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Home » Business News

RSM’s Weekly Tax Brief – 2 March 2016…

Submitted by on March 7, 2016 – 7:00 am |


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

  1. Chancellor’s choices: more tax, faster collection or both?

George Bull

With the referendum on the UK’s EU membership now set for 23 June, the Chancellor is coming under increasing pressure not to rock the boat with more tax hikes on Budget day. So what else might he do to collect extra tax, and could the self-employed be in his sights? £6bn says yes they might be.

  1. Cracking the 2016/17 PAYE codes is a job for Bletchley Park

Jackie Hall

Many company owners and directors could soon find themselves with a new tax code as a result of the introduction of the new dividend tax. So is this the latest wheeze by HMRC to collect more tax upfront? You bet it is. We explain what you can do about it.

  1. When a tax return isn’t really a tax return

Andrew Hubbard

A recent report from the tax tribunal has revealed that every year some 350,000 returns are submitted by individuals on a purely voluntary basis – largely by PAYE taxpayers who want to obtain a tax refund. However a recent tribunal decision has decided that in fact a voluntary tax return is not in fact a “real” tax return at all.

  1. Has Ofcom forgotten to tell the taxman something?

George Bull

Last week Ofcom published its long-awaited report on improving telecoms quality and coverage. It acknowledges that many people – especially in rural areas – suffer from poor quality broadband service, and pledged that all UK consumers will have access to fast, reliable broadband services over the next ten years. But that’s six years longer than the implementation of HMRC’s Digital Roadmap. What will happen to those people who are ‘digitally excluded’ and unable to meet their tax obligations?

  1. How do you build common sense into the tax system?

Andrew Hubbard

A recent case in which a local 5-a-side football league in Scotland was fined after getting into a muddle with its PAYE filing highlights the lack of common sense in the current tax system.  _______________________________________________________________________

  1. Chancellor’s choices: more tax, faster collection or both?

With the referendum on the UK’s EU membership now set for 23 June, the Chancellor is coming under increasing pressure not to rock the boat with more tax hikes on Budget day. He has already said that the Budget will contain no major tax increases although regular readers of HM Treasury’s figures will know that tax increases can take many forms.

For example, Treasury figures show that the dividend tax “allowance” which comes into effect on 6 April 2016 will increase taxes by an estimated £6.7bn between now and 2020/21. Similarly, the “liberalisation” of the pensions regime, which gave many people access to the value of their pension funds from 6th April 2015, will allow the Treasury to cream an estimated £4bn of extra taxes from pension funds during the life of the current parliament. In the strange world of taxation, things are not all that they seem to be.

From the Chancellor’s point of view, it’s all about cash in hand. Your cash. His hand. So what else might he do to collect more tax?

Collecting existing taxes quicker would be one answer. Heralding “the death of the tax return” in the March 2015 Budget, the Chancellor ushered in a project which will impose an obligation for individuals to use their personal digital tax accounts to file up-to-date information on their income with the taxman every three months. At present, all the work being done on this by HMRC is directed at the filing part of the exercise. However, it would only be a very small jump to go from in-year filing of tax information to in-year collection of tax payable.

Make no mistake, the tax authorities already have previous in this area. For example, for many years now large companies have been required to pay their corporation tax in instalments during their accounting periods. And, as a result of changes brought in by the current Chancellor, from 6th April 2019 UK taxpayers will be required to pay capital gains tax on disposals (except for sales of their main residences) within 30 days of the sale.

If the Chancellor uses personal digital tax accounts to collect more tax quicker from individuals, who will be affected? With PAYE already working “real time” for employees, the obvious target would be the self-employed. We all know that the numbers of the self-employed have grown dramatically over the last nine years so it’s instructive to learn from HMRC data published this week that nearly £17bn of income tax is paid by individuals where self-employment is their main source of income.

The current payment-on account-system for the self-employed, with payment dates of 31st January and 31st July, already applies to the two million-odd individuals for whom self-employment income is their main source of income. But on a cautious estimate, by bringing forward payment dates for self-employed income tax to coincide with quarterly returns under the new personal digital tax accounts, the Chancellor could probably accelerate tax collection by anything up to £6bn. That would of course be effectively borrowing from Peter (next year’s tax receipts) to pay Paul (this year’s tax receipts) but the one-off windfall could look extremely attractive to the Chancellor. We must wait and see.

  1. Cracking the 2016/17 PAYE codes is a job for Bletchley Park

Changes to tax on dividends, effective from 6 April 2016, may have a surprising effect on 2016/17 PAYE codes.

Once the new dividend tax is in place, dividends falling outside a £5,000 dividend “allowance” will be taxed at 7.5 per cent, 32.5 per cent and 38.1 per cent depending on the individual’s level of income, leading to an increased tax liability for many company owners/directors.

This additional tax on dividend income would normally be collected through the Self Assessment system and be payable by 31 January the following year. However, affected tax payers may instead see a new deduction in the coding notices hitting their doormats over the next few weeks.

This deduction is referred to as “dividend tax” but is not in fact tax. It is an amount of coding deduction estimated at a level to collect the appropriate amount of tax on the dividend income by deducting basic rate, higher rate or additional rate tax from payroll income. To check whether the amount is likely to recover the right amount of dividend tax requires a fairly detailed knowledge of the tax system and overall income level of the individual. Many taxpayers will be confused by this odd terminology.

Is this HMRC trying to get their tax upfront? Yes of course they are!

But do they have the power to do so? Income which is not already subject to PAYE can be estimated and included when determining the PAYE code. For individuals receiving a modest amount of untaxed interest or property income each year it may not pose too much of a problem for HMRC to make a reasonable estimate of the amounts involved. Dividends are another matter entirely, tending to be less modest and more irregular particularly in times of fluctuating profits and changing tax regimes. The potential for getting coding notices even more wrong than usual is immense.

The good news is HMRC can only include such a deduction in PAYE codes if the employee does not object. Employees receiving coding notices can object to having their dividend tax (and tax on any other non-PAYE income) collected early by either ringing the HMRC employee helpline or completing an on-line form setting out their objections. It should then be a fairly simple matter to reach agreement with HMRC on an amended code.

  1. When a tax return isn’t really a tax return

For most people completing the annual tax return is right up there with going to the dentist, unblocking a drain or cleaning the oven in the list of jobs you would rather not do. So it may come as a surprise to find that every year some 350,000 returns are submitted by individuals on a purely voluntary basis! It certainly came as a surprise to me when the figure was revealed in a recent tax tribunal report.

So are all these people masochists? There may be a few who consider completing a return to be their civic duty, but the vast majority of these returns are submitted by PAYE taxpayers who want to obtain a tax refund.  You can download a return from the HMRC website, fill it in manually and send it by post to HMRC.

Now this is where things start to get interesting. You might think that if you complete the form and send it in to HMRC that you have submitted a tax return. After all, it looks and feels like a tax return. But the tribunal decided that in fact a voluntary tax return is not in fact a “real” tax return.

That is because the tax legislation requires HMRC to issue a notice to file a return. Something filed without HMRC issuing a notice is not therefore a tax return. It gets more surreal. Because the “tax return” is not a real tax return it must follow that an enquiry into that “tax return” is not a valid enquiry because the “tax return” is not a real tax return. So HMRC can’t amend the “tax return” if they believe that it understates the tax due.

What a muddle! It shows yet again that even though Self Assessment has been with us for nearly 20 years there are still many quirks and anomalies which need to be ironed out. You may remember last year we talked about a case which showed that just because something was included in a tax return that did not necessarily mean that it was part of that tax return. There are others too numerous to talk about here and I am sure that yet more problems will emerge in years to come.

There was a way for HMRC to extricate itself from the muddle in this particular case. However by the time they realised what it was, the time limit for taking the necessary action had expired. You might think that the taxpayer got lucky, because in the end tax which was probably payable escaped assessment. But rules are rules and if the system falls down at times you can hardly blame the individuals who find that it gives them a better than expected result. After all, all too often we see cases where the system is weighted in HMRC’s favour.

  1. Has Ofcom forgotten to tell the taxman something?

Last week, Ofcom published how it planned to improve telecoms quality and coverage in its document making digital communications work for everyone.

In it, Ofcom recommended that BT open up its network to allow easier access for competitors to lay their own fibre cables, which is welcome news for the growing number of consumers and businesses who rely on broadband services.

This is also good news for the many individuals who are increasingly having to deal with HMRC and other departments online as the government’s ‘digital by default’ agenda gains momentum. Following HMRC’s publication of its Digital Roadmap last December, the government’s aim that every individual taxpayer and business will be able to manage all their tax affairs online by 2020 is clear for all to see.

It is regrettable, therefore, that Ofcom does not seem to recognise the importance of the government’s ‘digital by default’ agenda, and the consequential increase in the demands we will all have to place on broadband connectivity if we are to comply with our tax and other obligations to the government.

Ofcom agrees that many people – especially in rural areas – suffer from poor quality broadband service, and has pledged that all UK consumers will have access to fast, reliable broadband services over the next ten years. But ten years is a long time. Six years longer than the implementation of HMRC’s Digital Roadmap.

What will happen to those people and businesses who are committed to doing the right thing to meet their tax obligations and other commitments, but are unable to do so as they are ‘digitally excluded’? Will they be branded as non-compliant with all that entails in terms of interest and penalties, loss of services and even naming and shaming?

It appears that HMRC is rushing towards implementing its digital strategy without clear recognition of the problems that exist for these individuals. Taxpayers need to have confidence that they can trust the authorities to act in a joined-up fashion to deal effectively with issues such as this. Failure here traps the digitally excluded in a Kafka-esque state whose requirements can only be met by using services denied to some citizens.

Perhaps Ofcom and HMRC should talk to each other?

  1. How do you build common sense into the tax system?

A recent tribunal report left me asking that question. A local 5-a-side football league in Scotland got into a muddle with its PAYE filing. Why, you might reasonably ask, would an amateur league need to think about PAYE? The rules of the league require qualified referees: they are treated as employees of the league and need paying. We are not talking large sums here: the going rate for a 5-a-side referee seems to be about £20 a match. So the league needed to operate PAYE.

A combination of late payments of PAYE and late end of year return ended up producing penalties totalling £1,443, a very significant amount for a small local league. The league found navigating the HMRC’s systems difficult and thought at times that the penalties had been withdrawn: not an unreasonable conclusion perhaps as the penalties did not show up on the relevant online account.

There were conversations between the league and HMRC about appeals against penalties but the league misinterpreted what was being said and didn’t make timely appeals in writing. In the end the matter was referred to the tax tribunal. That tribunal took a very hard line and refused to admit late appeals against the penalties, so that the question of whether or not there was a reasonable excuse or special circumstances to reduce/eliminate the penalties wasn’t even aired.

Now I know nothing about this particular case over and above what is reported but I can’t seriously believe that anybody can be happy with the outcome. Whatever the rights and wrongs of what happened, it can’t be sensible public policy for a community group like this to be faced with this sort of level of penalty, particularly given that all of the tax due was paid. Who is to blame? You might blame the club for not understanding the rules: HMRC for not making things clearer: or the tribunal for not taking a sympathetic approach. The real problem is that the system is to blame.

I’m not usually one to look back through rose tinted glasses at the good old days, but I can’t help feeling that a generation ago none of this would have happened. The inspector might have had a quiet word with the club to help them understand the rules but would not have wasted his own and everybody else’s time by pursuing penalties in such a trivial case. Of course the problem with that approach is that it relies on discretion. Nowadays discretion is almost impossible within the public service. The need to be even handed, and to be seen to be even handed has become an overriding mantra, particularly with the threat of judicial review against any exercise of discretion by a public official. So we are probably stuck where we are. But wouldn’t it be great if a new section could be introduced into the Taxes Management Act which says “common sense takes precedence over all other provisions of this act”. It won’t happen of course, but it’s nice to dream occasionally.


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