For the past few years my home recording studio has been plagued by dogs which owners leave in their back gardens all day to ‘amuse themselves’ – which they do by barking at each other – a bit like the dogs in 101 Dalmations if you know what I mean.

Recently the worst offender seems to have gone so watch out for new blogs and podcasts as I can once again, it seems, record without interruption.  Expect a new podcast on the dividend tax and updates to earlier podcasts as well as other things that catch my eye.  If anyone has a particular topic they would like covered please let me know – feedback is always welcome…

Sweetcorn and Levi Jeans – the link is…???.

Main Residence Problem?

After a winter break we’re going to look at recent developments we ought to be aware of.  The first of these relates back to an earlier podcast in November 2011 when I looked at the very important main residence relief for capital gains tax purposes.

It is noticeable that over the last few years the revenue have been looking at taxpayers trying to claim the benefit of this exemption and challenging their entitlement.  In many of these cases it is quite clear that the taxpayer had never genuinely occupied the property as a residence and so the revenue were quite right to deny the relief.

However in one recent case it seems that a taxpayer who, I believe, should have been given the benefit of the relief was denied it – and that is a worrying development.

In the earlier podcast  I explained that to be able to claim that a property is your residence you need to reside in it, obviously enough and also pointed out that the courts often looked at a comment made by the judge in the Curtis v Goodwin case which is one of the most significant judgements in this area – the judge commented – “the principle is that in order to qualify for the relief a taxpayer must provide evidence that his residence at a property showed some degree of permanence, some degree of continuity or some expectation of continuity.”

That podcast looked at the position of two taxpayers, a Mr Favell and a Mr Metcalfe, both of whom had signally failed to show that they had resided in the properties in respect of which claims were being made by them.  Favell claimed that he had separated from his partner and so moved into another property that he owned for a period of eleven months.

Although the tribunal judge was quite happy that eleven months was a sufficient period of time to constitute a residence there was no evidence that Favell had genuinely lived there – the claim was rejected.

Metcalfe claimed to have bought a flat ‘off-plan’ which he sold 4 months later – he claimed that his girlfriend didn’t like the property and although he moved in he sold it shortly afterwards having already placed the property on the market.  Again there was little evidence that he had ever occupied the property as his residence, he had no phone connection, no TV license either and the utility bills were suspiciously low.

Neither Favell nor Metcalfe made the election discussed in my December 2011 podcast to determine which property was the main residence, so the Tribunal had to judge whether a property was the main or only residence in fact.

Now we come to the recent case which concerns a woman called Susan Bradley [Bradley v HMRC –].  Be careful not to confuse this with an earlier case reported in January 2011 concerning a woman called Alexandra Bradley – no relative I think – who I also referred to in the earlier podcast.

Susan was married but the relationship with her husband was getting worse and so in August 2007 she decided to leave him and seek a divorce after two years separation.  She owned, in her own right, two properties, one a semi-detached house in Exning Road and another small flat in Weston Way, both were normally let.  At the time she decided to leave her husband the Weston way property was vacant and so she moved into it.

Bear in mind she has moved from a marital home into a property which the tribunal judge described as “a small bedsit-type flat”.

The evidence presented to the tribunal was partly through a personal appearance by Mrs Bradley who was represented by her accountants, a revenue officer called Mr Hall and a bundle of agreed documents.  It is not clear from the Tribunal report whether legal representations were made on behalf of Mrs Bradley but the lack of any reference to them suggests that the evidence presented may have related solely to Mrs Bradley’s condition at the time of the events.

She was suffering from depression which required medical treatment and as a result, it was claimed, did not change her mailing address although she did claim single person discount for council tax purposes.  Her 16 year-old daughter, who continued to live with the husband brought her post over to her.  She continued to have a joint account with her husband but also had two bank accounts of her own which she used on a daily basis, one being used for the property business, the other her own personal money.

Then the Exning Road property became vacant and she decided to move into it – not surprising given that she was living in a ‘bed-sit’ – but made her fundamental and fatal mistake.  Although she moved into the property in April 2008 a couple of weeks earlier, on 20 March 2008 she had instructed estate agents to sell Exning Road.  No offers were received at that time, she continued to live in the property, and, said the Tribunal Judge  “even though Mrs Bradley told us that she was resigned to living permanently at Exning Road”, she never took the property off the market.  She redecorated the property at this time to make it ‘more a home’ as having been tenanted it was in poor decorative condition.

During the autumn of 2008 she became reconciled with her husband and she moved back to live with him in November of 2008.

The Tribunal Judge adds, without further detail, that Exning Road was then sold in January 2009.

Now it strikes me that we have an extended period of residing (for that is surely what, on the scant evidence quoted by the Tribunal Judge we have) in both the Weston Way property (from August 2007 to April 2008) and the Exning Road property (from April 2008 to November 2008) when compared to the bare 5 weeks of residence that was held insufficient in the Curtis v Goodwin case.

However the Tribunal Judge decides that Mrs Bradley did not intend to reside at Exning Road with a sufficient degree of permanence because it remained on the market and was, eventually, sold.  In this he claims to be supported by the Metcalfe case where there is, to be frank, no evidence that Metcalfe really did reside in the property at all, given the very low utility bills.

Now let us consider again what the judge said in Curtis v Goodwin – there needs to be “some degree of permanence, some degree of continuity or some expectation of continuity”.

Now even if there is, on the facts as determined with the benefit of hindsight, no degree of permanence, the judgement in that case refers to “some degree” of permanence and, perhaps more significantly, “some degree of continuity”.  It seems from the evdence that having moved into the Exning Road property she did not stay elsewhere on occasion, she stayed continuously at that address, and on her own evidence which the Tribunal Judge evidently accepted, she was “resigned to live permanently at Exning Road” which would seem clearly to comply with the required “expectation of continuity”.

It would seem that the only factor that prevented the property qualifying was the mistake of having placed the property on the market and not having then instructed the estate agent to take the property off the market again when it seemed clear it would not sell, no offers having been received.  Had the property not been placed on the market at all would the Tribunal Judge have come to the same conclusion?

Does this mean that whenever a taxpayer places the house that they live in on the market on a speculative basis it ceases to be their residence?  Surely not.

It seems to me that Nicholas Alexsander, the Tribunal Judge, has erred in law in placing too great an emphasis on the word permanence and far too little on the word ‘degree’; in seeming to ignore the concept of continuity, although it seemed clearly to be present, and the expectation of some degree of continuity. He stated “it was always only ever going to be a temporary home, and therefore it was never her residence” – but surely a temporary home may still be a residence, particularly if the taxpayer has no other residence – where did Susan Bradley reside after she had separated from her husband?  A separation that lasted for more than a year and which the Tribunal Judge accepted as being itself likely to prove permanent.

The Tribunal Judge in the Favell case, Guy Brannan, pointed out that the facts in the Curtis v Goodwin case were extreme, that the 5 week occupation of the property was merely temporary, in the words of Lord Justice Millett – a ‘stop gap’.  That is hardly the case here.  Had Favell been able to show occupation of the property for the 11 month period he would, he said, “have been minded to accept that the occupation would have amounted to residence” even though Favell admitted, in evidence produced by the revenue, that he claimed to have moved out without any intention that it should be a permanent move, he moved out because of “difficulties at home”.

I do not know whether the taxpayer will wish to appeal to the Upper Tier, I hope she does as this seems to me to be the wrong decision.  Of course the Tribunal Judge’s summary does not indicate all that transpired or indeed all of the evidence that was presented, but if allowed to stand it moves the boundary of what may be considered to be or not to be accepted as  ‘residence’ a very long way from the ‘stop-gap’ referred to by Millett, and creates a degree of concern for any taxpayer who wishes to move, when appropriate, from property to property, to ascend the property ladder.

This podcast was presented, written and produced by Paul Soper who asserts copyright therein.  The full text of this podcast can be read at my site For further details of podcast production, particularly if you would like me to create them for you, contact me at Paulsoper, all one word, at mac dot com.

Until next month, or maybe even sooner!…

RTI, Employers and the inevitability of penalties.

Endowment mortgages – the end….

A19 – What about the vulnerable?

Not every taxpayer is professionally represented and I’d like us to spare a thought for one particular group of taxpayers who might be characterised as being vulnerable.

A proposal is being consulted on by HMRC at present which could massively disadvantage these vulnerable people under the guise of making an existing extra-statutory concession more ‘user-friendly’ – the reality is likely to be the opposite for the vulnerable.

The concession is the one known as A19 and it rose to particular prominence a couple of years ago when HMRC were first able to reconcile taxpayer records and discovered that many people, hundreds of thousands, had paid too little tax.

Newspapers led a campaign encouraging taxpayers to take advantage of this extra-statutory concession – whether they were entitled to benefit from it or not – and this is where the problem started.

A19 says, in a nutshell, that if HMRC have failed to make timely use of information provided to them, and they then try to recover tax more than a year later from taxpayers who have reason to believe that their tax affairs are in order – then there is a discretion under which the tax due is not collected.

Now in some ways the most significant part of that is the bit about belief that your affairs are in order – if you are professionally represented and you have paid too little tax you cannot really try to claim the benefit of this provision that’s why practitioners would rarely see it unless approached by a taxpayer with substantial tax demands.

However a vulnerable taxpayer is much more likely, because of their disadvantage, to have that belief and so be able to benefit from this provision – so who might we consider to be vulnerable?

One group, obviously, would be the elderly, another perhaps those who have been recently widowed where the deceased spouse may have had sole responsibility for dealing with financial matters.  Another would be those members of our society who suffer from learning disabilities of all kinds, or those suffering from a mental or physical incapacity, whether permanent or because of illness.

So what do HMRC propose and why is it a problem – and what should we, as tax professionals do about it?

They intend to remove the requirement for reasonable belief and replace it with a more objective test which recognises revenue and taxpayer responsibilities instead.

The responsibilities undertaken by HMRC are no more than what they already do, or should do, but taxpayers are expected to take an interest in and have certain responsibilities for their own taxation affairs – and it is here that the major disadvantage for the vulnerable is introduced as there is no discretion left for those who are not easily able to be involved in their own affairs.

At present the reasonable belief discretion can be applied subjectively based on the taxpayer’s personal circumstances but this cannot be done where there are objective responsibilities.

However the problems with the new proposed A19 don’t stop there.  The revenue propose time limits so that a taxpayer is expected to inform HMRC of the problem, following the issue of a P800 tax statement, within the same tax year, before the new coding is applied to collect the underpayment in the following year.

Now whilst convenient for the revenue administratively, the example they give is of a taxpayer who is issued with a statement in June and is expected to advise HMRC of the problem before the following April – seems reasonable – however as they themselves point out these documents are issued throughout the whole of the year and if one is issued in March a taxpayer may have only days to react.

Furthermore the vulnerable may not appreciate the document’s significance until the tax deduction commences in the following year, under the new rules this is too late and would deny that person the benefit of the concession.

Although the original A19 operated where at least a year’s delay in using information had occurred it also provided for exceptional circumstances and in one recent case concerning a Mr Clark the Tribunal judge observed that he had received 14 separate coding notices which were confusing and difficult to understand – even though he had been notified within the same year the Tribunal judge ruled that exceptional circumstances could be considered in isolation from the one year rule .

The new ESC A19 proposes to remove the provision concerning exceptional circumstances altogether and clearly vulnerable taxpayers will be hit by this as well.

It further proposes not to apply to CGT on the reasoning that this is operated through self assessment but it does not recognise that non self assessment taxpayers might attempt to advise HMRC of a gain, as happened in a case concerning an elderly married couple, the Henkes, some years ago.  They filled in repayment claim forms R40 and attempted on this form to notify the revenue – at that time the form R40 advised that if there was a gain to report the revenue would send a form R40(CG) – although this had ceased to exist with the introduction of self assessment.

The local district sent them a self assessment capital gains form SA108 as a standalone document which was not acceptable unless accompanied by a return.  The tribunal ruled with reluctance that no return had been made so that a discovery assessment could be raised.  But this would be a situation where revenue discretion could be applied – not any longer!

Practitioners may not feel that this is very relevant to them but in the interests of the vulnerable I think we should ALL of us take part in this consultation and make it clear to the revenue  how unacceptable it is not to make adequate provision for the vulnerable – because the vulnerable will not be able to make these representations themselves.

Mind you this isn’t the only mean-spirited announcement by the revenue recently – they have just announced the interest rates that may be applied to Save As You Earn Share Option Schemes – these used to be a very popular way of employees saving with a tax-free return that was in total better than a PEP or an ISA which could be used, if the employee chose, to take up share options which employers could issue at a discount of up to 20%.  It was risk-free because if the shares went down in value there was no obligation to take up the options simply benefit from the tax-free savings rate.

For some time now shorter term contracts – those for three years and five years  – offered a zero return but the seven year contract offered a bonus of 1.6 times a monthly payment, equivalent to an interest rate of 0.58% – from 1 August 2012 this becomes – ZERO as well.

Olympic Torches, Taxation and more

I have recently set up a separate blog at and intended to record some slightly lighter-hearted points there – I recently added one concerning Olympic Torches and their taxability – but on reflection this raises one of those perennial subjects in taxation – whether an activity is or is not a trade.

Firstly lets remind ourselves about the Torch Story

8,000 people are taking part in the flame relay, some are celebrities, some connected with olympic sponsors but many ordinary people chosen though schemes like that established by Lloyds Bank.

After their part of the relay the person selected can keep the torch and tracksuit on making a payment of £215 which is roughly half, so we are told, the actual cost of the torches themselves.  Now some will keep the torch as a souvenir but many have already found their way onto the online auction sites.

HMRC decided to get in the act by issuing a press notice pointing out that the torch is a chattel – tangible moveable property – the significance of this being that if sold for more than £6,000 a capital gains tax liability might arise.  They also pointed out that online traders and others might have an income tax liability even if sold for less than the chattel exemption.

An argument which HMRC do not explore is that if the torch could be said to be machinery then it would be deemed to be a wasting asset and so would be exempt, unless used in a business, regardless of what it was sold for.  The torch does convert gas into a flame thereby providing illumination which should satisfy at least some definitions of what a machine is.

At the moment there doesn’t seem to be much chance of a CGT liability as the market price on eBay seems to be about £3,000 although some vendors are holding out for more!

A number of people have raised a question though – is it possible that a person who buys their own torch because they immediately plan to sell it on is trading and so would be chargeable to income tax on the profit?  Trading as a concept in tax law includes not only the obvious act of regularly buying and selling goods but also can be a one-off transaction, or ‘an adventure in the nature of trade’.  Lawyers look at what are called the ‘badges of trade’ in trying to decide whether such a liability is likely to exist – these are concepts derived from many taxation cases that have been considered in the past – one problem is that they often refer to circumstances that arose many years ago.

One case that is often advanced by HMRC in arguing that an ‘adventure in the nature of trade’ has been conducted in the Rutledge case.  This case, heard in the 1930’s, concerned a man who supposedly bought and then resold 1 million toilet rolls, the courts concluding that this was an adventure in the nature of trade as the subject matter of the transaction was such that a purchase and resale of household goods, unless surplus to personal requirements, could only be explained as an ‘adventure in the nature of trade’.  There is a suggestion that the toilet rolls never existed, that they were a convenient fiction to conceal the real, and illegal, nature of the goods that were being traded in!

A Royal Commission looked at the nature of trading some 40 years ago but even their conclusions – the so called badges of trade, have been expanded and altered over the years.  One problem was applying them to new types of transactions – for example – property development, in the UK before the second world war this was normally a process of expansion as cities grew and developers bought farming land and constructed suburban housing estates – usually clearly trading.

With the advent of the second world war large parts of our inner cities were destroyed and needed post-war rebuilding, but when this process had been largely completed developers didn’t go back to expanding the suburbs, planning laws and the green belt movement ruled this out.  Instead they looked to acquire city centre sites, assembling a larger site from many smaller ones and REdeveloped – often changing the use of the land from residential to commercial and making substantial fortunes in the process.  Harry Hyams who developed the Centre Point Tower in Central London specialised in keeping property empty on the grounds that that building value was a function of rental yield and future rental values would be make the building worth more empty than immediately selling the building on – was this trading?

In the 1970’s and 1980’s the courts considered this problem in the cases of Taylor v Good and Marson v Morton.

Taylor v Good in 1974 concerned a greengrocer who purchased a large landed estate at auction in 1959 before post-war building controls were removed – he had grown up in the house as his parents were servants on the estate – he then, claiming that he wanted to occupy the property as his residence, applied for and obtained planning permission to convert the estate into 93 individual dwelling units.  Before carrying out this programme he sold the property to an established developer for a very substantial sum as the restrictions had then been lifted.   The courts applied the traditional badges and concluded that his motive had been to live in the property until he received an offer he couldn’t refuse – if he formed an intention to trade it was when the offer was received and this would cause the special rule on appropriation to be invoked.  If you acquire an asset for a non-trading purpose and then decide to bring it into a trade it is ‘appropriated’ at it’s current market value not the original cost, this would be a deemed disposal for CGT purposes and probably the greatest part of the increase in value would have been taxed as a gain.

The courts were looking at a type of transaction that was quite new and the existing badges could be made to fit, but only with a struggle.  Marson v Morton in 1986 concerned four brothers who bought a plot of land on the advice of a property developer – they were told “it would be a good thing” and sold it three months later. After repaying the overdraft they used to finance they acquisition they had doubled their money in this short period of time.  One of them admitted that they purchased the land as a ‘speculation’ although another claimed that they intended to keep it as an investment – even though it would not produce any income and could only generate a profit by sale and it was financed by short-term borrowing.

The court in this case decided to restate the ‘badges of trade’ to make them relevant to property transactions of this type and added factors such as the method of financing, and previous expertise in a particular type of transaction.  Notwithstanding this the commissioners found as a fact that the land was bought as an investment and the High Court found that they could not disturb this finding, the speculation was not an adventure in the way of trade.

A runner in the torch relay, particularly if a sponsored one, did not acquire the torch as an adventure in the nature of trade and if they formed an opinion that they did wish to sell it even this would probably not be an adventure in the nature of trade.  Even if it were the torch would be appropriated at current market value, presumably close to what it was eventually sold for.  Of course if a trader purchased a torch from a participant and then sold it on that would almost certainly be a trading transaction, but they would pay a lot more than £215 to acquire the torch – one would hope!

But this question, whether a trade is being carried on or not, can be relevant in other areas – consider a case earlier this year concerning a tax-avoidance scheme based upon film exploitation – Eclipse Film Partners LLP no 35 v HMRC.  The idea behind the scheme was that a syndicate of investors would borrow a substantial sum of money by way of loan and that these funds were to be used to acquire, for a very short period, the rights to distribute two films made by the Disney Corporation.  The rights would then be sold back again although if the films were very, very successful further profits might accrue.  The two films were called Enchanted and Underdog.

On 3 April 2007 the rights to the films were acquired for sums close to £790 million and then leased back again to Disney for £784 million.  The members had injected £50 million into the scheme but the bulk of the finance was provided by those diamond bankers – Barclays – on loan terms which would be repaid out of the proceeds, no member would be liable to pay any part of the loan back. As part of the agreement a substantial sum of interest was “prepaid” with the intention that the film partnership members should obtain interest relief to offset against their income for 2006/07 – in effect the £50 million they injected was to be turned into a tax deduction worth substantially more – but this could only work if the partnership was trading in the year in which the interest was paid in advance.  The Tribunal held that this was not an ‘adventure in the nature of trade’, merely a speculative investment and as a result the participants did not benefit from the interest relief they thought they could claim.  It was a business, but a ‘non-trade’ business.

So whether a trade is being carried on can be seen to be a quite complex issue – we don’t have time to examine each of the many badges of trade individually, but sometimes whether a trade is being carried on can lead to arguments not dissimilar to those of the middle ages when theologians would discuss the number of angels that could dance on the head of a pin!

A taxpayer might buy an asset, whether it is an Olympic Torch, a plot of land, a million toilet rolls or a commercial film and imagine on sale they have made a capital gain, in which case their CGT liability would be a maximum of 28% – it would be a nasty shock if HMRC successfully contend that it was an adventure in the nature of trade and they have an income tax and NIC liability at a rate which could be 52% or even higher!

Child Benefit Clawback

Last month I looked at the relief capping proposal and tried to encourage you all to take part in the consultation process- that still hasn’t commenced and on the treasury website that tracks all consultations it is merely scheduled for the summer.  Keep watching this space or… listening to these podcasts…

This month I’m going to consider another part of the budget proposals intended to claw back part or all of the Child Benefit from certain taxpayers – but before I do I think we need to consider some taxation history.

Until 1973 when a couple married the wife lost her independent status as a human being – I know that sounds awfully dramatic but if a wife wrote to the revenue pointing out that she had paid too much tax on her earnings under the PAYE system the reply was addressed to her husband and the cheque making the repayment was made out to him and not her! 

This was not misogyny on the part of the tax officials, because the revenue could not legally write to a wife at that time. From 1973 onwards they were permitted to write to a wife directly but our taxation system was still based on the family unit and the husband had the legal obligation to return his wife’s income and the overall liability was still his and his alone.

This caused enormous practical problems for a minority of taxpayers – I remember a young man who’d received a letter from the revenue pointing out that he had not returned bank interest – except… he didn’t have any.  Eventually he was pointed in the right direction and asked his wife to provide him with the details that needed to be returned to the revenue – she refused and he was visited by his father-in-law threatening violence if he continued to ask his wife these inconvenient questions!

It was possible for taxpayers to elect to submit separate tax returns and pay their own share of liability but the assessments that were issued were still based on total family income with personal allowances and reliefs being apportioned.  I can remember the practical difficulties of acting for a wife who submitted her own return but her husband used a different firm of accountants and was considerably in arrears in submitting his actual figures.  To make matters worse both firms of accountants were under strict instructions not to correspond with each other and so we had no way of checking the revenue’s calculations!  The only solution was to surreptitiously take the file down to the pub on a Friday night , unofficially meet an opposite number from the other firm and check the figures unofficially!

These practical difficulties came to an end in 1990 with the advent of independent taxation – at last spouses submitted their own returns, were responsible for their own taxation liabilities, and these idiocies of the old system disappeared – that is until the idea of clawing back child benefit was floated.

Child benefit is one of the fundamental building blocks of the benefit system and has been paid, as of right, to individuals resident in the UK for more than six months with responsibility for children – in a couple usually the wife will receive it – it was at one time paid on a weekly basis through vouchers that were cashed in at post offices but is now normally paid 4 weekly into the claimant’s bank account.

It used to be paid only for second and subsequent children but when the special tax allowance for children was abolished many years ago the value of that relief was incorporated into this benefit.  It has never before been subject to taxation.

That it is unfair that a higher rate taxpayer gets the same benefit as a basic rate or even a non-taxpayer seems to have been a suggestion made at a Conservative Party conference which has been subsequently taken up as coalition government policy – and it clearly creates an enormous headache for the revenue who have to implement this idea.

Given the constraints of independent taxation it was decided that the clawback would take place in the hands of the spouse with the highest income where this exceeded the initial threshold, as set in the budget, of £50,000.  1% of the benefit would be clawed back from this person whether they were the actual recipient of the benefit or not for every £100 of their income in excess of £50,000.

Therefore if a taxpayer had income for this purpose of, say, £53,500 then they would suffer a clawback of 35% of the child benefit received.  If the income exceeded £60,000 the whole of the benefit will be clawed back.  Instead of restricting the benefit actually payable it was decided that the clawback would take place through the tax system.

With one child the benefit currently payable is £20.30 per week, for each subsequent child the amount payable is £13.40 per week. The clawback starts, strangely, from 7 January 2013, some people have suggested that this is a needless complexity but for most claimants the amount payable will be known.  If you have three children you will be paid a total of £47.10 per week or £188.40 each 4 weeks.  7th January is simply the first Monday of 2013 and the benefit paid 4 weekly during the remainder of the that tax year would be £565.20, exactly the same for every taxpayer with three children.  The clawback would then be 35% of this figure – £197.82.

For the following year assuming total income was now, say, £56,500 the clawback would be 65% of the benefit.  The benefit has been frozen until 2014 so we know that the amount payable for the year would be £2,449.20 and the clawback £1,591.98.

Now this is income which has already been taxed at 40% and if earned income is also subject to NIC of a further 2%.  The more children a taxpayer has the greater the benefit they will have received and so the larger the clawback they will be subject to. With three children the effective total tax rate at this level is 66.5%, with eight children the effective tax rate is 101.34%!

If the income is derived from a company which the taxpayer controls the effective liability is even greater when employers’ NIC get added into the equation.

Income is measured in the same way that it is measured for the clawback of personal allowances that takes place at £100,000 worth of income.  This means that the gross equivalent of pension contributions, personal pensions, stakeholder pensions etc and the gross equivalent of gift aid donations, reliefs usually given by extending the taxpayer’s basic rate band will actually be deducted from income for the purpose.  Incidentally if the effective tax rate is more than 100%, as it can be for very large families, then the effective tax relief available for these payments is in excess of 100% as well!  It is possible, by careful planning, to keep income just below the clawback figure and so avoid the liability.

It is unfair that where one taxpayer earns substantially more than the other the one with the higher income is subject to the clawback.  Where a couple each have income of £49,999 their joint income will be £99,998 and yet as neither has income in excess of £50,000 no clawback will occur, whereas a taxpayer with income of £50,500 will suffer a 5% clawback.

Taxpayers with their own companies or partnerships may be able to divide income between themselves to avoid or at least minimise the clawback that may occur.  They could also transfer income producing assets to the other partner to avoid the clawback.  Of course this is only possible if you know what your income is going to be in the tax year.  Pension contributions cannot be carried back to the year before but interestingly gift aid donations can be.

Lets look at some of the other practicalities involved…

The clawback will be recovered through the self-assessment system which may mean that having attempted, successfully, to reduce the number of taxpayers subject to self assessment there will now be a dramatic increase in the number of taxpayers subject to self assessment.  The clawback could also take place through the PAYE system for certain taxpayers but this would often involve delay in determination and collection of the liabilities involved.

It will be applied to single parents of course but couples will have to decide who is the one with highest earnings – fine if they are prepared to sit down and discuss their financial affairs with each other but if they don’t, or won’t… This brings back the spectre of couples deliberately not revealing their income to each other or even simply getting it wrong.

Suppose Alan earns £57,000 per annum and his wife, Zena, earns £54,000 – it seems clear that Alan is subject to the clawback.  Suppose he was encouraged by a financial adviser to pay £2,880 into a stakeholder pension some years ago and this is paid through a direct debit.  When they are talking about this Alan forgets this and so he becomes subject to clawback until he puts the premium paid on his return, this is grossed up to £3,600 and Alan’s income is now £53,400 and so it is Zena who should have been subject to clawback. She can be penalised for failing to make this adjustment to her liability.

To make matters worse still the legislation says that it applies to couples who are married to each other and also to civil partners.  But it will also apply to people who live together as though they were married and also to couples who live together as though they were civil partners.  This is a potential minefield.

Let’s suppose that Beatrice is a single mother earning £20,000 as a teaching assistant, her best friend Charlotte is also single and earns £65,000 and has her own house.  Knowing how tough life is for Beatrice Charlotte asks her to come and live with her and Beatrice gladly accepts.  Are they living together as though they were civil partners?

This is not as straightforward as it may seem.  The law permits any two persons of the same sex as each other to register a civil partnership provided that they are not already married to someone else, or in a civil partnership with someone else, and are not within the prohibited degrees of relationship – close relations like brothers and sisters.  Civil partnership resembles civil marriage in all respects bar one.

And this is why people have advocated so-called “gay marriage” even though a civil partnership is treated as though it were marriage for all practical legal purposes.  You do not need to be homosexual or to have a homosexual relationship to enter into a civil partnership so – are Beatrice and Charlotte living together as though they are civil partners?  I am not sure that anyone would like to have to answer this question or even ask it, but this legislation may make this unavoidable.

To satisfy an off-the-cuff political statement the revenue have been forced to create a considerable trap for the unwary, a deeply unfair and potentially divisive system – this is what happens when we let politicians dabble in our taxation system.  It may see the return of the crazier aspects of taxation that applied before independent taxation was created. Oh dear!

Relief Capping

I want to examine one of the proposals in George Osborne’s recent budget which has attracted a lot of press comment – however the press discussion has ignored rather more significant aspects of the proposal.  This entry is now amended to reflect the Chancellor’s announcement on 31 May 2012.

I’m talking about the suggestion that a cap should be introduced on all forms of tax relief which do not have a separate limit.  It has been suggested that some very wealthy taxpayers are using these reliefs unfairly to minimise their taxation liability – George Osborne claimed to have been shown evidence by HMRC concerning the aggressive use of upcapped reliefs to minimise liability –

He told The Telegraph:

“I was shocked to see that some of the very wealthiest people in the country have organised their tax affairs, and to be fair it’s within the tax laws, so that they were regularly paying virtually no income tax. And I don’t think that’s right. I’m talking about people right at the top. I’m talking about people with incomes of many millions of pounds a year. The general principle is that people should pay income tax and that includes people with the highest incomes. I’m not allowed to be shown the names of the individuals but I’ve sat with the most senior people at the Inland Revenue, the people who run some of the high net worth units there. They have given me examples, anonymised examples, and so we are taking action.”

Ironically in 2007 HMRC published a report on Gift Aid which suggested that wealthy people were not sufficiently aware of Gift Aid in particular – their report states – “If Tax reliefs on charitable donations are to be used more widely by wealthy people, levels of awareness must be improved…” seems they have been improved considerably.

The Press have focussed on the impact on charitable giving but it may be important to remember that gift aid as a system has not always been an unlimited relief – in 1999 Gordon Brown announced a number of initiatives to increase charitable donation in a package entitled “Getting Britain Giving” which included removing a number of gift aid and payroll-giving restrictions.

It is true that many very wealthy people have used their own charitable trusts to shelter income which has richly endowed many charities ranging from the Sackler galleries at the Royal Academy to local church halls.  Osborne has also stated that he is “specifically looking at making sure we are still encouraging philanthropy and charitable giving.”

Interestingly this capping will not affect the ability of the charity to reclaim tax under the Gift Aid system, only the excess liability relief that the taxpayer will be entitled to.

But the impact of this proposed measure may be more significant in two other areas – loss relief and relief for interest as a charge against income.

It seems that this will not affect the carry forward of losses against future profits nor carry back against trading income in earlier years.  However relief for trading losses against other income will now be capped at £50,000 or, if greater, 25% of a taxpayer’s income.  And that will apply to all of the reliefs which may be subject to capping.

Now it may be true that some very wealthy individuals have been buying avoidance schemes to artificially generate losses to offset income – and this year’s budget contains specific anti-avoidance provisions to counter the use of some of these schemes.  But if HMRC are concerned about the very wealthy why set the limit for this capping at such a low level?  Let’s think about a practical situation.

Alan set up a trading company eight years ago and subscribed for £120,000 worth of shares at this time.  Because of adverse trading conditions the company has failed and had to be liquidated with no money to return to shareholders.  Alan has taken employment with a company at an annual salary of £140,000 and in that sense he is lucky.  Alan can claim that the loss that he suffers on the disposal of the shares can be converted into an income loss and offset against other income that he may have – but he will now be affected by capping.  No more than £50,000 can be offset against income (as 25% of £140,000 is less) and as there are no other sources against which the loss can be offset the balance will be lost.  Is this the sort of situation that that George Osborne had in mind?

Aiden has two separate trades which he pursues, one as a farmer which generates income of £140,000, the other as an active Lloyds Underwriter.  As a result of several natural disasters his underwriting syndicate suffers losses of which his share for the year is £80,000.  This will be capped at £50,000.  If he claims against the previous year he may be allowed to offset against the trading profit of the previous year but not other income, however for this to be permitted reform will be needed to the scheme for offsetting losses as well, at present this relief is against total income from all sources without distinction.

Lets look at another situation – interest relief.  Relief can be claimed for interest paid as a deduction in calculating income from certain sources, principally trading and property ownership.  These are, we are told, not affected.  Interest relief can also be given as a charge, a deduction from total income which will now be subject to capping; these reliefs apply to loans applied to a qualifying purpose, broadly relief for loans used to purchase an interest in a close company or a partnership, loans used to make loans to a close company or partnership and loans used to purchase plant and machinery for use by a company in it’s trade. Relief is also available for loans used by employees buying an interest in an employee controlled company, for investments in co-operatives by members and loans used by executors to pay inheritance tax arising on death.  These will all now be subject to capping

Brian has traded through his company for many years and recently it made a takeover bid for another trading company.  This was financed by a loan which Brian took from his bank, as it was not willing to lend to his company directly.  Brian lent the money on to his company and charges the company interest of the same amount that he pays to his bank.  Under the new proposals he runs the risk of not being able to claim full interest relief on the amount he pays to the bank even though he will still be taxable on the amount he receives from the company.  Was this the sort of situation envisaged by George Osborne?

Bill is a director of a large manufacturing company and has the opportunity, with five other directors and senior managers, to complete a management buyout.  He will mortgage his home and borrows £1,500,000 on which he will pay annual interest of £75,000.  He has agreed with the individuals involved to draw modest income for the first few years until the business is established. Unless Bill receives income of at least £300,000 pa he will be subject to capping.

Is this what George Osborne intended? – Personally I doubt that it was.

I think part of the problem is the very low level at which the restriction applies – HMRC and Osborne are complaining about the actions of multi-millionaires and yet setting a level of £50,000 is going to directly affect many taxpayers who are most certainly not millionaires and not using this device to avoid liability. There are also no exceptions envisaged for bone fide reliefs where avoidance or even mitigation of liability is the furthest thing from a taxpayer’s mind.  Loss-making multi-millionaires may have bought into artificial schemes to minimise the tax that they pay but many, many ordinary taxpayers will be adversely affected by these proposals.

Perhaps if the ceiling was set considerably higher at £500,000 it would attack the sort of abuse without significant adverse effects, and if there were exceptions permitted it would help but as it stands this is evidence of the revenue simply being unwilling to use existing measures to counteract avoidance.  It is easier for the revenue to impose this sort of limit than to have to police more specific anti-avoidance measures even though they continue to actively seek these powers as well.

This is exactly the same strategy that saw the ludicrously small £25,000 limit set on the statutory equivalent of ESC C16 that I discussed in my December podcast last year.

What can we do?  Like many suggestions in the budget which are intended to be applied in the future – this restriction is intended to be introduced in April 2013 – this will be subject to consultation later this year.  It is vitally important that we take part in the consultation process – and yet very few people do.

Here is a quote from the published results of a recent consultation – 83 representations were received from a range of interested parties including 11 individuals and 72 organisations, ranging from the professional bodies and larger firms of accountants to commercial companies and institutions affected by the measure.  11 individuals only!

If accountants and taxpayers simply sit back and do not take an active part in consultation which potentially affects them then they shouldn’t complain when these measures are subsequently introduced.

There are reliefs which know will not be affected, these include credits against liability – tax credits, double taxation relief and credits under the event gain regime and also where there is a financial limit established such as Pension Contributions and the various Venture Capital reliefs.  We are also told that it won’t apply to the Cultural Gift Scheme – this is the name now being given to the scheme introduced in the Finance Act 2012 for objects of pre-eminent interest being gifted to the nation – although the capping here is the total value from all taxpayers of objects accepted of £30million per annum – the Secretary of State for Culture, Olympics, Media and Sport will have overall accountability for ensuring that the annual limit is not exceeded.

There are also reliefs which might be affected where no clarification has yet been received – what about the payment or spreading of patent royalties for example, or the averaging provisions allowed for authors artists and farmers?

The guidance says that computational reliefs which determine how income from a particular source is measured are excluded which should mean that interest on the acquisition of buy-to-let properties will not be affected although this is often cited as an example of avoidance of this type.

In applying the cap we are told that income is measured without deduction of capped reliefs which can help to maximise the relief available but the revenue’s own example is not completely clear on this point.  In applying the limit relief such as gift aid relief which operates by extending the basic rate band will be converted into the equivalent of a relief that reduces income.

Suppose Charlie has total income of £250,000, claims qualifying interest relief of £40,000 and relief for a donation of shares to a charity valued at £25,000.  That gift of shares qualifies for gift aid relief but there is no deemed basic rate tax deducted at source, he simply claims a deduction for the value of the shares gifted.  He also invests £50,000 under the Enterprise Investment Scheme.  In calculating liability without capping his taxable income will be reduced by £65,000 and there will be a tax reducer relief of £15,000 to offset against the liability arising because of the EIS investment.  Although legally he has taxable income of £185,000, for the purpose of the cap the full income of £250,000 will be used, 25% of which is £62,500 leaving taxable income of £187,500 after capping.

Until we see the consultation document we will not know whether it is the charitable gift or the interest relief that will be practically reduced.  Taxpayers may be allowed to choose.

The document points out that if the EIS shares are disposed of at a loss there will then be a further potential loss relief claim which will also become subject to capping and in fact in this example Charlie will get no relief at all.

Unfortunately capping can’t be applied until the income for the whole of the year has been ascertained and that will usually be after the year has finished.  Traders with a 30 April year end, or one ending earlier in the year, will have an opportunity to know what their income for the year will be and plan accordingly.  Those with a 31 March year end, or an employee with bonus entitlements arising late in the tax year will not.

Timing of certain claims will also become critical to avoid, perhaps, two claims in a single year where capping might then apply where one claim would not be.

Remember – if you or a client of yours is likely to be adversely affected by this proposal you will only have yourself to blame if you fail to take part in the consultation later this year.

31 May 2012 – update:  George Osborne apparently stated today (although there is as yet no confirmation on either the Treasury of the HMRC websites) this:

Mr Osborne said: “I can confirm that we will proceed next year with a cap on income tax reliefs for wealthy people, but we won’t be capping relief for giving money to charity.  It is clear from our conversations with charities that any kind cap could damage donations, and as I said at the Budget that’s not what we want at all. So we’ve listened.”

The point is that the capping of losses and interest relief will go ahead despite the damage that this is likely to cause to the SME sector – this measure, remember, is supposedly aimed at multi-millionaires but the limit, £50,000 or 25% of income is set so low that it WILL affect many smaller businesses – Consultation is likely to start in June or July and it is still critical that that taxation professionals and their clients make it quite clear how damaging this proposal may be.

Remember – if you or a client of yours is likely to be adversely affected by this proposal you will only have yourself to blame if you fail to take part in the consultation later this year.


Budget 2012

George Osborne’s budget is the first under the budgetary process in full.  This involves an announcement made in budget 1 (in this case the 2011 budget on 23 March) being subject to consultation over the summer, then the draft finance bill measures are published in December for consideration.  If adopted they are included in the budget statement No 2, this year on 21st March and then published as part of the actual finance bill, this year expected on 29 March.  The measures are considered by parliament and the final amended version emerges in the middle of July.

Meanwhile advance announcements in this budget in 2012 will be consulted on this summer, included in a draft bill next December, and then adopted in the Finance Act 2013 after next year’s budget.

One measure which was going to included in this year’s finance bill was the new statutory residence test we discussed in October last year.  This is to be postponed and will now be brought forward for inclusion in next year’s finance bill, the rules becoming operational from 6 April 2013.  We also learn that the concept of ordinary residence is to be largely abolished and it’s effect preserved in connection with certain overseas duties.

A number of measures in this year’s budget have started with consideration by the Office of Tax Simplification – and one of these seems to have backfired on the government. You’re probably aware that the office started off looking at IR35 and redundant tax reliefs.  It then went on to consider small businesses and some it’s recommendations are adopted here including allowing businesses with a turnover below the VAT registration threshold, called ‘Nano’ businesses, to use the cash basis rather than the full GAAP which, in strictness, they should be using.  OTS think that 65% of the smallest businesses, many not using accountancy services, are using this method anyway!

The OTS went on to look at two further areas, issuing initial reports but not final recommendations; one of these concerned employee shares schemes, the other taxation of the elderly. They identified the problem that the tax affairs of elderly people are quite complex, they often have several sources of pensions and income, often dealt with by different districts and, if the taxpayer’s income is below £29,000, they have been entitled to a higher tax allowance when reaching 65 and a higher allowance still on reaching 75, although if their income is just below £29,000 the higher allowance is subject to clawback.

In the meantime the coalition have been pursuing the idea of substantially increasing the normal personal allowance to take increasing numbers of people outside of the scope of IT.  From April 2012, as was announced in 2011, the personal allowance goes up by £630 to £8,105 and to balance this the higher rate threshold is reduced by £630 from £35,000 to £34,370.  This budget provided that next year, from April 2013, the allowance would increase by £1,100 to £9,205, although the higher rate band threshold would reduce by rather more, £2,125, to limit the benefit of the allowance increase to higher rate taxpayers to 25% of what a basic rate taxpayer benefits by.

Now we know that the Lib Dems want to increase the allowance to at least £10,000 and if this allowance eventually exceeded the higher amounts of the age allowance, and of course you can’t have an allowance which is lower that the personal allowance so the age allowance can be done away with then the complexity of the age allowance and the clawback of the additional relief which gives affected taxpayers a marginal rate in excess of 20% could be done away with.

But George has jumped the gun.  Before the OTS makes its final recommendations and before the ordinary personal allowance has caught up with the age allowance George has decided to accelerate its withdrawal – this is the so-called “Granny Tax”.

The age allowance will be restricted now to those who reached the age of 65 before 6 April 1948 and the higher level of the allowance will only be available to those born before 6 April 1938.  It is also going to be frozen, which is the main complaint of the grannies, that in inflation adjusted terms they will be worse off. Although the pension may well be increased next year to compensate those persons who are affected by this ‘granny tax’, the increase in liability of those whose allowance is frozen has been seized upon by the press.  It reminds me of Gordon Brown’s ill-fated attempt to ‘simplify’ the tax system when he controversially eliminated the 10% starting rate for all income other than savings income.

It is made all the worse because George also decided to reduce the 50% rate to 45% on the grounds that the higher rate was counterproductive, it may well be that it is, HMRC figures seem to suggest it, but of course it makes it look as though he is taking from pensioners to transfer to the very wealthy.

In an historical sense this budget will be seen as the one where the government and the revenue finally accepted the need for a General Anti-Avoidance Rule or GAAR; given the number of targeted rules (TAAR) implemented since 2006 when the first one was introduced (concerning capital losses for CT purposes, and was so successful that it was extended a year later to individuals and trusts for CGT purposes) this should enable a significant reduction in the length of taxation legislation and may allow abolition of individual TAARs which now litter the legislation and account for much of the length of recent Finance Acts.

In the past HMRC have been reluctant to introduce this sort of measure, even though it is a potent one in the war against avoidance, because of the need to have a parallel clearance mechanism so that business can achieve certainty before entering into transactions.  It is claimed that Canada – who introduced a GAAR without a clearance mechanism – have suffered as a result.

Graham Aaronson QC, who suggested the GAAR in a report commissioned in last year’s budget, believes that it is possible to have such a rule as a limited GAAR, Sounds like a contradiction in terms which would allow ‘reasonable tax planning’ and so would not require new clearance mechanisms.  It remains to be seen whether it could be effective, as the arbiters of reasonability in the first instance would be – the revenue, although the final decision would be up to the Tribunals and the Courts.

Investors may have a quite unique opportunity in 2012/13 to secure 78% tax relief – it works like this…

Genuine small start-up businesses can use a scheme to raise capital called the Seed Enterprise Investment Scheme or SEIS – this offers investors a tax reducer relief of 50% which they can set against this year or last year’s liability regardless of the rate of tax they actually pay.  But they can do better than this – if they also make gains during the year 2012/13, and they would be advised to do so if they can, these can be matched against the investment into the SEIS and will be exempt from CGT.  Now the ordinary EIS offers 30% relief and deferral of gains, but this is a genuine exemption worth a further 28%.

Middlemen have already started to try to attract investors and match them with suitable small businesses.  It is obviously very high risk but the relief available may make it worthwhile.

Company cars are subject to good news and bad news – lets look at the… good news first.  From April 2013 the current scheme which gives a business 100% relief on the cost of a car which emits less than 100 g/km of CO2 was to come to an end.  It will now be extended to 2015 but at a slightly lower emission limit of 95g/km.

You can still get an Alfa Romeo Mito 1.3 diesel and claim a 100% FYA after April 2013 but if you want an Audi A1 Sportback you’ll need to be quick as it will cease to qualify after April 2013, its emission value is 99g/km – unless the manufacturer improves efficiency even further.

The Bad news? – well there’s rather a lot of it… cars which emit more than 130 g/km but less than 160 g/km will qualify for an 18% WDA until April 2013, but from that time onwards purchasing such a car will give you a writing down allowance of 8% pa only which at the moment only applies to cars with an emission figure in excess of 160 g/km.

In addition between April 2014 and April 2016 several changes are to be made to the company car benefit in kind scheme which will see the benefit in kind, in other words the tax liability, on some vehicles increasing by 25% over this short period, or indeed even more!  If you have a zero emission vehicle, which at the moment has a zero benefit in kind, from April 2015 onwards you will have a 13% benefit and in the following year this will be increased by a further 2% to 15%.  The maximum percentage for company cars is going to go up as well, it is at the moment 35% but will increase to 37%.  From April 2016 onwards you will no longer need to add the extra 3% for a diesel vehicle.

The announced reduction in the rate of corporation tax from 26% down to 24%, where last year we were told that the rate would go down to 25%, was a welcome reduction for larger companies with profits in excess of £300,000, and next year and the year after the rate will go down to 23% and 22% respectively.  But what of the lower 20% rate that applies to profits up to £300,000?  Would that be reduced as well?

The problem is that if this rate is reduced a 40% taxpayer taking a dividend from a company would be liable to a combination of corporation tax and income tax on the dividend which would be less than 40%. This was the mistake made some years ago by Gordon Brown, in reducing the rate to 19%, which he compounded by increasing national insurance so that a self-employed taxpayer was liable at 41% but dividend extraction from a small company attracted a liability of only 39.25%.

In a throwaway comment George indicated that he intended the main rate to fall even further to 20% in the future when there would then be one rate of tax applying to all companies regardless of size and the marginal relief calculation, necessary for profits between £300,000 and £1,500,000 to avoid a large jump in liability would no longer be needed and the complicated Associated Company rules, which were only reformed in last year’s Finance Act would also not be necessary.

In addition to increasing R&D relief further for small and medium sized businesses, a welcome change, he also confirmed the introduction of the idea of a “patent box”.  Originally dreamed up by his predecessor, Alistair Darling, this would mean that profits derived directly or indirectly from the exploitation of patent rights would be charged at an effective rate of 10% from April 2013 onwards and it worth noting here that this is not confined to patent royalties but also the trading profits that manufacturers derive.  As a response to this and the general reduction in CT liabilities Glaxo SmithKline have already announced a half a billion pound investment in UK manufacturing.

The CFC, Controlled Foreign Company, regime is extensively overhauled as announced last year to prevent it falling foul of EU discrimination laws and will only apply where profits are artificially diverted away from the UK by larger companies, rather than applying by default at the moment unless you benefit from an exemption.

A number of VAT anomalies have been removed from 1 October 2012 so that enjoying a hot chicken from your supermarket, drinking sport nutrition drinks, using self-storage facilities, even going to the hairdresser now that self employed stylists will not be able to rent chairs in a salon on an exempt basis could all become more expensive.

When the last government implemented SDLT, Stamp Duty Land Tax, in 2003 a number of bodies suggested they were too hasty in doing so and since then every year has seen further attempts to limit tax losses caused, at least in part, from the revenue’s Stamps Office seemingly not understanding real world property transactions. Of course, before SDLT came in, they were experienced in valuing legal documents but were not required to be aware of other transactions.

Residential properties costing more than £2,000,000 will now be subject to a 7% rate of SDLT and where companies have been used to acquire this sort of residential property there will be a 15% liability on the transfer into the company, because subsequently the shares can be transferred at a much lower Stamp Duty liability of 0.5% or outside the UK with no liability at all – other measures will include charging gains on the sale of property within these offshore companies to CGT and even a version of Vince Cable’s vaunted mansion tax where a company is used as an envelope to avoid liability.

This podcast can only skim the surface of the budget provisions and further information can be obtained from the revenue and treasury websites. There is a 206 page document “Overview of Tax Legislation and Rates” containing details of all of the budgetary changes which can be downloaded from and The Chancellors full budget report, the ‘Red Book’ as it is called is available from