The Fizz! Blog

Thoughts on Panorama's corporate tax avoidance edition

I just got round to watching the Panorama documentary on corporate tax avoidance, originally broadcast on Monday:

http://www.bbc.co.uk/iplayer/episode/b01hzg7y/Panorama_The_Truth_About_Tax/

If you read Private Eye, there's nothing new in it - the prevalance of high profile British corporations shifting profits to Luxembourg to slash their tax bills has been exhaustively covered there.  I'm sure it will have been eye opening to many viewers though.

Most interesting were the ideas discussed in the last few minutes - the implications of changes in modern business and tax planning. as opposed to their mechanics.

The suggestion is that, as countries compete to create attractive tax regimes to tempt multinationals to their shores, governments will just have to accept this siphoning of profits to low tax regimes if they want the multinationals' presence.  I think that's probably completely accurate.  It used to be the case that the head office of a massive company was an almost impossible thing to move.  Now it's an inconvenient thing to move.  If the tax savings are big enough, the the inconvenience can happily be swallowed.  So anybody hoping that some kind of aggressive crackdown on this type of corporate tax dodging/planning is going to be disappointed.

The logical conclusion that follows on from that is that low tax/low spend government is going to be much more compatible with modern business than high tax/high spend government.  It's easy to forget that almost all tax revenues are ultimately derived from the activities of business, but governments will overlook that at their peril.  At the moment, though, it seems fairly clear that the public mood is very much anti-business.  It's a tough spot for a politician - on the one hand, the reality is that they must be business-friendly, because that's where all the money comes from.  On the other hand, they must convince a large part of the electorate that they're going to come down hard on businesses and somehow punish them.  That can't be sustainable indefinitely.

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What we think about this year's budget

Although this week's budget was really quite interesting (if you like that sort of thing), there wasn't a lot of immediate change for small and medium businesses.  Here's a quick summary of the announcements we think are most relevant.

Personal Allowance

The amount you can earn tax-free is going up to £9,205 - from April 2013.  That means that our recommendations to clients on tax-efficient salary and dividends for director-shareholders of limited companies over the next twelve months remain unchanged.

The increase is billed as helping out the lowest paid workers.  In reality, it benefits all basic rate taxpayers.  Higher rate taxpayers don't benefit, as the higher rate threshold is being shifted down and they'll pay more higher rate tax, wiping out the saving.

Granny tax?

At present, those over retirement age get an extra bit of tax-free personal allowance each year - about £3,000.    But you start to lose that extra allowance once your income hits £24,000 (this year), so retired people with high incomes don't get any extra allowance.  Anyway, that extra allowance will be disappearing in future - although people already of retirement age will retain it.  The argument is that, since the 0% allowance is going up very quickly anyway, the extra boost is no longer necessary.  On top of that, our changing economy and housing market could mean that a presumption that the old need more help than the young from the tax system may be less robust than it once was.  Admittedly, that's unlikely to wash with those who were expecting an increase in their 0% allowance on retirement and now won't be getting it.

Corporation Tax

This is coming down for large companies, but for small companies (i.e. the majority of people reading this), the rate remains 20%.  In the long run the government's target is certainly to equalise basic rate tax, small company tax and large company tax at 20%, so don't expect a change in small company corporation tax any time soon.

Child Benefit

The plan to remove this from all households with a higher-rate taxpayer has been softened.  Now it will be removed from households with someone earning over £50,000, on a gradual basis.  A knock-on effect of this is going to be more people having to submit tax returns.  At present, HMRC don't ask most higher-rate taxpayers to submit tax returns.  However, the removal of child benefit is going to be achieved via a tax return, so HMRC will be asking lots of parents earning £50,000 to £60,000 to submit tax returns from now on.

50p down to 45p next year

From April 2013 the top rate of tax will go down to 45p.  This is probably sensible - high rates of tax clearly cause behavioural changes that can lead to a reduction in tax payments.  We saw at first hand taxpayers taking completely reasonable and straightforward action to reduce their liabilities as a result of the 50p rate.  Announcing the reduction so far in advance is in itself going to cause behavioural changes - anyone who was planning to take massive dividends from their company between now and 5 April 2013 is now quite likely to wait until 6 April 2013 before doing so, to take advantage of the lower rate.  So tax will still be paid - perhaps even more than would have been paid under the 50p regime - but it may be paid a year or two later than it might have been.

Cash accounting for small businesses?

The Chancellor confirmed the aspiration for small businesses to become exempt from having to prepare accounts on a conventional basis - income earned minus costs incurred, regardless of whether they've been paid or not - and instead use "cash in minus cash out", with some modification for non-cash items.  We're sceptical about whether this will result in people paying an appropriate amount of tax (whether too little or too much), but apparently it has worked in some other jurisdictions, so we'll keep an open mind!

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Some tax simplification it would be great to see in the Budget

Most people think the highest rate of tax in the UK is 50%.  It isn't.  It's 60% (*).  When someone's income exceeds £100,000, they lose £1 of their tax-free personal allowance for every £2 they earn.  The practical effect is that for every £1 they earn, they get to keep 40p (38p if you take NI into account as well).  That rate persists until their income reaches £114,950, at which point it reverts to 40% again, until the £150,000 mark is reached.

It's a completely ludicrous situation, to the point that people often don't believe you when you tell them about it.  Income tax is 0%, then 20%, then 40%, then 60%, then back down to 40% for a bit, then back up to 50%.  Why on earth would you have that pattern?  Essentially it's because the last Chancellor correctly judged that gradual withdrawal of the personal allowance was a good way of collecting some extra tax without people really understanding what was going on.

It would be really, really sensible to ditch this loss of the personal allowance.  It would make things so much easier for the affected taxpayers (admittedly a very small minority) to understand, it would be a significant effort to make the tax system more straightforward and easy to understand, and it would just be nice if something so perverse could be ditched.  Will it happen?  I hope it might.  Cutting the 50% tax rate would be politically explosive and easy for the opposition to attack.  Reversing the loss of the personal allowance was deliberately introduced by the last government to be obscure and difficult to understand, and consequently is much harder for them to attack now, remaining similarly obscure and difficult to understand.  On the other hand, its obscurity means that there may be no plaudits for ditching it, so perhaps the loss of revenue won't be judged worth the upheavel.  We will see.

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* Actually, marginal rates can be higher when someone is earning more but losing tax credits as a consequence, but that's a subject for a different blog...

Company owner wanting to get a mortgage? Plan ahead

Getting a mortgage has always been slightly more hassle for company director/shareholders than for the employed or self-employed.  An employed person's income is easily assessed from payslips and P60s, a self-employed person's from their accounts and tax return.  A mix of salary and dividend is harder for a mortgage adviser to assess and understand - but you can generally get to a department within a lender who understood and dealt with such applications.

Historically, many or most lenders, when considering a mortgage application from a company director/shareholder, would take into account a) salary, b) dividends taken and c) profit that could have been drawn as a dividend but wasn't (retained profit).

It seems now that most lenders will only take into account a) and b) and ignore retained profit.  We're reliably informed that there are now only three lenders who will take into account retained profit as well.

Many company owners don't take anything like the dividends they could, as they want to (prudently and legally) shelter income from higher-rate tax.  However, if you do that and will be looking to get a mortgage in the next few years, you might want to at least think twice about that policy.  Your favoured lender (and maybe, in a year or two, *all* lenders) might only take into account dividends that actually *have* been taken, as opposed to dividends that *could have* been taken but weren't.  You could consider biting the bullet and starting to pay yourself higher dividends to make yourself "mortgage ready" and able to borrow more in future.  You may have to demonstrate two years of earnings to the lender, so plan ahead.  It would be frustrating to be assessed on income of £40,000 when you could have been assessed on something much higher, and could easily service the debt.

This may not apply in your circumstances, but it could be really important for some people.  Talk to a good mortgage broker if you think it could be an issue for you - we're very happy to recommend someone if you don't have an adviser on hand.

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Fuel-only mileage rates change tomorrow

Taxman-approved fuel-only mileage rates change tomorrow (in fact, the diesel ones are changing - the petrol ones haven't changed).  These are the rates that HMRC are happy for employers to use a) to reimburse staff for fuel used for company business that they've paid for and put in company cars, or b) reclaim from staff the cost of company fuel they've used for their own private motoring.  But they're also the rates that businesses can use to reclaim VAT on some of the mileage allowances paid to employees and directors.

Employers can pay a mileage allowance of up to 45p a mile, tax-free, when employees use their own car for business.  That hasn't changed, it remains 45p.

You can’t reclaim VAT on all of the 45p, but you can reclaim VAT on the part that represents fuel, as long as you retain VAT receipts covering the cost.  As fuel costs have increased so sharply, the approved rates - the part of the 45p that the taxman is happy to accept as representing the cost of fuel - have just been increased once more.  The new list of rates is here:

http://www.hmrc.gov.uk/cars/advisory_fuel_current.htm

If you're VAT registered, not on the flat-rate scheme, and failing to reclaim VAT on your mileage costs at all, you should start.  You can even reclaim some of the VAT you've missed out on in the past - get in touch with us to find out how.

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There's nothing new about government staff being paid via limited companies

Limited companies tend to be the structure of choice for most reasonably profitable businesses, as they allow the owner to minimise tax and National Insurance liabilities.  The principal ways of achieving that are a) by being paid via NI-free dividends and b) perhaps by sharing the income with a spouse or partner to use a second person's tax allowances.  It's not the right solution for every business, but it's standard tax planning for many.

Through the 1990s, more and more highly paid employees started to use this structure as well, particularly in the IT industry.  The man on the street would probably have though that many of these people weren't really running a small business, but really just had a job, but there was nothing to stop them from exploiting this same limited company structure to save tax and NI.  They were giving up employment rights, but the often massive decrease in tax and NI bills generally made up for that many times over.

After a while, HMRC got fed up with employees going home on a Friday with their P45, then coming back on Monday, sitting at the same desk, doing the same work, but invoicing their former employer via a limited company, with a consequent drop in the tax and NI going to the Exchequer.  In 2000, a rule known as IR35 came in.  In very basic terms, it said: if what you're doing really amounts to a job, you can't use dividends to save NI and you can't split income with your spouse to save tax.  Your company has to pass pretty much all its income on to you via PAYE salary, meaning the tax and NI take is pretty much what it would have been if you had been on PAYE in the first place.

IR35 hasn't worked that well.  Firstly, there are a lot of grey areas in many people's relationship with their customer/employer.  Some people had some of the characteristics of employment, but some of self-employment as well.  If HMRC decided to try and impose IR35 upon them, it could take years to resolve, and HMRC generally seemed to lose the argument in the end anyway.  Secondly, the initial onus is on the taxpayer to put their hand up and pay any tax and NI due under IR35.  Almost nobody put their hand up, and HMRC had nothing like the resources to police it.  Overall, I would think that even HMRC themselves would have to acknowledge IR35 as somewhere between a disappointment and a failure as legislation.

There's now an attempt to portray as a scandal the number of people being paid via these arrangements by the government itself.  It's being painted as a coalition problem, but the truth is that this story could have come out any time in the last 15 years - these arrangements have been commonplace for ages.  I completely agree that they are undesirable - it's grossly unfair that highly paid people can afford to put these arrangements in place but that it isn't economical for someone on £15,000 a year - but they're normal.  For them to be stopped, it will need either a) IR35 to be changed so that it works or b) tax and NI to be fundamentally changed so that the company route offers no material tax savings.  Probably, neither of things will happen.  What will actually happen is that a few high profile arrangements will be changed now, words will be spoken about lessons learned, the media will get bored, and then it will be business as usual.

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Rangers and the problem with aggressive tax saving schemes

It's been well publicised over the last few days that Glasgow Rangers FC are on the verge of administration due to disputed tax bills.  It's actually a story that's been ongoing for some time now, without making the headlines.

Very broadly, Rangers used an tax planning scheme involving Employee Benefits Trusts - EBTs.  Rather than paying their players via PAYE, they paid the money into trusts.  The trusts then lent the money to the players, enabling them to avoid paying most of the tax that they would normally be due to pay.

Ever since these schemes were introduced, they were controversial and many advisors wouldn't recommend them.  There's a spectrum of tax planning, from the safe as houses (e.g. ISAs) to the very aggressive and borderline abusive.  It was known that HMRC considered the EBT schemes to be off the scale at the abusive end and would try to prevent their use if they possibly could.

We've always said that a big problem with aggressive tax schemes like this is the years of uncertainty you'll have to endure before being sure they've succeeded - seven to eight years is a good rule of thumb before the processes available to HMRC and taxpayers are exhausted.  For most of us, it's better to spend seven or eight years getting on with running our businesses, not worrying about tax schemes that may or may not work and very clearly lie outside the spirit of the law.  Even if you do go ahead with such a scheme, you're well advised to keep the tax saved to one side, in case the scheme collapses.

Amazingly, Rangers are now attempting to blame HMRC for this drawn out process:

"Even if Rangers wins the tribunal, HMRC has made it plain that they will ‘appeal, appeal and appeal' the decision.  The practical effect of this will be to plunge the club into years of ongoing uncertainty. It would also mean the club having to pay immediately a range of liabilities to HMRC."

Well, tough.  That appeal process and the time it takes would (or at least should) have been laid out to them as a basic caveat when the scheme was put in place.  It's no use crying about it now.  If you attempt to use such aggressive tax planning, you have to be aware of the risks.  Unfortunately, many taxpayers get blinded by the tax savings - which may, in this case as in many others, turn out to be illusory.

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Could a Childcare Voucher scheme work for your business?

Childcare Vouchers are a pretty decent perk that employers can provide to their employees.  They effectively enable a company to pay for a certain amount of childcare for an employee, without any need for the employee to pay tax on that amount.  Most employees can receive up to £55 a week of vouchers, tax-free - that's £2,860 a year, tax-free, which isn't bad.

The scheme can be used even if you're the director of your own company and have no other employees.

This is a pretty good resource for further reading.

A few points to bear in mind.

1. You do actually have to be paying a registered child carer or nursery for care.  You can't just take the money and keep it, or give it to a (non-registered) family member!
2. This may seem obvious, but it's the biggest single reason that tax planning strategies fail - you need to actually do it properly.  Some people think it's OK if they just get their company to pay for all their childcare costs, and if HMRC have a look at the arrangement it'll probably be OK.  It won't. You need to have everything in place and done correctly.  If that seems too much hassle, then tax-efficient childcare is not for you, unfortunately!
3. You can't use the scheme for your own childcare costs if you're a sole trader or partner.
4. You have to make the scheme available to all employees (broadly speaking).
5. It's possible that receipt of vouchers could have a negative impact on receipt of state benefits - specifically the childcare element of Working Tax Credits.  So look out.  There's a calculator which may help here.

If you'd like to explore this further, get in touch.

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The problem with the VAT Flat Rate Scheme

When the Flat Rate Scheme (FRS) for VAT was introduced, it was intended to make completing accurate VAT returns easier for small businesses.  Rather than a) adding up all the VAT that they'd received from customers, b) adding up all the VAT that they'd paid out to suppliers and then c) paying over the difference to HMRC, they could just add up their gross income from customers and then pay over a fixed percentage of that income to HMRC, the percentage being dependent upon their industry sector.

The idea is that the percentages for each business sector should pretty much reflect how small businesses in those sectors typically operate.  In industries (say management consulting) where businesses have minimal VATable costs, their VAT payments tend to be quite high, and so the FRS gives them a high percentage.  In businesses with greater VATable costs (say a shop), VAT payments tend to be low, and so the FRS gives them a lower percentage.

That sounds fair enough in theory, but in practice there's only one real reason why some businesses sign up to the scheme, and that's to pay over less VAT to HMRC each quarter.  There's a big problem with the table of percentages, which is that it's really poorly put together.  It's pretty likely that there will be two categories which seem appropriate, and very likely that there are none.  It's often the case that sloppy drafting means that a rate that's plainly intended for one type of business can be used by another.  Plus, since many pretty common types of business are omitted entirely, they can choose the "Other" category where that really gives a lower percentage than is really appropriate for their business model.

No blame should be attached to businesses that go for as low a percentage as is realistic, of course - they'd be mad not to.  This thread shows an accountant who's been able to claim (somewhat implausibly, to my mind) that he's not really an accountant, and he appears to have persuaded HMRC to agree.  The problem lies with the conception and execution of the scheme itself.  Keeping accurate records under the traditional system is no big deal - you've got to track your costs in the end, in order to get your year-end accounts done - and, apart from anything else, to know how much money you're making.  So the scheme wasn't really needed.  But what makes it worse is that hopeless table of rates.

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A late tax return could be expensive this year

For many years, the fine for sending your Self Assessment Tax Return in late has been £100, with a second penalty of £100 if you then failed to get it in within six months of the deadline.  However, the fines would be reduced if the tax due was less than £100.  If no tax was payable, the penalty would be cancelled entirely.

For the year ended 5 April 2011 (for which the deadline for submission is the end of this month) the rules have changed.  They are now:

• £100 if you're late.
• After three months, a further penalty of £10 per day, for the next 90 days.
• After six months, another fine of £300 - or 5% of the tax due, if higher.
• After twelve months, a further £300, or 5% of the tax due.

Crucially, these fines are no longer reduced or eliminated if there's little or no tax due.  Historically, many people have not bothered too much about the 31 January deadline - knowing they've no tax to pay, they've submitted the return later with no real consequences.  Or they've seen £100 as a reasonable price to pay for being able to submit their return many months late.  If they take the same approach this year, they could find themselves with a substantial bill.

At the moment there's no indication that HMRC will exercise any discretion about charging these penalties, though it seems likely that before long some taxpayers will challenge what could be seen as disproportionate fines when compared to a negligible tax bill.  But you'd be well advised to get your return done this month to make sure you're not one of those test cases.

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