Archives for posts with tag: consultation

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.


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.