Crystal Umbrella

The Office of Tax Simplification has announced that its first two reviews are progressing well. They released a press statement to this effect while also announcing the recruitment of four tax experts to the team. It will fall upon these experts to furnish OTS with their public and private sector expertise and experience. Their role will be an advisory one. Kate Cottrell, of Bauer and Cottrell, is amongst those taking up position with OTS.

Tax director, John Whiting, stated: “I am delighted to have such an experienced team with their wide range of tax backgrounds in place, and I am very grateful to the firms that have released them. We are now getting going on our challenging task of helping to simplify Britain’s tax system.”

The Office of Tax Simplification was founded back in July. Its purpose is to advise the Chancellor George Osborne on matters directly relating to taxation. When this government came to power it pledged to simplify the country’s taxation systems and the reviews tasked to OTS are the first step in this process. They are currently reviewing small business taxation and tax reliefs, exemptions and allowances.

A published list of tax reliefs will be made available in the next couple of weeks and OTS will identify their planned review criteria. They are anticipating and welcoming comments on this which will inform the report which follows. The interim report on the small business taxation review is due to be published in time for the Budget 2011.

Launching their latest investigation into underpayments of tax, HMRC have announced they are to target a number of contractors working in television. Thousands of TV freelancers who have their accountancy needs met through Christopher Lunn & Company will find themselves under scrutiny in the coming months. Those whose tax affairs are coming under scrutiny have received letters from , dated 17th September, which outline the reason for the investigation as “tax returns submitted to HMRC may not be correct for a number of reasons”.

HMRC detail a list of concerns which fall into two main categories. The first area of concern is excessive expenses claims including subsistence and travel. They also cited charges for accountancy services. The other area for concern, according to HMRC’s letter was that certain people represented by Christopher Lunn & Company were “routinely, and apparently falsely, claiming self-employment status by directors”.

John Cassidy of PKF accountancy firm addressed this issue in an article for www.taxation.co.uk. It is Mr Cassidy’s belief that the latter area of concern has provided the impetus for this full scale investigation as he believes that any other concerns relating to expenses would have been dealt with as a matter of course on a claim by claim basis.

The Individuals who have received letters from HMRC have been given a disclosure opportunity. They have until 30th November 2010 to disclose any unpaid tax liability, After this date, any irregularities uncovered by the HMRC investigation “will be dealt with either by criminal or civil procedures…depending on the nature of those irregularities.”

HMRC are currently consulting on their proposed changes to the PAYE system which would see the implementation of a centralised IT system which would calculate PAYE automatically.  This would take the process of salary payments out of the hands of employers.  However, a warning has been issued by Giant Group that contractors and freelancers could be left considerably out of pocket if these proposed changes go ahead.

Giant stated that the very nature of working flexibly means that individuals can change jobs frequently.  This, in turn, leaves them vulnerable to over-payments of tax particularly if the calculations are automatic.  Under the proposals, employers would make gross payments to HMRC who would then be at liberty to make deductions before passing the net pay onto employees.

Matthew Brown, Giant’s managing director, acknowledges that there are existing problems within the current system, with “increasing numbers of workers paying the wrong amount of tax”.  HMRC have come under fire recently as it emerged that £334 million has been overpaid by taxpayers during the last two financial years.

Responding to the proposals for a centralised tax system, Mr Brown commented: “The proposal that a centralised computer should be responsible for the entire UK workforce is a chilling prospect when you look at HMRC’s track record in this area.  The PAYE system was designed for a time when people changed jobs far less frequently than they do now.  An error by a centralised computer could leave millions of workers unpaid or taxed the wrong amount.”

The National Audit Office have published the report ‘Engaging with Tax Agents’ and the preliminary response has been a positive one.  However, there are some concerns that the paper, which details the partnership between tax agents and HMRC in overhauling tax systems, has missed an ideal opportunity.

Responding to the report, Chartered Institute of Taxation’s Deputy President, Anthony Thomas, commented: “This is a helpful report which sets out ways in which HMRC can work with the tax agent community to improve its systems and services, making the tax system run more smoothly for HMRC, taxpayers and their agents.  In particular we welcome the NAO’s recommendation that HMRC reduce its costs by enabling agents to do more on-line self-service, thus reducing delays in dealing with post.”

Mr Thomas then pointed to the omission of dealing with over-declarations of tax.  He said: “We see this as a missed opportunity.  It would have been really useful to have had proper analysis of who are making these errors and why.  We have been working with HMRC for many years on these issues; it is unfortunate that the report does not reflect this.  Nor does it look at HMRC’s own error rate.  We welcome the acknowledgement in the report that were it not for the work of good agents in ensuring clients get their tax right, the level of under-declarations could be significantly larger.  Overall tax agents save the Government money both by helping their clients get their tax bills right and by taking on tasks that would otherwise fall to HMRC.

Mr Thomas concluded: “The CIOT will continue working for a better, more efficient, tax system for all affected by it – HMRC, taxpayers and their advisers.”

The Chartered Institute of Taxation have responded to governmental plans to overhaul, and subsequently improve, the PAYE system for employers and employees as discussed in the HMRC-published paper ‘Improving the operation of Pay As You Earn’.

This paper suggests the introduction of ‘Centralised Deductions’ and a process by which information flows more frequently between employers and HMRC resulting in ‘Real Time Information’ being available to the taxman.
Tax Policy Director at CIOT, John Whiting, commented: “The fundamental aim in this area has to be to get PAYE deductions to be more accurate so that the numbers of taxpayers over and underpaying each year are significantly reduced.”
He continued: “The idea of information flowing from employers to government as soon as circumstances change, rather than being reconciled at the end of the tax year, is a seductive one, but this proposal would be likely to load additional costs onto employers, particularly those who do not currently use electronic methods for paying their employees. The real benefits of real time information would only be seen if the system became truly interactive and allowed three-way communication and data transfer between employers, HMRC and employees. We are a long way from that.”
Concluding the CIOT stance on these proposed changes and raising concerns about the risks involved, Mr Whiting said: “The proposal for centralised deduction of tax by HMRC should reduce employers’ admin burdens, but raises many other issues. Having the wages of every employee in the country passing through one huge data processor is high-risk and many people would be concerned by the prospect of their wages passing through the Government’s hands. HMRC’s help and advice services would need much greater resources if they are going to have to field the enquiries about deductions currently being fielded by employers.”

At a time when HMRC have made their intention clear in respect of investigating any suspected tax avoidance or evasion, Shout 99 have been speaking to accountancy group Smith & Williamson who have some advice for any new businesses and self employed individuals. Their advice pertains to record keeping in all aspects of their tax affairs including VAT.

Smith & Williamson’s national tax director, Richard Mannion, commented: “In light of the recently announced tax gap of £42billion and the pressure on public finances, the taxman will be wanting to recoup funds as soon as it can from people and businesses who have under-paid their tax. Besides, the taxman can now carry out checks on individuals and businesses which relate to the current year. This makes it more important than ever before to make sure record keeping and filing are up to scratch – and then to hold onto those records. The taxman expects to see records going back for at least six years.”

With regards to what the taxman is looking for, Mr Mannion had the following advice: “Certain areas frequently catch people out. For example, if you use assets for both business and personal use – perhaps if you are working from a spare bedroom in your home – you must keep sufficient records to back up any claims you may make for electricity and gas, for example. Similarly, if you use a car for both business and personal use you need to keep a log of mileage associated with the business and hold onto receipts for petrol and any repairs.”

Finally, with specific reference to self employed individuals, the tax advice was simple: “In general terms, the self employed must keep a record of all sales and takings, purchases and expenses. Any purchases or sales of assets such as a computer, tools or other equipment necessary for your work must also be noted, but separately from day-to-day purchases.”

Contractors who work through umbrella companies instead of their own Limited Companies may be relatively safe from unwelcome entanglements with IR35 legislation – but this doesn’t necessarily mean that they’re completely out of the HMRC frying pan. With deficit reduction being the superordinate priority of the UK’s coalition government, HMRC is making it plain that it intends to collect every penny of tax from the citizenry that it can find.

Anyone who has held two or more jobs during the course of a single tax year could well attract the scrutiny of the tax man, which means that agency temps and employees of umbrella companies may find themselves the focus of revenue raising attention. It’s in the nature of contractor work to move from project to project and HMRC’s decision to use this particular criterion as an “alert” signal is leading to some anxiety amongst the flexible workforce.

Things shouldn’t be too bad if your umbrella company has maintained your paperwork properly – you should, if required to do so, be able to demonstrate fairly easily that you’ve paid all due taxation through your PAYE umbrella as well as all necessary national insurance contributions. Whilst this may not spare you an unwelcome phone call or letter inviting you to attend an HMRC interview, you probably only need to worry if your company has been a little on the slapdash side in its financial record-keeping. This is a little more likely to be the case where record-keeping systems are manual rather than automated.

Yesterday we reported on plans by the government to tackle tax evaders and tax avoiders in equal measure. Tax experts are warning that the result of this crackdown will be innocent individuals and businesses finding themselves the subject of lengthy HMRC investigations. The government are spending £900 million in a bid to recoup taxes which they feel have been illegally evaded or avoided through clever accountancy or use of offshore schemes.
Accountancy firm Hurst’s tax partner, Rachel Murphy, spoke to Shout 99 stating: “Everyone knows taxes are largely a given but there are many legitimate ways they can be managed to lessen the burden. The risk is that the Treasury is increasingly merging the two premises of avoidance of tax – which is legitimate – and evasion, which is illegal, couching it in terms of what is ‘acceptable avoidance’ and ‘unacceptable avoidance’.
She continued: “However, with the economic situation as it is, we have to be aware of the political sensitivities and the pressure the Treasury are under to raise revenues. Individuals and businesses need to be aware of this and the increasing scrutiny their tax affairs will be under.
Ms Murphy concluded: “If HMRC does start going through the affairs of business or individuals, it’ll take time and energy to answer their queries. If you do get a letter or a call, don’t ignore it – speak to your tax advisor about how to deal with it.”

The chief secretary to the Treasury, Danny Alexander, has delivered a hard-hitting speech in which he condemns individuals and companies who work with accountants to reduce their tax burden legally as being the same as tax evaders. Mr Alexander was speaking as he unveiled plans to spend £900 million to tackle anyone who avoids paying their “fair share” of taxes, whether by legal means or otherwise. He stated his intention that such individuals and companies “will no longer get away with it”.

Mr Alexander has taken the view that evasion and avoidance is one and the same, labelling both “morally indefensible” and “unacceptable” particularly in light of the current state of the economy.

During his speech, Mr Alexander stated that avoidance and evasion is equivalent to “stealing money from your neighbours” and that such behaviour has become a “lifestyle choice that is socially acceptable”.

Despite the huge sums being invested in tackling avoidance and evasion, Mr Alexander, together with Chancellor George Osborne, believe that it will reap rewards financially for the state with an expected annual return by 2014-15 of £7bn.

Mr Alexander continued: “We will be ruthless with those often wealthy people and businesses who think they can treat paying tax as an optional extra.”

He said that they will be tackling those who avoid paying higher rate taxes and HMRC will continue their campaign to recover taxes from money sheltered offshore.

In conclusion to his tough speech, Mr Alexander said: “To those who think the taxman will never come knocking. To those who hire accountants to dream up a clever new tax dodge. I say this: Think again.”

The rate of VAT in the UK is set to increase to 20% on the 4th January 2011. In these months preceding the rise, VAT-registered businesses are planning for the change. They have to change their accounting systems to deal with the increase but they also have to plan how their business will cope.

As a result, most businesses are actually increasing their prices now as they are worried about the effect of rising inflation. Therefore, they aim for the increase to be absorbed by their customers. A poll was conducted by Kraeb Gavin Anderson on this very issue. They found that around 20% of their respondents said they were planning to pass on some of the increase to customers.

However, all businesses have to be very careful of what action they take due to the anti-forestalling legislation which will be enforced by HM Revenue & Customs. This legislation will effectively block any attempts at planned pre-payments which are against ordinary commercial practices. They will be paying close attention to any firms who charge VAT at 17.5% now for orders or services which will be delivered from 4th January onwards.

Speaking to Contractor UK, accountancy firm MMH partnership commented: “Special scheme [users on the] annual accounting and flat rate schemes must ensure they are aware of how the rate change affects them.” They continued by acknowledging that there were special rules applicable to sales that straddle the change on 4th January and for any supply of services which is continuous. Obviously any business with concerns should seek accountancy advice.