950.

The gradual tapering of the allowance – within the narrow banding of £100,000 to £112,950 – means that where income falls within these limits, the effective rate of income tax is 60%.

In the current fiscal year ending in April it may be possible to convert income chargeable at 50% to gains chargeable at 18% or even an effective 10%. It would really depend on the circumstances of course, so no idle promises.

From 6 April 2010 there will be three rates of tax on dividend income. Where income falls within the basic rate band, the 10% tax credit will extinguish any liability, as before. The equivalent rate for 40% taxpayers remains at 32.5%, but a new rate of 42.5% will be introduced where income will be taxed at the new rate of 50%.

National Insurance contributions (NICs) are due to rise from April 2011 (a further year on), but if these go ahead as planned they will add another 1% to the rate, which is a significant uplift and may be a very sobering thought as people look ahead. Businesses could consider paying themselves in advance through salary or dividends, or paying their employees early bonuses but these are tough times from the point of view of cash flow. Still, any available option should be considered.

Our clients' finances and tax positions need to be looked at in the round; taxation of small businesses is inextricably linked to the reward and taxation of their owners and their families. Whilst high earners will bear the brunt of the initial increases, every taxpayer will feel the effect. These are tough times and tough decisions need to be made, although not to the long-term detriment of the businesses themselves. In addition, with a General Election in the offing we can only plan in the short term based on what we know now.

If you know anyone who may be affected make sure that their accountants and tax advisers are reviewing their tax positions in these next few weeks. Of course you may wish to talk to me about how I can help. Not everyone will have the flexibility to adjust their financial strategy, but it is worth checking.

Scary tax planning in a changing world

I cannot remember a time when the tax regime in Britain was in a position of such flux. As we know the cost of the banking crisis and the recession has cost the government, or at least UK plc dearly. There is a huge deficit to be made up, exacerbated by the futile policy of reducing VAT from 17.5% to 15% for thirteen months. There is talk that after the election whoever is in power will have to raise VAT to 20%. There is not much we can do to mitigate this in advance, and from the Government's point of view, indirect taxation on sales is inescapable. We are all paying VAT on a daily basis, and we have to hope that any currently exempt or zero-rated goods and services will not have a charge imposed.

At these sorts of times and particularly in advance of an election the parties find themselves painted into a corner. Are they honest and admit that services will have to be cut and that charges will have to be made in the NHS and in education, or do they keep quiet and get on with doing what they perceive is necessary when in power after May (we still assume the election will be in May)? Will taxation be raised even more after May?

Regular readers of this blog will know that my view is that increases in taxation are counter-productive because they encourage dishonesty. I don't like it, but that is the reality, especially in the cash businesses HMRC hate, but frankly are not equipped to do anything about. Those professionally represented businesses have a close eye kept on them by the likes of us, but many who are not and particularly those who are not even registered at all (the black economy) are very hard to catch. This does not bode well for the immediate future because we then have a division between the honest and highly-taxed legitimate law-abiding business and the dishonest who are better off because they do not pay their taxes and are robbing HMRC and therefore all the rest of us doing our best to stay on the straight and narrow..

So, what do we professionals do? There is some tax planning which seems tempting in terms of the 2009 Pre-Budget Report. We know that the rate of income tax is going up to 50% for taxable income over £150,000. There is also a withdrawal of personal allowances on income over £100,000, which means that there is a marginal rate of 60% for incomes just over £100K and when you add in National Insurance the situation seems scary. What do we tell our clients to do? Have their bonuses now (unless they are in the bankers' trap), have them much later, or leave the country?

Well of course, it might be an idea for owner-managers to pay themselves dividends at 32.5% instead of 42.5% after April if they are in that sort of league. It might be sensible for spouses and partners to equalise their incomes to reduce rates, but frankly those sorts of arrangements may well be in place, especially as the income-shifting legislation is currently on the shelf because it was impractical and ill-thought out. However, being impractical and ill-thought out has not always prevented legislation from being introduced, and there is still the spectre of perhaps a higher charge on dividends in general or an imposition of NIC.

Our clients should talk to their financial advisers in view of the changes to the pension regime from April and the further restrictions on tax relief on premiums paid.

The whole point is that I cannot remember a period of so much uncertainty in the tax world. In past years we have planned ahead, but now we can and must take action on many fronts before April, because we know not what is round the corner. Our planning may not help our clients after April, but we must talk to them to see what we can do now.

From a business point of view, the one thing worse than a recession is the inability to plan ahead, because who knows what tax costs are round the corner? That is why I wish the party in power could be more candid about its general plan on tax increases. I wish the opposition would say that whilst it cannot reduce the proposed increases in the short term it will not invent any new taxes and that it will cut services, so that at least we know where we stand. The election is badly needed in terms of politics, but it is getting in the way of all our lives in terms of knowing where we stand or fall. How can a business make plans if it has no projection on costs?

Tax disenfranchisement

It was reported this last week that 1.5 million UK pensioners are paying too much tax which is because too much is being deducted from their occupational and private pensions and from any employment earnings they have. Once upon a time of course, most pensioners with taxable income of any sort had to complete tax returns. Since the introduction of Self Assessment in 1996-97 and increased automation and exchange of information as well as significant job cuts in what has become HM Revenue & Customs, far fewer people have to complete tax returns. In itself this is sensible, because why should people have to worry about form filling if it is not necessary, and can be dispensed with? However, if we have a more “automatic” system, it should work and be seen to work. This means that if age allowances are due then they should be allocated, and it should be easier for the public to talk to the Tax Office about their issues.

I believe information should be supplied to every household in the land explaining the system of personal allowances and how direct taxation works at its most basic level, but in reality, the only time most of us get any proper information about the workings of our liabilities to tax is if we actually have to complete tax returns ourselves. For the rest who just have periodical Notices of Coding, HMRC is simply explaining why they are doing what they are doing, and leaving out information which they perceive as irrelevant but which may not be.

Of course, the public may talk to someone at an HMRC call centre if they think they have problems or are being taxed incorrectly, but they need to know they have a problem first. Some no doubt complain about high taxes without knowing that they are being overcharged. This of course takes me back to the point a made a few months ago about “progress” disenfranchising the non-technical population.

© Jon Stow 2009

BBC: 1.5m pensioners 'overpaying tax'

Is "progress" disenfranchising the non-technical population?

A couple of incidents recently highlighted have highlighted how easily “progress” can isolate people and prevent them from getting help, and those people are often the neediest.

As a tax professional I am used to the bureaucracy of HM Revenue & Customs, though even for me it can be extremely frustrating. I received a form from HMRC concerning a pensions coding (Form P161 for the initiated). It was addressed to my firm, but did not have the taxpayer-client’s name on it, only the National Insurance number. I could not trace the number in my tax software and telephoned HMRC to find out whose form it was. However, having given the number to the call centre person, she told me I could not discuss the client unless I knew his / her name, but that was what I was calling to ask. She recommended that I sent the form back with an explanation and waited for them to respond by post. However, I knew that the Tax Office in question was months behind with paper correspondence, but even so, there was nothing to be done but to ring off.

Such an intransigent attitude and inability to take the initiative and work around to solve the problem quickly would deter any individual taxpayer trying to understand a confusing form. I can well imagine it would be intimidating. In the good old days…..etc.

The second incident started when one of my very elderly clients telephoned to say she had received a form she had to fill in to get the refund I had recently applied for on her behalf for 2008-09. I was puzzled, but asked her to send me the form to look at. It turned out that the form was actually for next year’s claim – a Form R40 for 2009-10 for the initiated. These elderly people, often on very low incomes and who are on low fees – my few “charity cases”- have no idea how to obtain even the most basis information or understand their entitlements. Just dishing out a form, which would have been best sent to me as agent anyway, is no form of proper communication. I have tried hard to get as much of these people’s investment income paid without deduction of tax so they do not have to get me to reclaim tax, but to no avail. Life would also be simpler if HMRC were to have the option to deduct PAYE from the State Pension, as they have in respect of most pension annuities these days, because fewer elderly people would need to complete tax returns and claims. The only thing is that they like their hands held over all sorts of financial matters even if it is helping them to find a good IFA, so to a degree I am a sort of financial social worker and some would rather pay me a little something so that I am available at the end of a telephone. I would do some stuff for free for a few if I thought I would be insured for it.

Still, I am in business in order to make a living. I do charge realistic and suitable fees to a majority of clients for the excellent service they get. The good news is that having searched my archived records on a whim I found the former client to whom the pension coding form related. I telephoned to ask if he wanted me to send it on and it turns out he would like me to act for him again due to a change of circumstances. All in all that was good news, but I just wish that the workings of government bureaucracy were simpler for the more senior citizens and for those who are not comfortable sitting at a keyboard and monitor.

© Jon Stow 2009

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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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