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Home » Business News

Baker Tilly’s Weekly Tax Brief – 17th September 2015…

Submitted by on September 18, 2015 – 6:50 am |

Baker Tilly logoIn this edition of Baker Tilly’s weekly round-up of the most important tax news, we cover the latest developments…

  1. How much do tax reliefs cost? Doesn’t Treasury know? Don’t legislators care?

George Bull

When new tax reliefs are proposed in Budget Day speeches, their projected cost has to be computed, verified and published by the Treasury. Once the reliefs are available, neither HMRC nor the Treasury can always say what they cost, to the profound irritation of the Public Accounts Committee. This suggests a worrying lack of interest among legislators as to whether tax laws are achieving their intended effects.

  1. Tax breaks for business – are the regions losing out?

Andrew Hubbard

The latest figures from HMRC show that the take-up for Research & Development tax credits rose again last year. But dig a little deeper, and these figures reveal some interesting trends that beg the question – are regional businesses missing out on these valuable tax breaks?

  1. Ignorance is….SRIT

Stephen Hay

With only seven months to go until the Scottish Rate of Income Tax comes into effect, it comes as a shock to discover that most Scottish taxpayers remain unaware of this important change. Clearly the news will come as a disappointment to John Swinney as he prepares to deliver his Scottish Budget in a few months’ time. For taxpayers north of the border, it seems that ignorance truly isn’t bliss…

  1. There Be Dragons In The Land Of Pensions

Bill Longe

Tuesday was Pensions Awareness Day, and to coincide with this the Pensions Regulator is launching a TV campaign encouraging small employers to comply with their auto-enrolment obligations. But with concern growing that many of these employers are choosing to ignore their obligations, will the Government‘s threat of a hefty fine finally wake up the 1.8 million small employers who have yet to register?

  1. The personal touch

Andrew Hubbard

A recent survey carried out by HMRC has revealed that 87% of the customers that took part, described their experience of dealing with the taxman as good or very good. So who are these people? The answer may just surprise you…

  1. Inflicting or contradicting? Why HMRC can’t make its mind up about fines…

Mike Down

HMRC has started sending Self-Assessment ‘correction’ letters to taxpayers failing to disclose the receipt of Child Benefit on their Tax Returns. The good news is that HMRC simply ask for payment, and don’t appear to be imposing ‘inaccuracy’ penalties. But this is in stark contrast to recent cases where the taxman has aggressively pursued penalties for the simplest of errors…


  1. How much do tax reliefs cost? Doesn’t Treasury know? Don’t legislators care?

When new tax reliefs are proposed in Budget Day speeches, their projected cost has to be computed, verified and published by the Treasury. Once the reliefs are available, neither HMRC nor the Treasury can always say what they cost, to the profound irritation of the Public Accounts Committee. How can that be?

On the face of it, tracking the cost of tax reliefs ought to be a simple matter now that the UK tax system is completely digitised. After all, knowing the cost and value of what one pays for is just normal housekeeping isn’t it?

In selected areas – R&D Tax Relief for example, explored in more detail by my colleague Andrew Hubbard below – the Treasury and HMRC can certainly produce the detail when they need to. But, as the PAC has demonstrated, time and again the tax authorities cannot demonstrate the cost of tax reliefs which were introduced to achieve specific policy objectives. How can that be? Not being able to evaluate the costs and benefits of specific policy measures is more than a simple housekeeping failure, it’s a major blunder. Of course I recognise that it will often be difficult to measure the benefits of tax policies with any precision, but not to be able to quantify the costs is inexcusable. To quote an old joke ‘we recognise that half the money spent on [insert subject here] is wasted. The problem is that we don’t know which half.’

The same inability to quantify costs and benefits also suggests a worrying lack of interest among legislators as to whether specific tax legislation is achieving its intended effect.

With former PAC Chair Margaret Hodge now preparing to lead a cross-party group looking at responsible taxation, we hope that she’ll be looking at the responsibility of legislators as well as taxpayers.

  1. Tax breaks for business – are the regions losing out? 

There is much talk about the effectiveness of tax reliefs. The Public Accounts Committee was very critical of HMRC’s failure to track the use of reliefs, and the spectre of avoidance always hangs over the way that some reliefs are used in practice – recent publicity about the possible misuse of Business Property Renovation Allowance is a case in point.

It is therefore comforting to be able to look at a tax relief where there are good statistics and where tax avoidance does not seem to be an issue. Research and Development (R&D) Tax credits have been with us now for over a decade and have generally been regarded as a success. Certainly the latest statistics show a consistent growth in the take up – with something like £1.7bn of tax incentives being given in 2013-14.

Digging a little under the surface reveals some interesting trends and areas where further analysis might be worth undertaking. You might expect that there would be a broad correlation between economic activity and R&D relief, but breaking the figures down by region shows some significant distortions. London and the South East have 37% of the UK’s economic activity but 53% of the value of R&D claims. By contrast, the Northern Powerhouse of the North West and Yorkshire has 16% of economic activity but only 9% of the value of claims.

Are these differentials simply a reflection of the nature of the activities carried on in the different regions? Is there proportionately more research and development carried on in the South? It could be, but given the very wide scope of the relief – it is not just for men and women in white coats working in high-tech labs –  it could be that the messages about the availability of reliefs get lost in the ether the further one gets from London.  If that is the case, there is a message for all of us – HMRC, industry and the profession – about the need to communicate positive messages.

  1. Ignorance is….SRIT

Well, now we know what we have suspected for some time. Taxpayers, and in particular Scottish taxpayers, have absolutely no idea that there will be any changes to the Income Tax rate in Scotland. A research report conducted on behalf of HMRC by Ipsos Mori, identified only one participant from 85 who were questioned having any knowledge of the changes.  A further study of 2,000 taxpayers was no better, with a ‘low level of awareness’ that any major change to Income Tax in Scotland was happening.

While pension providers, payroll agents and large employers had a good knowledge as you would expect, small employers’ knowledge was described as ‘vague’.  Just as important, the taxpayers had difficulty in understanding who a Scottish taxpayer will be, particularly mobile workers who were residing in one jurisdiction and working in another.  It seems that the fact that SRIT is based on main residence and not on work location has not been understood – if explained at all.

So, with seven months to go until the SRIT is due to come into effect, and only four months until John Swinney presents his Scottish Budget, few people actually have any understanding of what this will mean in practice.  Given that the taxpayers to whom the tax relates are unsure of who they are and that they have no idea that changes will be undertaken anyway, suggests chaos will reign when the new tax system in Scotland is live.

  1. There Be Dragons In The Land Of Pensions

Next month will see The Pensions Regulator launch a TV campaign to encourage small employers to comply with their auto-enrolment obligations. To date the very successful ‘We’re all in it’ campaign has been run by the Department for Work and Pensions and included the Dragon’s Den Star Theo Paphitis. This latest campaign by The Pensions Regulator, the first time this watchdog body has used television in this way, suggests a move away from the softer message of Theo, and perhaps the emergence of a newer fire breathing dragon.

In October, auto-enrolment – the requirement for employers to provide a qualifying workplace pension to their workers – will have been a part of the employer-employee landscape for three years. To date the UK’s largest employers have been required to register, and 46,000 have been done so with over five million employees now covered by a workplace pension. Whilst these numbers are impressive they are dwarfed by the truly staggering 1.8 million small employers who will have to register between now and 2017.

The Regulator confirmed the new campaign is going to focus on small businesses and will include a revamp of the auto-enrolment website to provide more helpful support to such employers. Whilst it is pleasing to see the Regulator has announced a new approach is required for small employers, it did not escape the notice of many insiders that there is concern within the Government that many small employers will choose to ignore their obligations. Speaking at a recent conference The Pensions Regulator (TPR) head of industry liaison Neil Esslemont made this comment ‘If you talk about why someone might not comply, it might be because they don’t think it applies to them, so we are trying to address that point. It might be because they think they will get away with it, so our message will try to incorporate ‘yes, the duty does apply to you and we know who you are and you could get fined if you don’t adhere to it’.’

The threat of fines does suggest the Government has recognised it will be no easy task to get so many small employers on board, and perhaps it is time to introduce a more fearsome dragon onto the scene. After all, it is one thing to see a friendly dragon on the TV and quite another to meet one brandishing all manner of fines.

  1. The personal touch

Here’s a statistic which may surprise you: 87% of customer described their experience of dealing with HMRC as good or very good.

Given all of the publicity about poor HMRC service, you may wonder whether somebody has made the number up? But no, it is a genuine statistic coming from a reputable independent survey.  What I have not revealed is the sample population…

The 87% is the figure for the largest companies, dealt with by HMRC’s large business service where there is a dedicated customer relationship manager (CRM) with HMRC responsible for each company. Significantly, the figures drop to 68% for companies dealt with by HMRC local offices where there is no CRM – simply an assigned point of contact. Those are still large companies by any measure (the survey only covered the 10,000 largest companies), but even within this limited population it is clear that a direct relationship with a named individual in HMRC is by far the best way of achieving a positive working relationship. This should come as no surprise.

The issue is of course that the vast majority of taxpayers (individuals and businesses) don’t have this personal relationship. All too often taxpayers struggle to find an individual within HMRC to take responsibility for their particular question or problem. Now it is clearly impossible for every taxpayer to have their own dedicated HMRC officer – resources don’t allow this and I suspect that many people would not want it – but taxpayers deserve personal service from HMRC when they need it.

Yet again we come back to the digital strategy. If it all works out – and I remain an optimist – then much of the routine admin of the tax system will become automated, and HMRC staff will be able to spend their time giving a quality service to taxpayers rather than simply processing paper: I know that many of HMRC’s staff want to deliver that service. But that ‘if’ hangs in the air. If it all goes wrong then service levels will get worse…

So let me leave you with a thought – who is more in need of a personal relationship with HRMC? A large multinational with its own tax and finance department and a team of professional advisers, or a widow in her 80s with poor eyesight struggling to cope with HMRC forms which she can hardly read and which might be written in Martian for all the sense they make?

  1. Inflicting or contradicting? Why HMRC can’t make its mind up about fines…

HMRC has started to issue a number of Self-Assessment ‘correction’ letters where taxpayers with annual income in excess of £50,000 have failed to disclose the receipt of Child Benefit on their 2013/14 Tax Returns. It seems that for these cases, HMRC’s approach is going to be very ‘light touch’, with letters simply requesting settlement of the amount due. Nowhere in the letter is there mention of the possibility of ‘inaccuracy’ penalties being sought as a result of the error, or indeed whether HMRC intend to pursue any similar underpayment for 2012/13.

This contrasts starkly with the robust pursuit of penalties in many other ‘inaccuracy’ cases where HMRC deem the taxpayer’s behaviour to be ‘careless’. A recent Tax Tribunal decision provides a good example of HMRC’s typical approach. The case involved an individual who upon retirement from employment, started to draw a pension. With the pension having already been taxed (albeit at basic rate) at source, the taxpayer overlooked the need to include the initial pension receipts of £8,468 on his 2012/13 Tax Return. Additional tax of £1,775 was found to be due, and HMRC sought a 15% penalty of £266 on account of the taxpayer’s ‘careless’ behaviour. Upon appeal, the Tribunal upheld HMRC’s view and confirmed the imposition of the penalty, rejecting the taxpayer’s request for suspension of the penalty, claiming that the error involved a ‘one off’ matter for which suspension conditions could not be set going forward.

We are seeing considerable inconsistencies in the way in which HMRC seek penalties in cases such as this where arguably simple errors occur. Whilst it is encouraging to note HMRC’s approach to Child Benefit cases, it does seem unfair that others who make errors when completing their tax returns are being subjected to much harsher treatment. A worry for the future is that changes to the Tribunal system will result in fees being charged to register and conduct appeal cases. This may lead to the perhaps inevitable result that many taxpayers, when faced with HMRC seeking relative small amounts of penalties, will simply decide to give up by not pursuing appeals – even where they consider that their actions leading to the inaccuracy were no more than a basic mistake.

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