Thursday, 28 October 2010

It's all about discrimination: New Equality Act has come into force on October 1, 2010

From 1 October 2010, the Equality Act 2010 has come into force. The Act unifies all different forms of discrimination (age, disability, race, sex, gender reassignment, religion or belief, sexual orientation, marriage and civil partnership, pregnancy and maternity)  under the same umbrella. It also makes the law stronger (!) in some areas. Main changes are:
  • Third party harassment (different target): Employers can be sued if anyone (e.g. an employee) takes offence at something (e.g. a joke) said by another party (e.g. a customer), even though the  offensive material was not directed at the person who makes the complaint. For example, an employee can make a claim for harassment if another employee is harassed by a manager because of a disability. The unaffected employee has the right to claim on the grounds that the harassment of the disabled member of staff has lead to an offensive work environment.

    Comment: Aim is to force employers to establish zero tolerance towards potentially offensive behaviour. Valid question: How can possibly employers police the measure and hence steer clear possible employment tribunal claims?

  • Harassment by or against third parties: Employees can sue their employer if they were offended by people who are not employees (such as customers or contractors), if the employer does not take steps to address this when they become aware of it. Customers could also have a claim against the employer if they were offended by a member of staff.

    Comment: Aim is to reduce discrimination at workplace by everyone. Employers could rightly ask: What control do they have over third parties like customers or contractors?
  • Discrimination by association: An employee will be able to sue their employer if they believe they have been discriminated against because of their association with someone else (for example, an employee is refused flexible working arrangements, even though it has been offered to others, because that employee has caring responsibilities for a child or spouse with a disability and the employer believes they may not be dedicated enough to their work).

  • Comment: Aim is to reduce discrimination at workplace. Are employers supposed to ask their staff intrusive questions to ensure they steer clear of offence or discrimination?

  • Discrimination by perception: Employees will be able to sue if they are treated unfairly because the employer or other employees think - rightly or wrongly - that they have a protected characteristic (for example, an employee is discriminated against because the employer thinks he is gay).
  • Indirect discrimination: If the employer has a condition, rule, policy or even practice that applies to everyone, but disadvantages a certain employee. Can get away with, if the employer shows that has acted fairly and reasonably towards achieving a legitimate business aim, other than solely reducing costs.
  • Pre-employment health secrecy: Employers will not be able to ask job applicants questions about their state of health except to help them decide  whether the applicants could carry out functions essential to the job (for example, where a role involves heavy duty packing).

    Comment: Aim of the measure is, supposedly, to protect people from health and disability discrimination. However, employers will be unable to spot any employees who are not fit for the job, or would be unreliable, due to ill health.

  • Equal pay direct discrimination: A claim of unequal pay can be made not only by comparison with a real person of the opposite sex in the same employment, but even if no real person can be found, by proving what their remuneration would be if they were of a different sex. See example in next point.

  • Pay secrecy: Employees will be free to discuss their pay or bonuses and employers cannot enforce secrecy clauses in employment contracts where they are related to protected characteristics such as race or sex. For example, a male employee working in female environment and doing same job as his female colleagues has a right to make a claim to equal pay as the opposite sex and his employer cannot prevent him from talking to his colleagues about pay differences.

    Comment: Aim of the measure is, supposedly, to end pay discrimination. Employers fear this could lead to rash of claims for pay rises or even to claims if they believe they have been discriminated against.
  • Victimisation: When an employee is treated badly because they have made or supported a complaint or raised a grievance under the Equality Act (unless maliciously made or supported an untrue complaint), they have protection.

  • Employment Tribunals: Powers extend not only in fining employers, but also in (effectively) forcing employers to change work practices if found guilty of discrimination, not only in relation to the claimant but to the other employees too.

    Comment: Employers fear this would amount to Tribunals interfering with the way businesses are run.

  • Disability: the definition of disability changes, making it easier for a disabled person to prove disability. A disabled person only needs to show that their physical or mental impairment has a substantial and long-term effect on their ability to carry out normal day to day activities, such as using the phone, reading a book or using public transport.

Wednesday, 6 October 2010

Taxman introduces penalties on all employers for paying PAYE late

What's new:
From May 2010, employers are subject to penalties for not paying their PAYE bill on time, either monthly, quarterly or annually. The late payment penalties apply to all employers, regardless of size. 'Late' in this context means the payment reaches the Tax Office after the 19th of each month, (or 22nd when paying electronically).

Until now the Taxman did not impose penalties or interest on small employers if all the payroll deductions for the year reached him by 19th April (or 22nd) after the end of the tax year. Large employers (those with more than 250 employees) have been subject to surcharges for late payment for some years, as they have been obliged to pay over all deductions electronically.Those surcharges for large employers have been scrapped and all employers are now subject to the same penalties. However, small employers do not have to pay over their deductions electronically.

For penalties relating to late payments due in the current tax year 2010/11, HMRC will send late payment penalty charges after the end of the tax year (5/4/11). HMRC can issue a penalty letter up to two years after the late payment occurred. It is your responsibility to make sure that you pay PAYE on time. HMRC does not issue reminder letters.

How penalties operate: 
The penalty will be based on the total amount of deductions paid late for the tax year and will be calculated based on the number of times payments are late in a tax year as follows ...

- Late once – no penalty (as long as the payment is less than 6 months late)
- Late 2 to 4 times – 1% penalty
- Late 5 to 7 times – 2% penalty
- Late 8 to 10 times – 3% penalty
- Late 11 or more times – 4% penalty

If the employer has still not paid an amount in full after six months, a penalty of 5% may be due. A further penalty of 5% may be charged if payment is still outstanding after 12 months. Please note that these penalties are in addition to the penalties fro monthly and quarterly payments described above and they apply even where only one payment in the tax year is late!

(Comment: The taxman is closing down on all employers, going for their monies on time! However, it remains to be seen how the system will be implemented in practice, as the taxman doesn't know until after the end of the tax year - when P35 is filed - if there was any underpayment. Even if P35 shows an underpayment, surely, it is not possible to inspect PAYE records of all employers that underpaid to establish for how long the underpayment has been outstanding, so that the amount of the penalty is determined! In addition, even where P35 does not show an underpayment, it is possible that some amounts were paid late during the year and that cannot be discovered unless a PAYE inspection of the records. Bottom line is, this puts an additional responsibility on the employer's shoulders to reconcile the PAYE account every month, e.g. to ensure that late adjustments have been accounted for and so on).

Saturday, 2 October 2010

Minimum National Wage increase from October 1st, 2010

Minimum national wage (hourly rates) rises from 1 October 2010 as follows:

  • Workers aged 21 and over: From £5.80 to £5.93.
  • Workers aged 18-21: From £4.83 to £4.92.
  • Workers aged 16-17: From £3.57 to £3.64.
  • Apprentices under 19 and apprentices aged 19 and over (in first year of apprenticeship) £2.50 .

(Notes: Minimum wage limits for apprentices have been set for the first time! Also, from 1 October the minimum age for the top rate to apply has been reduced from 22 to 21 ).

Thursday, 22 July 2010

Government sets up OTS to simplify Taxes

The Government has announced that it has set up the Office of Tax Simplification with the view to simplify taxes in the UK.

The tax system in the UK is so complex that businesses have been complaining that it is a liability to the UK economy.

The OTS was welcomed by business groups and accountants, on two conditions: one that it is genuinely independent, the other that ministers are prepared to act.

The OTS is to be manned by a group of tax experts, lawyers and civil servants, to identify problem taxes and reliefs and recommend solutions. The OTS will deliver two reviews before the next Budget; one will be on small business tax simplification, including the IR35 on the tax treatment of contractors, the second on the system of tax reliefs.

The Government says that, despite no official commitment of ministers to the OTS, close public interest will be enough to create politicla pressure on the government to respond to recommendations.

(Our comment: The tax system is crying not just for simplification of the rules but for a radical overhaul, but we have heard this before! In our opinion, simplification starts from the HMRC, putting their house in order, making their operations more competent and efficient (so that it doesn't take a month to open a letter)and accountable to the taxpayer for their errors. Usually, politicians change things round for their own benefit; for example, I am wondering, could it be that they want to simplify tax rules as an excuse to introduce a general ("blanket") anti-avoidance rule? Can I remind my readers that the Emergency Budget last month mentions anti-avoidance several times?)

Wednesday, 21 July 2010

Taxman owes taxpayers £3bn

The taxman owes taxpayers in the UK as much as £3billion in tax overpaid, going back for more than 2 years, it was announced by the National Audit Office.

The National Audit Office put the blame on a backlog created by new computer system glitch, which involved 15 million taxpayers. The errors resulted in additional costs of £33 million and the loss of £55 million in planned efficiency savings!

It said that because of, the HMRC is also chasing unpaid taxes worth £1.4 billion.

(Our comment: What we have suspected from experience now confirmed: the taxman is hanging on to £3 bn in overpaid taxes and "doesn't want to give it back!")

Friday, 16 July 2010

Enterpreneurs Relief and pulling the rug from under the taxpayers' feet!

Today I will touch on an undesired development for property onwers that has literally removed the carpet from under their feet overnight!

Some time back in November 2007, the then government decided that capital gains tax was scandalously low, and so the Chancellor announced that he was making changes in the next budget to put up Capital gains tax (CGT).

He then in April 2008 abolished business asset taper relief and brought in what is known as Entrepreneurs Relief. Under this, capital gains made on disposal of assets owned by individuals and used in the trade are taxed on those persons at 10% up to an upper limit (currently £5 million). But, not quite so...

The point we are making is not with the particular kind of relief but with a certain condition contained in the new legislation: If a person owns the property used in the trade of his company, he will not benefit from the 10% rate when he sells (or disposes otherwise) the shares in his company together with the property if he has charged the company full rent all along for the use of the property to trade from. Instead, the CGT rate will be 28%!!!

Presumably, the justification for that is that the property is not a trading asset but an investment. Fair enough, what the heck! The problem is however where trading properties were purchased before 6 April 2008 and those traders were advised by their accountants back then to own the property personally rather than buy through their companies to make sure that they could benefit from the then Business Asset Taper relief, according to which CGT would be taxed at 10% provided the property was kept for at least 2 years. It was also a brilliant idea to extract rent from the company rather than salaries as there is no national insurance on rents (being treated as "unearned income").

What makes it worse is that those property owners also stand to lose the mortgage interest relief if they stop charging rent and will be unable to claim any capital allowances on fixtures fixed on the building as they will have no rental income to offset the capital allowances! Losing those reliefs could amount to higher taxes by hundreds of thousands in some cases!

Unfortunately, this shows that planning one's tax affairs within the foreseeable future is a very difficult task because of the uncertainty in the regulatory environment. I hate to say that all I can advise clients in this mess right now is to carry on charging rents so that no interest relief is lost and hope that the law will change before they sell (perhaps before an election!).

Please be free to add your own comments or similar experiences.

Wednesday, 23 June 2010

Emergency Budget 22 June 2010

With Budgets, the devil is in the detail. The obvious changes and looking beyond the headlines...

Business taxes

Corporation tax cut for large companies: The full rate of corporation tax to be reduced from 28% to 24% over the next 4 years by 2014. (Note: This is the rate paid on profits over £1.5 million).

Corporation tax cut for small companies: The tax rate for small companies to be cut from 21% to 20% from next April. (Note: Small companies are companies with profits up to £300,000).

Capital allowances reductions:
  • The main rate of capital allowances on plant & machinery is reduced from 20% to 18% per annum from April 2012. The rate on fixtures is reduced from 10% to 8%.
  • The annual investment allowance (this is the 100% first year allowance available to write off the cost of plant & machinery is reduced from £100,000 to £25,000 from April 2012.

(Comment: it is estimated that 2/3 of the corporation tax cuts will be recovered by a reduction in capital allowances for investment in plant, machinery and equipment from April 2012).

Capital gains

Capital gains tax rate rise: Capital gains tax on non-trading assets will rise from 18% to 28% from 23 June 2010 for higher-rate taxpayers. Basic rate taxpayers will continue paying CGT at 18%. (Note: Non-business assets include second homes, buy-to-let properties and shares. An individual’s capital gains will be added to their income in assessing whether they remained basic rate taxpayers for the purpose of the new higher rate of capital gains tax. The income threshold for the higher rate is currently £43,875).

Comment: Not many people will benefit from the 18% rate because, almost certainly, significant assets sales (property sales) will push a lot of lower-rate taxpayers into the higher rate of tax and hence taxed at 28%! Prediction: the no re-introduction of indexation allowance to eliminate effect of inflation on gains (or taper relief) will be more painful to investors than the rate increase! This will result in taxing the part of the gain that is attributable to inflation!!!

CGT annual exempt amount freeze: The tax-free allowance for capital gains tax remains the same at £10,100 per annum.

Entrepreneur’s relief increase to £5 million: The lifetime CGT allowance for entrepreneurs who sell their businesses is to be increased from £2 million to £5 million on gains arising from 23 June 2010.

Income tax

Personal allowance increase: Personal allowance (tax-free income) up by £1,000 to £7,475 from April 2011. This will take about £880,000 low-earners out of the tax system.

Higher rate threshold reduced: From April 2011, the threshold at which the 40% higher rate of income tax kicks in is lowered by £1,500 to £42,375. The new thresholds will be frozen for 3 years.

Comment: Taking into account the £1,000 rise in the personal allowances, the basic rate band is shrunk by a total of £2,500. This means that the basic rate limit, at which income is taxed at 20%, will fall from£37,400 to £34,900. This will result in about 700,000 more people falling into the 40% tax rate.


VAT increase: VAT standard rate is to be increased from 17.5% to 20% from January 4, 2011.

National insurance

NIC reduction for new regional businesses: Businesses setting up outside London, the South-East and East of England will be exempt from £5,000 of employer’s national insurance for each of the first 10 staff hired with immediate effect for three years beginning from September. Any new business starting up from 22 June 2010 will be eligible, subject to meeting various criteria. The tax break is worth up to £50,000 per business. HMRC has said that only those businesses carrying out a “new economic activity” will benefit.

Plan to lift employer’s NIC is partly axed: Employers employing staff earning less than £21,000 a year will be protected from a 1% increase in national insurance contributions from 6 April 2011. However, businesses with staff earning more than £21,000 will pay more. The so-called “jobs tax” brought in by Labour will not be abolished and the rise of 1% for employer’s and employee’s will go ahead from next April (Class 1 & Class1A)!

Employer’s NIC threshold rise: From 6 April 2011, the threshold at which employers pay Class 1 NIC on employees’ salaries will rise by £21 per week more than the annual increase in the RPI.

Comment: The rise above inflation together with protection from increase on lower paid employees has supposedly been introduced to mitigate the effect of the 1% hike on employer’s and employee’s national insurance contributions on salaries.

Consumer’s taxes
  • No increase in alcohol and tobacco duties. Plan for 10% increase on cider is scrapped. No increase in fuel duty either. Government to launch a review of fuel duty that will link petrol duty to the wholesale price of crude.

  • The increase in VAT rate to 20%, coupled with rises in Labour’s Budget in March, will hit the cost of fuel, drinking and smoking.
  • Could this lead to petrol prices at the pumps being less volatile and even lower prices when crude price drops?)
  • Plans to levy 50p a month on every phone bill to pay for the introduction of rural broadband have been abandoned.


Child benefit: 3-year freeze in child benefit. The benefit is worth £20.30 per week for the eldest child and £13.40 for any additional child.

Parents’ benefits cut: The £190 health-in-pregnancy grant is to be abolished from April 2011. The Sure Start Maternity grant worth £500 to mothers in jobseeker’s allowance would be limited to the first child. Lone parents will be expected to look for work when their youngest child starts school.

Tax credits cuts: From April 2011, the child tax credit (family element) worth £545 is no longer available to families with household income more that £40,000. But from April 2012, those families with combined income more than £28,000 will also lose the benefit, while those on £25,000 or above will see their payment reduced to £460. Furthermore, the child tax credit payable in the first 12 months after birth, worth £545 is abolished from April 2011. However, the child element of the child tax credit will increase by £150 a year for 2011/12 and by £60 f0r 2012/13.


Housing benefit cap: Cap introduced to £250 for one-bedroom property and £400 for 4-bedroom property.

Disability living allowance: There will be medical checks for people on the benefit.


State pensions to be linked with earnings: From April 2011, pensions will rise from now by a minimum of 2.5% or in line with earnings or prices, whichever is greater.

Comment: Any rises will only be moderate and will not reflect the true effect of price rises as pensions will be liked to the Consumer Price Index (CPI) and not to the Retail Prices Index (RPI). RPI takes into account a wider range of costs including mortgage interest payments, which doesn’t the CPI.

State pension increase: State pension to increase by £1.45 next year.

Requirement to buy annuity extended to age 77: With effect from 5 April 2011, the age by which members of registered pension schemes have to buy an annuity will be increased from 75 to 77.

Retirement age increase:
  • Government plans to increase state retirement age from 65 to 66 from 2016 rather than 2024.
  • Default retirement age at 65 to be phased out. This means workers over 65 will not be forced to retire.

Old people’s benefits: Winter Fuel Payment and free bus travel not affected.

Registered pension plans

Pensions u-turn: The Finance Act 2010 restricts tax relief on pension contributions from 6 April 2011 for individuals with annual earnings of £150,000. However, this complex legislation is likely to be abolished, and replaced by a system of reduced annual allowances with a broadly similar effect (see below).

The Chancellor signalled a U-turn on previously announced plans to gradually withdraw higher-rate tax relief on pension contributions by those earning £130,000 or more. Instead, he is consulting with insurers and employers about drastically reducing the amount that can be saved into a pension annually and be eligible for tax relief to between £30,000 and £45,000. Doing so will still save the Treasury whilst being easier to administer. (Note: currently, contributions up to £255,000 per annum can be paid into pensions plan and qualify for tax relief).

Business start-up finance:
  • The Enterprise Finance Guarantee Scheme that guarantees 75% of finance to small businesses with no assets as security will be extended by an additional £200m.
  • The government also announced that it will set up a Growth Capital Fund as part of the Enterprise Capital Fund to tackle a shortage of private investment in young, growing companies with high growth potential by providing a further £37.5 million in equity finance.

And finally...

IR35 to be abolished?

Despite no announcements in the Budget, government small business minister M. Prisk announced that the spiteful and controversial IR35 will be abolished and that the government is looking at ways to replace it in a way that guarantees a lasting settlement.

Thursday, 20 May 2010

Government to review IR35

The Chancellor has promised at his speech during the CBI dinner that the government will review the (unpopular) IR35 legislation as part of a “wholesome review of small business taxation” and it will seek to replace it with simpler measures. These plans “will prevent tax avoidance but will not place undue administrative burdens or uncertainty on the self-employed or restrict labour market flexibility”.

(Our comment: let’s hope simplification is not used again to tax self-employed even more!)

Monday, 17 May 2010

Chancellor to deliver emergency Budget

The Chancellor has announced that the coalition Government’s emergency Budget will be delivered on Tuesday, June 22. The Budget will lay out the specific measures to tackle the UK’s deficit.

Saturday, 15 May 2010

IR35 - Taxman loses in the Novasoft case

The taxpayer’s appeal was allowed in full by the Commissioners against the HMRC. The tribunal decided that this was a case of “self-employment” and therefore the dreaded IR35 legislation (intermediary companies) did not apply. In reaching it verdict the tribunal quoted the Hall V Lorimer, that it is necessary to “paint a picture from the accumulation of detail”. It will be interesting to see if HMRC takes this case to further appeal although it will be more interesting to see what impact this case will have on the IR35 legislation.

(Note: IR35 is a complex set of rules introduced to catch disguised employees falsely trading through their own limited companies to reduce their tax. The problem lies in its complexity itself and in that it has in some cases it has unfairly treated genuine self-employed).

Thursday, 13 May 2010

Taxman seeks access to accountants’ working papers

Government consultation on “Tax agents and deliberate wrongdoing” has been met with outcry by the accounting profession. They fear that the controversial government proposals will lead to deterring tax advisors from offering legitimate tax advice to clients for fear of opening themselves to prohibitive fines and investigation for assistance to unacceptable tax avoidance. Under the proposals, the HMRC will have access to accountants’ working papers.

(Our comment: we can’t help it thinking that this is another attempt by the taxman – following removal of legal privilege - to increase its take by restricting the taxpayer’s ability to influence the amount of their tax through legitimate tax planning by using accountants’ expertise).

Thursday, 15 April 2010

Government Tax U-Turn

The following controversial proposals announced in the last Budget have been dropped at the Conservatives’ insistence by in order to pass the Finance Bill before dissolution of the current Parliament:
  • Proposal to remove the trading status from furnished holiday lettings, which was announced in the last Budget to come into force from 6 April 2010.
  • The proposal in Budget 2010 to obtain a security for PAYE.
  • Cider duty increase by 10% reverse – cider duty to be same as for beers and spirits (2%)
  • 50p landline duty on telephone landline bills to fund next generation broadband development.

Thursday, 25 March 2010

Budget 2010


The Budget contained no great surprises from the tax point of view before the upcoming general election and a series of “stealth taxes” were contained in it, including freezing of personal allowances, income tax bands, capital gains annual exemption and inheritance tax thresholds. However, we must wait for the post-election Budget, or more likely next year, for the really hard-hitting changes.

  • Business taxes
    • Companies: No changes in corporation tax rates.
    • Capital gains: No increase in capital gain tax rates. Entrepreneurs’ relief doubles to 2 million pounds (this is the threshold for paying CGT at full rates on business assets gains)from 6 April 2010.
    • Capital expenditure: Annual investment allowance on capital expenditure for plant and machinery for small businesses increases to £100,000 from £50,000 incurred on/after 1 April 2010 (companies) and 6 April 2010 (unincorporated).
    • Business rates: small rate business relief exemption for 1 year from October 2010 on properties with rateable values up to £6,000. Partial relief for properties with rateable values up to £12,000.
    • VAT: No VAT rate increase.
    • Small businesses: £200 million will be given to a capital growth fund to invest in small developing businesses.
  • Personal taxes:
    • Income tax: bands frozen. Introduction of 50% income tax rate on income more than £150,000 from April 2010.
    • Personal allowances (threshold for paying income tax) frozen. Personal allowances phased out in stages for people earning over £100,000.
    • High earners: high earners will lose higher rate tax relief on their pension contributions from April 2011.
    • Workers: Minimum national wage to increase by 2.2% to £5.93 per hour from next October.
    • Pensioners: basic state pension is rising by £2.40 (2.5%) to £97.65 per week from April.
    • The number of hours pensioners will need to work to qualify for working tax credit reduced to 16 from 30.
    • Savers: From 6 April 2010, the amount of money that can be put in ISA without being taxed will go up from £7,200 to £10,100 for all savers regardless of age.
    • Attack on the rich: Mansion tax introduced. Stamp duty land tax on residential properties worth more than £1m rises to 5% from April 2011 and will remain permanently!
    • Stamp duty land tax: exemption for 2 years (25/3/10-25/3/12) for first-time buyers for houses costing up to £250,000. This doubles the current lower threshold.
    • Inheritance tax: nil-rate band (the threshold at which inheritance tax kicks in at 40%) frozen for the next 4 years at £325,000.
  • Tax avoidance:
    • Tax avoidance schemes: Strengthening of disclosure rules for tax planning schemes. Changes to definitions of scheme 'promoters', to promoters' duties, to intermediaries' responsibilities and the time at which a duty to disclose a scheme arises.
    • Employers: From April 2011, the taxman will have the powers to demand “security” from businesses which habitually fail to meet their PAYE and NIC bills.
    • Offshore: Penalty 200% for those who evade tax offshore!
    • Clampdown on companies’ double taxation reliefs.
    • As part of HMRC’s ongoing clampdown on offshore centres, imminent signature of a tax information exchange agreement with Belize, Grenada and Dominica, the Caribbean tax havens, announced. However, the information exchange is not automatic and HMRC would need to request specific information on a specific taxpayer. This makes the agreements of limited use.
    • A disclosure facility with Liechtenstein, another tax haven, is expected to raise more than £500 million.
    • Close companies cannot take deduction for writing-off loans to participators in that company.
  • Consumers’ taxes:
    • Duty on beer, wine and spirits 2% (equal to 2 pence on a pint of beer, 10 pence up per bottle of wine. Increase in spirits equal to 36 pence on a bottle.
    • Tax on cider increased by 10% - 5 pence on a litre of cider.
    • Fuel: up 3 pence to be staggered over the rest of the year.
    • New “showroom” tax means buyers of more polluting cars will pay up to £515 extra.
    • Tobacco duty up by 1% above inflation, then 2%. Cigarettes up 15 pence per packet of twenty.
    • Households will have to pay 50 pence per month tax on their telephone landlines to hep pay for rural areas to receive broadband internet.
  • Families:
    • Child tax credit will increase by £4 per week for every child aged under two from April 2012.
    • Kinship payments: Grandparents and relatives will get up to £56 a week for looking after children during “family difficulty times”.

Tuesday, 9 March 2010

Anomaly (or perversity) of the tax system?

In all my years of experience as a practicing accountant, I cannot recall of a bigger anomaly in the tax system than using market values to pay capital gain in cases where none should be due.

I am not referring here to the situation where an individual disposes a capital asset that has appreciated in value for a consideration. Provided that money changes hands at market values, I can understand the logic behind charging CGT on the gain (as computed by the difference between original cost and market value on the sale). I have no serious problem with that, other than the fact that it would be fairer if the gain is adjusted downwards by the effect of the inflation since purchase(inflation is a fact of life and eats into profits and gains). Regretfully, that concession was also gone a couple of years ago...

My biggest objection is taxing an individual on a ghost gain (a book gain!) when there is no consideration, i.e. in the case of gifts. In my opinion this comes close to amounting as a rip-off (big brother poking his hand into people's pockets to take money when none was actually made!!)

Take for example the unfortunate parents who have been letting a second house for a number of years and when the time comes, they affectionately want to pass it on to their offspring to help him/her out to start out in life. Here is where the anomaly comes in: since the house has appreciated in value over the years, they will not be able to help their child unless they fork out a respectful amount of tax to the taxman based on the gain made - from which of course the poor parents will not enjoy any benefits in any way. Pay tax out of an unrealised profit,that is. How more cruel could it get?

Amazingly, this anomaly does not occur in other taxes e.g. stamp duty land tax (tax is paid only due where consideration).

I think there should be some rectification in the law to ensure that the gain is taxed only where a disposal for a consideration at market value occurs, i.e. when the child eventually sells the house to a third party and the gain is realised.

For the time being, the regime is fairer for capital gains on disposal of assets used in a trading business, like goodwill, shares etc. These gains can be deferred where disposal is to connected persons (limited companies, relatives) or where the gain is re-invested into another asset and taxed only where eventually the asset is old to a third party or the asset sold is not replaced. In other words, there is some kind of "hold-over" or "gift" relief. The effect is the same, no matter what the name is: tax on the gain is postponed. These concessions exist to encourage continuation of business and enterpeneurial spirit.

Someone could ask: Shouldn't help to family members be among government priorities and a good enough reason to enjoy some kind of relief for gifting non-trading assets, for passing a house or a plot to a child by parents to help them out (especially in a age where it has become harder and harder for young people to buy their own home because of the sky-rocketing house prices?)

Am I missing something here? Any more thoughts?

Sunday, 28 February 2010

Reminder on new tax year changes

From 6 April 2010:
  • Car benefit rules: For 2010/11, the lower CO2 emissions threshold (which sets the 15% rate) drops from 135g/km to 130g/km. Electric cars pay 0% for 5 years.
  • Personal allowances: personal allowance is reduced by £1 for every £2 of income above £100,000.
  • Income tax rate: 50% income tax rate for income over £150,000 comes into force.

Time bar on VAT refund claims

The European Court of Justice has confirmed an HMRC 3-year time bar on claiming VAT refunds.

Official rate of interest

From 6 April 2010 the official rate of interest will reduce from 4.75% to 4%.

Payment of VAT

HMRC have announced that from 1 April 2010 all cheque payments by post will be treated as being received by HMRC on the date when cleared funds reach HMRC's bank account.

Monday, 22 February 2010

Age discrimination

The owner of a hair salon in Newcastle has been banned by the local Job Centre from advertising for a junior stylist because it might discriminate against older jobseekers.

Sunday, 31 January 2010

HMRC’s blunder over employees’ tax codes

It has been announced that HMRC has issued a whopping 25 million PAYE tax codes for 2010/2011, double that of the previous tax year, as a result of having moved into a new computer system. However, according to the Chartered Institute of Taxation, a substantial proportion is wrong!

May we use the opportunity to urge both employers and employees to check their new codes on coding notices they receive and never assume that what the taxman sends is correct, especially for employees with multiple employments or pensioners who work part-time. Furthermore, HMRC may try to collect tax on an individual’s investment income through their PAYE tax code. After all, any errors are likely to result as much in tax overpayments (and hence reduction in their take-home pay) as in underpayments, which eventually will have to be put back.

Tax amnesty for doctors

HMRC has announced on 11 January 2010 the launch of the so called “Tax Health Plan”. This is a disclosure opportunity for medical professionals registered with the General Medical Council. It applies to all taxes and duties. Disclosure of income other than received as a medical professional is not part of the arrangement. Deadline for registering for THP is the 31 March 2010 and disclosure and arrangement to pay all tax and penalties by 30 June. Penalties will be 10% for those who qualify for the opportunity and no penalty will apply where the total unpaid tax/duties are less than £1,000. In addition, interest will apply; the fact that disclosure is required for the last 20 years may well result in penalties and tax eventually exceeding the unpaid tax!

HMRC has said that they have received information from NHS trusts, private hospital and medical insurers such as BUPA. HMRC has said that, from next April, it will be using the information at their disposal to investigate medical professionals who have not declared their full income. Taxpayers who do not disclose may face penalties between 20% and 100% of tax evaded.

Chancellor delivers his Pre-Budget Report

The main points were:
  • Small businesses: Previously planned corporation tax increase for small companies postponed.
  • Businesses: The Business Payment Support Scheme has been extended. Businesses that can demonstrate that they need time to pay, can defer VAT, PAYE and NI, CIS, income tax or corporation tax payments.
  • VAT: VAT to return to 17.5% on 1 January 2010. From April 2010, VAT payments and returns will be online. Businesses and agents should register now.
  • Workers: 0.5% increase in NI contribution for employers, employees and the self-employed from April 2011. This means that the employer’s rate will rise to 13.8% and the employee’s rate to 12%. The threshold for paying NIC for employees will rise to £135 per week. NIC rate on earnings above £43,888 per annum will double to 2%.
  • Salary sacrifice schemes: Workers who enjoy tax-free lunches at their office canteens will lose the perk from April 2011.
  • Benefits: Company car drivers whose private fuel is paid by their employer will see the figure used as the basis for calculating the benefit in kind which is chargeable to tax and Class 1A NICs increased from £16900 to £18000 from April 2010. Furthermore, from April 2012, all CO2 emissions thresholds are to be moved down by 5g/km. This will mean that the 10 per cent band will apply to company cars with CO2 emissions up to 99g/km, pushing the vast majority of vehicles into a higher tax bracket. There will be no benefit in kind on electric cars from 2010.
  • Middle earners: Freeze of threshold at which 40% income tax is paid, resulting in 70,000 more people to become higher rate taxpayers.
  • High earners: Those with “gross income” more than £180,000 (including employer’s pension contributions) to lose higher-rate pension tax relief from April 2011. For those with “gross income” £150,000 and over, tax relief on pension contributions will be restricted.
  • Bankers: Introduction of a one-off windfall 50% rate for a bank payroll tax on bonuses exceeding £25,000.
  • Pensioners: Basic state pension to rise by 2.5% in April 2010 from £95.25 to £97.65 for a single pensioner (from £152.30 to £156.16 for couples).
  • Welfare: Child and disability benefits to increase by 1.5%.
  • Tough new anti-avoidance proposals will be rolled out demanding harsher penalties for failing to disclose aggressive tax schemes to the authorities.
  • Inheritance tax: The Inheritance tax threshold for individuals (nil-rate band) has been frozen at £325,000 for 2010/11 rather than raising it to £350,000 as it had been previously announced. The IHT threshold for married couples is also staying the same at £650,000.