Response to Making Tax Digital – Sanctions for late submission and late payment

 

Eaves and Co have submitted a response to the HMRC consultation document of 20 March 2017 in relation to sanctions for late submission and late payment as part of Making Tax Digital.  We have reproduced our response below.

 

Please feel free to comment.

 

Response to Making Tax Digital – Sanctions for late submission and late payment. Consultation document – 20 March 2017

 

This is a very difficult document to respond to, because it is so wrong headed.  When Chancellor Osbourne announced it, it was alleged to be a liberating move.  He has since been relieved of his position.  The legacy of ‘Making Tax Digital’ remains.  My concern is that, as currently drafted, it runs a high risk of ‘Making Tax Dysfunctional’.

 

  1. Fundamentally, if it is such a good idea, and is going to work well, so that ‘businesses flock to it’, there is absolutely no reason to make it compulsory.

 

  1. In a free society, businesses should have the discretion to run their own affairs as they see fit.  The proposals extend the historic system of annual filing to filing 5 income tax returns per year.  This is not ‘liberating’, it is adding extra commercial pressure and cost.

 

  1. The Federation of Small Business puts the costs at 10 times the HMRC estimate.  For bigger businesses the extra costs may be more.  As one provider put it, even the cost of a training seminar may well exceed FSB estimate.

 

  1. These costs would just be a burden if the system was compulsory with ‘sanctions’, as proposed.  If there was a benefit, which added to efficiency businesses would (and should) pay for appropriate software at market price.  No need for Government interference.

 

  1. On this theme, which bit of the equation:-

Government + Big Computer Idea = Cost Effective Happiness

has even been proven true?

 

  1. HMRC say that the Making Tax Digital programme will not save them material costs.  If the benefits therefore ensue to business, should they not be given the choice?

 

  1. There should be no sanctions if they decide their current systems are adequate, or perhaps even better than the HMRC ‘private licensing’ proposals?

 

  1. Everyone should be equal before the law.  Self-employed tax payers already suffer extra burdens in that they are more often called upon to file annual tax returns.  To make it 5 returns per annum is unfair and oppressive, especially if the stress of potential sanctions is imposed.

 

  1. Businesses are already obliged to maintain and produce adequate records to prepare relevant annual returns.  Understandably most view it as an unprofitable burden, accepted as part of the benefit of being a citizen of a democracy such as the UK.  Politicians should recognise though that the equation and relationship are each fragile and based on mutual trust.  To multiply by 5 the burden risks suggesting a taxpayer is untrustworthy and (with sanctions) ought to be punished for errors in compliance.  This is not a route to encourage the levels of voluntary compliance that the UK has been fortunate enough to experience historically.

 

  1. Recent case law on ‘reasonable excuse’ highlights the lack of HMRC sympathy and understanding on the pressures imposed by tax compliance, so would not seem to be adequate protection.

 

  1. In any event, this is starting from the wrong perspective.  Individuals and businesses should be free to act as they see fit to benefit the economy as a whole.  They should not be restricted by regulation to act in accordance with Government dictat, unless the action they propose is harmful.  There is already an obligation on business to keep adequate records.  This should include the freedom to keep them in accordance with specific, tailored business requirements, suitably for the business concerned, rather than following a generic algorithm designed by someone with no knowledge/interest in the particular business.  Surely it is patently obvious such freedom must be better for the UK economy as a whole.

 

  1. To suggest that a single ‘app’ can successfully organise management accounts from every business from baking creak cakes to running a portfolio of investment properties is too bizarre to be believable.  Any accountant will tell you the key profit indicators are going to be different.  The business software market can respond, as appropriate, but buying a government approved Trebant (historic reference) will only end in tears.

 

  1. Distorting the business software market by imposing ‘Government Requirements’ is providing anti free market protection for the software houses concerned.  This must be unfair and an inappropriate use of Government power.  Why?  Would this not be illegal under EU rules whilst we are still a member, pending finalisation of Brexit?

 

  1. In a secular, capitalist society, why can there be an exemption for ‘religion’.  Why not allow a simple commercial decision: ‘This adds cost, stress and burden for (no) business benefit.  I choose (or choose not) not to do it’?  That would allow those believing in Making Tax Digital to move ahead, without distorting the rest of the crucial, small business economy.

 

  1. The benefit claimed by HMRC is that small businesses would keep better records.  Some small business have poor records, it is true, but they tend to be at the bottom end of the spectrum.  As businesses grow, especially when they take on staff, record keeping becomes more important.  To state the obvious, losing a cash receipt when it goes to a pilfering employee costs 100% of the receipt.  This is undesirable for the business!  Compare to saving 20% on income tax?  Bigger business have controls.  Bigger businesses tend (by definition) to make more profits, so the ‘tax saving’ by imposing MTD is I suspect mythical.

 

  1. In any event, to put it into context Tesco recently paid £108m to avoid being prosecuted for financial fraud, plus more again in compensation.  How many window cleaners taking the odd tenner in cash would that amount to?  Compulsory MTD looks like a sledgehammer to crack a nut, and so, in the way of many such initiatives has the appearance of overzealous behaviour by the State for little/no benefit.

 

  1. There may well be an argument to say that the idea is discriminatory in that it prejudices:-

a) Entrepreneurs who do not have English as their first language.

b) Those self-employed with learning difficulties etc., who may well earn a decent living with a ‘hands on’ a labouring job making them proud and independent, but would find quarterly reporting unfairly daunting.  Should they be forced on to Government benefits?  To what end?

c) Entrepreneurs who do not trust electronic intercourse for financial transactions.

 

  1. With regard to the latter HMRC have been somewhat patronising about ‘elderly’ taxpayers.  It is age discrimination in itself?  They have then pointed out that such people often use mobile telephones etc.  True, but there is a huge difference between making a telephone call and engaging with third party electronic transactions which may not be totally secure.

 

  1. The internet is inherently insecure as has been proven by a series of hacks into various Government and Business computer systems.  The NHS was recently severely disrupted by ‘relatively unsophisticated’ hackers.  The CIA has been hacked – despite (presumably) top quality security and operating protocols.  Why would any nation therefore risk putting much of its economic output on to a single system, which is also going to have the ability to demand money?  Do you think the odd criminal or foreign Government might fancy the ability to have even just a day of receipts (I’ll take 31 January, please)?

 

  1. The underlying ethos is that ‘Digital’ is the best.  It is new.  It is the way forward for the future.

 

Fine; then let it compete in the Market Place.  If it is good then there is absolutely no need to make it compulsory and penalise those who trundle along behind.

 

‘Digital’ is best [as a hypothesis].  Prove it by not requiring sanctions.  Freedom for taxpayers to choose.  Yes, comply with the law to submit annual returns but no to 5 times that obligation.  (Choice for business to focus on their own key profit indicators – not arbitrary rules set by centralised dictat.  If we were customers we would have gone elsewhere!]

 

  1. The proposed exemptions for MTD are noted.

 

There is a religious exemption.  How do HMRC intend to ‘police’ claims under that heading.  In this context I note the firm swearing by Elizabeth I on her Coronation, that the State should have ‘no desire to make windows into men’s souls’.

 

What is to happen if someone claims the exemption?

The Result is in …..

We have opened the right envelope!

Congratulations and thank you for all who correctly entered our ‘Twelve Days of Christmas’ Quiz.  Eaves and Co are pleased to announce that the winner is Catherine Rogers of Ashford Rainham Ltd.  David Stebbings recently handed over her prize.

 

IMG_20170217_154204 (1)

For completeness here are the answers:-

 

The name Santa Claus evolved from Sinter Klass, a nickname for Saint Nicholas. What language is Sinter Klaas? Dutch

 

What fruit is traditionally used to make a ‘Christingle’?  Orange

 

Who ‘Rattle and Hum’ along to Angel of Harlem?  U2

 

Which carol is about a 19th Century Duke of Bohemia? Good King Wenceslas

 

“Christmas won’t be Christmas without any presents” is the first line from which literary classic by Louisa May Alcott? Little Women

 

Christmas Island, in the Indian Ocean, is a territory of which country? Australia

 

In the song ‘The Twelve Days Of Christmas’, how many swans were a-swimming? Seven

 

The North Pole, said to be Santa’s home, is located in which ocean? Arctic Ocean

 

The name of which of Santa’s reindeer means ‘Thunder’? Donner

 

Marzipan is made mainly from sugar and the flour or meal of which nut? Almond

 

Which traditional Christmas plant was once so revered by early Britons that it had to be cut with a golden sickle? Mistletoe

 

Who was Jacob Marley’s business partner?  Scrooge

 

The initial of each answer spells out DOUGLAS ADAMS.  The quote attributed to him on our website is ‘I’m spending a year dead for tax reasons’.

We are not, so look forward working with you again this year.  Remember the new tax year starts on 6 April.

HMRC Announce Further Tax Office Closures

Following the recent criticism of HMRC’s service standards (see ‘HMRC Criticised Again For Poor Service‘ – http://eavesandco.co.uk/blog/2015/11/04/hmrc-criticised-again-for-poor-service/) it appears that further reorganisations over the next few years are planned.

HMRC have announced that 137 local tax offices are to be closed with 13 new ‘regional centres’ set to replace them.

It appears unlikely that such large scale upheavals will do anything to improve HMRC’s performance, certainly in the short-term, with the tax office closures set to take place over the next few years until 2027.

The new plans are proposed to save HMRC £100m by 2025.

Boyle v HMRC: Crack down on Payroll Tax Avoidance Scheme Continues

In the recent Autumn Statement, George Osbourne announced several governmental counter-avoidance measures that confirm that the net is closing in on those who subscribe to tax avoidance schemes. A failed tax avoidance scheme marketed by Consulting Overseas Limited has been identified by a recent First-Tier Tribunal case of Boyle v HMRC. HMRC has vowed to pursue all other subscribers to the same scheme that Mr Boyle was involved with and will also target others who have used similar schemes to avoid tax.

Mr Boyle was a contractor who originally worked for a company called Sandfield Systems Limited (SSL) and subsequently worked for Sandfield Consultants Limited (SCL) when a significant fall in his income was noticed by HMRC. It is important to note that Sandfield Consultants Limited (SCL) was a company registered in the Isle of Man. The director of SSL was also the director of SCL and Consulting Overseas Limited (COL) which marketed the tax avoidance scheme. The scheme was marketed by COL to the employees as a remuneration package that could achieve income tax and national insurance contributions (NICs) savings.

The FTT found the conclusions of HMRC’s investigation to be correct. The significant fall in Mr Boyle’s income was explained by the fact that about 2/3 of the income generated by the taxpayer was withheld and then paid to him by way of a ‘loan’ made in Romanian, Byelorussian or Uzebekistani currency. When Mr Boyle entered into a contract of employment with SCL it was agreed that he would be paid a salary but he would also participate in the ‘soft currency loan scheme’ arranged by SCL to receive the remainder of his salary. All employees of SCL used the foreign broker Credex International SA, when taking out the loans in question. It was the currency trades organised by Credex that turned the earnings into what the scheme claimed to be “non-taxable foreign exchange gains”.

The FTT found that the loans were not genuine and also found no evidence to prove that the foreign currency ever existed or that Credex was a genuine dealer independent of SCL. Notably the FTT ruled that the monies which were allegedly paid to Mr Boyle as loans in foreign currency constituted emolument from employment/earnings under s.173 ITEPA 2003. Furthermore, according to s.188(1)(b), as the ‘loans’ that were made were essentially written off, the amount written off is deemed to be treated as earnings from employment for that year and therefore should have been subject to income tax and NICs. They also ruled that Mr Boyle was aware that the loans were a means of receiving his income to avoid tax.

The FTT also stated that even if they were wrong to state that the loans were emoluments of his employment, Mr Boyle should be liable to tax under the transfer of assets provisions so there would not be any further grounds for appeal. The numerous appeals raised by Mr Boyle including his claim that he was entitled to credit for income tax which ought to have been deducted by SCL, were rejected in their entirety. It was found that Mr Boyle was liable to income tax for the years 2001/02, 2002/03 and 2003/04 in respect of monies he received as employment income.

This case demonstrates that efforts to avoid tax using offshore vehicles are being increasingly targeted in the crackdown against tax avoidance. This case also suggests that schemes where employees receive ‘loans’ as a form of payment are also being treated with suspicion. It is estimated that more than 15,000 people have used schemes similar to Mr Boyle and that the pursuit of the outstanding tax and national insurance contributions associated with these schemes will amount to over £400 million.

With the courts continuing to find against avoidance schemes, and the host of new regulations designed to increase the pressure on such schemes, the viability of such schemes is seriously called into question. Genuine tax planning, rather than convoluted schemes, appears to be the way forward and Eaves and Co are here to help.

HMRC: Reasonable Excuses and Suspended Penalties

Many years ago, as a young Inspector of Taxes, my District Inspector taught me not to take a harsh line on “late” submissions on behalf of the Inland Revenue.  His policy was that it was not the job of the Government to fine or penalise citizens if they were broadly trying to comply with their tax obligations but were slightly late in doing so.  The thinking behind this idea was that people were far more likely to be co-operative and compliant – factors key in having a capable and cost effective tax system – if citizens felt they were dealing with people who were reasonable and flexible, rather than hide bound by bureaucratic rules.

Perhaps as a result of such benevolent views, Accountants rarely thought about questions of Revenue powers and procedures, trusting the administrative reasonableness of the ‘Powers that be’.  It appears to me that such flexibility and judgement has been eroded from the Revenue lexicon.  This may be because of a desire to be more consistent, but in any event Accountants should help clients by considering carefully whether penalties have been correctly and legally levied or whether they can be eliminated or mitigated via concepts such as reasonable excuse or the use of suspended penalties.

Examples of cases where the Revenue line taken to the courts could appear harsh include;-

Cotter, where the Revenue sought to deny a taxpayer the right to claim a stand over of collection of tax which was in dispute pending resolution of the appeal.  The taxpayer won in the Court of Appeal, but HMRC are now taking it to the Supreme Court, demonstrating their effective limitless resources compared to individual taxpayers.

Business Women’s Coaching, where the taxpayer was fined for filing a return due by 31 December on 11 February.  The return in question was updated as originally it had been submitted on 9 December, but was then rejected as being incomplete.  The taxpayers did not advance a ‘reasonable excuse’ so their appeal was rejected, but would taxpayers consider HMRC’s behaviour as reasonable and proportionate in imposing a fine on being just 6 weeks late in adding extra material to a return originally submitted in time?

F Weerasinghe, where an accountant had lost the client’s papers and HMRC then rejected updated figures from a new accountant on the basis that they were too late.  The taxpayer won on a technicality because the tribunal held the time limits did not apply, because HMRC had not issued a formal demand for the Return in question.  They also found that the taxpayers figures appeared more reliable than those calculated by HMRC.

Hard cases make bad law and HMRC have a very difficult job to do.  It is a question of balance but perhaps it may be worth reflecting on the original responsibility of the Inland Revenue for the “care and management” of the tax system in Section 1 of the Taxes Management act 1970.  This was changed in 2005 to “collection and management”.  Maybe a little more “care” to mitigate pure “collection” may pay dividends in keeping taxpayers happy and compliant?

The other lesson is that accountants should be helping their clients by seeking to identify circumstances winthin the scope of “reasonable excuse” or the regime for suspending penalties.

New Amnesty on Tax Penalties – Isle of Man Disclosure Facility Agreed with signing of Memorandum of Understanding

A memorandum of understanding between the Isle of Man Government and the UK’s HM Revenue & Customs was signed on 19 February 2013 setting out the terms of a new agreement and disclosure facility between the two countries.

The financial world becomes steadily more transparent.  Those with ‘hidden funds’ should beware.  The UK Government is using Money Laundering regulations to pursue previously untaxed funds.  The latest is with the Isle of Man Disclosure Facility.  The agreements signed include an automatic tax information exchange and the setting up of a disclosure facility.

The Isle of Man Disclosure Facility will run from 6 April 2013 to 30 September 2016 in order for taxpayers with relevant investments in the Isle of Man to bring their tax affairs up-to-date.

The terms set out in the Memorandum suggest that the Isle of Man Disclosure Facility will bear some similarities to the Liechtenstein Disclosure Facility, including an April 1999 cut-off date, a guaranteed penalty rate of 10% for returns due to be filed before April 2009 and a proposed single point of contact.

There are some key differences however, including the fact that there will be no guarantee against criminal investigation for tax related offences.

Further confirmation will be needed but it appears that a qualifying connection to the Isle of Man could be established if an interest in relevant property is established at any time before 31 December 2013.  This may mean that those with undisclosed income could transfer assets to the Isle of Man in order to take advantage of the beneficial tax treatment available.

Eaves and Co have successfully completed a number of disclosures under the Liechtenstein Disclosure Facility and will therefore be well placed to advise on the new Isle of Man Disclosure Facility if you are affected.

A copy of the Memorandum of Understanding can be found here, whilst the HM Treasury press notice can be viewed here.

Inheritance Tax Series – Overseas Issues

A series of articles highlighting key areas that affect taxpayers and practitioners involved with inheritance tax and estates and identifying opportunities to mitigate inheritance tax.

Inheritance Tax – Overseas Issues

General Rules

Where a person is UK domiciled their estate will be subject to inheritance tax on their worldwide assets.

Therefore overseas assets such as foreign bank accounts, holiday homes etc. will be subject to inheritance tax in the UK.

Relief is given for foreign liabilities (for example an overseas mortgage) by deducting the amount of the liability from the value of non UK property.  Any excess can then be set off against UK property.

 Foreign Property – Deduction for Expenses

Where the estate includes overseas property, the personal representatives may incur additional expenses in connection with the disposal.

It is possible to claim a deduction for expenses of administering or selling overseas property up to a maximum of 5% of the value of all foreign property in the estate.

Thus, where the estate of a UK domiciled person includes a house in Spain worth £250,000, the personal representatives may claim a deduction for expenses of up to £12,500 (£250,000 x 5%), potentially saving inheritance tax of £5,000 (£12,500 x 40%).

Double Tax Relief

Where an estate is subject to inheritance tax in both the UK and another country on the same assets the estate may be subject to double tax.

The UK has double tax treaties for inheritance tax purposes with the Republic of Ireland, USA, South Africa, France, Netherlands, Sweden, Switzerland, Italy, India and Pakistan.

These double tax treaties set out the taxes that qualify for relief under the agreement, the taxing rights of each country in respect of different types of assets as well as the mechanism for double tax relief where inheritance tax is payable in both countries.

It is important that care is taken to review the appropriate double tax treaty carefully because the personal representatives will need to understand whether relief should be claimed in the UK or abroad.

Where inheritance tax is payable in the UK and a similar tax is payable in a country that does not have a double tax treaty with the UK, double tax credit relief should be available in relation to assets situated in the other country under the unilateral relief provisions.

For these purposes the location of the asset is determined in reference to UK law.

The amount of double tax relief under the unilateral provisions is limited to the lower of (i) the UK inheritance tax, or (ii) the foreign inheritance tax.

In cases where tax is payable in both the UK and another country in relation to an asset that is situated in a third country, or treated as situated in the UK under UK law and the other country under that country’s law, a proportion of the tax may be relieved in the UK.

Deadline to opt out of Child Benefit charge – High Income Child Benefit Charge (HICBC)

The High Income Child Benefit Charge (HICBC) starts on 7 January 2013. The new charge will be imposed if a taxpayer’s, or their partner’s, income is more than £50,000 in a tax year, where they or their partner are in receipt of the child benefit.

Taxpayers earning more than £60,000 and in receipt of child benefit only have until 6 January 2013 to opt out of receiving the benefit, to prevent the benefit from being clawed back at the end of the tax year.

Taxpayers with income of more than £60,000, will incur a tax charge of 100% of the amount of Child Benefit. Those with income between £50,000 and £60,000 will incur a proportionate charge.

It is therefore now the time to decide whether to keep receiving Child Benefit and pay the charge through Self Assessment, or stop receiving Child Benefit and avoid the later charge.  Care should be taken, however, as receipt of Child Benefit can currently be used to determine qualifying years for the state pension for those taking time out of work to bring up children.

In addition, if income is less than £60,000, the tax charge will always be less than the amount of Child Benefit, so a couple could lose money to which they are entitled if they choose to stop receiving Child Benefit and their income dips below the £60,000 mark.

If you keep receiving Child Benefit and you or your partner earn over £50,000 then you should lay plans of how to pay the benefit back and make sure that you file a tax return for the year in question.

Termination Payment Tribunal Case – PILON Was Contractual (Kayne Harrison v HMRC)

Termination payments, specifically a payment in lieu of notice, were considered in the recent First-tier tribunal case of Kayne Harrison v HM Revenue & Customs.

Mr Harrison had been dismissed on 16 February 2006 without written notice and had successfully won a small amount of compensation from an Employment tribunal.

Three days after he was dismissed, his employers made a termination payment, consisting of a payment in lieu of notice.  This termination payment was made in line with the terms of his employment contract.  Mr Harrison argued that as his position was terminated without written notice, the payment was not contractual as it had been made in circumstances outside of his contract.  He believed that the findings of the Employment tribunal backed up this belief.

The tribunal found that Mr Harrison’s interpretation of the Employment Tribunal was incorrect in that they found the payment in lieu of notice had been made in accordance with the contract.  Despite the issues raised at the Employment Tribunal, Mr Harrison’s employment had ended on 16 February 2006 and the payment had been made in accordance with his contract.

HMRC were therefore correct to argue that the payment was taxable and the tribunal dismissed Mr Harrison’s appeal.

Recent Inheritance Tax Case – Silber v HMRC

The First Tier Tribunal Inheritance Tax Case of Silber v HMRC looked at how a settlement of cash made between the beneficiaries of the deceased’s estate and the deceased’s sister should be treated for Inheritance Tax.

The sister challenged the will of the deceased and she was paid an out of court settlement of £400,000 by the beneficiaries.

The Beneficiaries claimed the £400,000 as a liability of the estate and thus a reduction in Inheritance Tax payable of £160,000 (£400,000 x 40%).

The Court held that the money paid was not a liability incurred by the deceased and thus wasn’t allowable for IHT relief.

The taxpayers’ case was not helped because of the fact that they did not turn up for the Tribunal hearing (even though they were expected) although there is little doubt that the tribunal reached the right conclusion anyway.

Eaves & Co are experienced in inheritance tax planning and compliance, please call if you have IHT concerns.