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.