Professional firm targeted by fraudsters

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

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

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

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

Unintended consequences

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

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

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

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

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

Working Tax Credit and working hours ploys

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

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

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

State Pensions, PAYE and unfairness

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

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

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

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

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

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

What do you think?

Fair Tax and the real world

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

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

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

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

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

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

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

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

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

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

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

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

Margaret Hodge and the British Inquisition

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

HMRC cannot do joined-up writing

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

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

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

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

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

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

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

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

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

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