The Fizz! Blog

A sixth lesson from the Hillgrove case

There's a good article here on AccountingWeb about the recent Hillgrove tax case, which essentially revolved around a business owner blaming his accountants for his failure to pay large quantities of VAT and PAYE to HMRC.  The business owner, Richard Hillgrove, lost in the end, but it will have been an uncomfortable few years for the accountants.  The five recommendations made to accountants to protect their position in similar cases are (paraphrasing somewhat):

1. Get written confirmation of the client's acceptance of significant recommendations you give them.
2. If you've got doubts about a client's ethics, don't put your head in the sand - look into them.
3. Always be conscious of your responsibilities under the anti-money laundering recommendations.
4. Don't make assumptions (the accountants had done lots of guesstimating of whether costs were business or personal - all accountants have to make some educated guesses like this from time to time, but you need to be careful).
5. Don't let difficult situations drag on - nip them in the bud.

Those are all really good and accurate points.  There's another really important aspect though.

The defence case revolved around efforts by Hillgrove's accountants to restructure his business (from LLP to Limited, chiefly), in order to ring fence old tax liabilities and set the business on a more tax-efficient footing going forward.

The thing is, restructuring can only do so much.  Yes, trading via a different legal structure can often make a difference (sometimes substantial) to the amount and timing of tax payments.  What it can't do is turn a bad business into a good one.  What's clear from the case is that the business was not making nearly enough profit to feed its owner's requirements for income.  The profits from the business might have been enormous, but if the owner's cash needs are more enormous still, it still isn't going to work in the long run!  Restructuring might change the pace at which the business owner digs themselves into a hole, but unless it's a marginal case, they're still going to be digging a hole somewhere.

Sometimes the accountant needs to step back and point out that the problem with a business isn't the way it's structured, but something more fundamental - either it's a rubbish business, or it's a business that would be good were it not for the income requirements of its owners.  If either of those things are the case, it's not a restructuring scenario.  It's a situation where either the business needs to make more profit or the owner needs to spend less money personally.  Putting off the inevitable by moving to a new legal entity without addressing the underlying problem might stop the digging of hole one, but it just means you're starting to work on hole two.   Be brave and try and address the real issue.  If your client isn't prepared to do that it's usually easier and less stressful to just walk away.

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What's this fuss about Child Benefit?

Until this year, Child Benefit was universally available; it wasn't means-tested.  As of January, that changed.

Now, if the higher earner in a household has an income over £50,000, then the household loses some of its child benefit, and if their income is over £60,000 it's all lost.  You lose the housing benefit on a sliding scale - if the higher earner's income is £51,000 you lose 10%, if it's £52,000 you lose 20% and so on.

For last year, only three months' Child Benefit is at stake (payment made to families between 7 January and 5 April 2013), so the financial loss isn't great.  For the current year, a whole year's Child Benefit stands to be lost, so it's a much bigger deal.  When you take into account income tax and the loss of Child Benefit, then the higher earner in a four-child family this year could suffer an effective tax rate of 73% on income between £50,000 and £60,000.  Of that £10,000 of income, they'll only get to keep £2,700!

There are ways round it for some people.  If you're on £60,000 you can bring your income for these purposes down to £50,000 by contributing to a pension, in which case the household won't lose any Child Benefit.  Effectively for the higher earner in that four-child household it will cost £2,700 for to get £10,000 into a pension.  That's potentially a great option - if you can do without the cashflow right now.

If you're resigned to losing all of your family's Child Benefit, you must either a) put details of it on a Self-Assessment Tax Return or b) just ask the government not to pay the Child Benefit in the first place.  For anyone who doesn't have to do a Self-Assessment Tax Return already, the first option is the path of least resistance - though if your circumstances change and your income decreases, remember to ask the government to restart the payments sharpish!  If you already have to do a Self-Assessment Tax Return, you could ask to not receive the payments, or you may prefer to receive them then give them back via the return, for reasons we've previously outlined.

If you're only going to lose some of the benefit, and you don't already have to submit a Self-Assessment Tax Return each year, you unavoidably have to register with HMRC to submit returns, which is a real pain.  And that's what all the fuss has been about in the last few days.  5 October was the technical deadline for registering, and supposedly 150,000 such people have failed to register so far.  In reality, it seems really unlikely that HMRC will impose any penalties for missing that date.  It's not a special date for these purposes, it's just the date that you have to notify HMRC of *any* new taxable source of income so that they can issue you with a return for last year (so the same deadline applied to, for instance, someone who bought a rental property during the last tax year and will have to submit tax returns to show the income).  We've never, ever seen a penalty issued for late notification for Self-Assessment and we've not heard of it anecdotally either.  So if we were in the position of suddenly realising we needed to register for Self-Assessment and having just missed the deadline, we'd personally be relaxed about it.

However, anyone who leaves it much longer might genuinely find themselves with a problem (leaving aside the problem of having to find the money to repay the benefit.  The deadline for submitting a return for the year ended 5 April 2013 is the end of January (assuming you're doing it online or an accountant is doing it for you).  To submit a return you need a 10-digit Unique Taxpayer Reference number (UTR).  You get the UTR once you've registered for Self-Assessment - but HMRC can be really slow at processing registrations, and occasionally seem to miss them entirely.  So if you need to register for Self-Assessment for last year but didn't do it by the 5th October, there's probably no need to panic - but do get a move on, because you need to register miles in advance of 31st January to be sure of getting that UTR in good time.

There's not much accountants can do to accelerate this process - most clients of accountants already have to submit a return (hence having an accountant!) so shouldn't be among the 150,000.  So we can only be interested spectators for the time being.  We'll be ready for a few calls in January from people who've just realised what's going on, though!

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Our thoughts on the 2013 Budget

You may not have noticed, but it was budget day yesterday. Here's our roundup of the things that we think could be of most interest and practical use to owners of small businesses.  As usual, it's far from exhaustive - if you want a complete rundown of everything there are plenty of places that will provide it!

National Insurance savings for employers - from 2014

So, this is probably the biggest thing for many small businesses.  From 6 April 2014, employers will get let off the first £2,000 of Employer's National Insurance that they'd normally pay.  So, if you're in that position that's money in your pocket.  Of course, your profits will have gone up as a result, so you'll have a bit more tax to pay - a small company that benefits from the full discount will see its profits go up by £2,000, and therefore its corporation tax bill go up by £400.  So the real benefit to the company is £1,600.  But it's still worth having!

If you're a "director-only" company and have no National Insurance cost at present, it seems unlikely this change will benefit you that much, as it eliminates Employer's National Insurance but not Employee's National Insurance, meaning that it's unlikely to be massively beneficial to pay a significantly greater PAYE salary to take advantage of the concession.

Corporation Tax

As ever, all the headlines about corporation tax going down only apply to big companies (or, at least, companies making big profits).  For a company with profits of £300,000 a year or less, corporation tax was at 20% and it remains at 20%.

Income Tax

As was widely predicted, the personal allowance (i.e. the amount you can earn free of tax) will go up to £10,000 - from 6 April 2014, not now.  That's only actually about a 6% increase on the year to come, so not a massive difference, but will of course be welcome to many - it'll be worth £112 a year to basic-rate taxpayers.

Childcare Tax Break

From next year, parents of children under 5 will effectively be able to get £1,200 of childcare paid for by the state, per child, as along as they're not getting a childcare element to their tax credit payments.  This applies as long as a) both parents work and b) household income is less than £300,000.  Given that the government has in the last few months begun to withdraw child benefit from households where someone earns more than £50,000, you might question the logic of introducing a new flat-rate child payment that you can still get if you and your partner each earn £149,999.  So would we.

SEIS extended

The Seed Enterprise Investment Scheme is something we've talked about before, offering income tax savings on investments in new businesses.  I won't explain it again, you can read about it here:

http://tinyurl.com/cvr6k7x

Anyway, for the current tax year within the scheme there was also an opportunity to reduce or eliminate existing Capital Gains Tax bills by reinvesting in a company via SEIS.  That opportunity was supposed to cease on 5 April - but it's being extended for another year.

Tax reliefs for creative industries

The government confirmed the introduction of a tax credit for companies "involved in the production and development of culturally British animation, high-end television drama and documentaries, and video games".  However, at the moment it appears that the beneficiaries will be the actual companies producing the animation/film/game, rather than any subcontractors, and that animation for advertising purposes won't qualify.

Help to Buy

This will be of no particular use to 99% of people, but very valuable to a few.  Essentially, the government will apparently lend you most of the deposit for a new-build house, or guarantee most of your mortgage, on the condition you repay them at a later date.  Of course there are plenty of questions one could ask about this - what happens if the house goes down in value and you want or need to move, for example.  But there's no detail on the scheme yet anyway - with the previous FirstBuy scheme it was many months before the loans actually became available, so don't start looking at places this minute!

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Three reasons why the "shares for employment rights" plan is ridiculous

Yesterday George Osborne announced proposals for employees to be given shares in their employer, in return for giving up a substantial portion of their employment rights.  I could come up with many more reasons why it's a plan so ridiculous that it's surreal, but here's three to be going on with.

1. What on earth have employment rights and share ownership got to do with each other?  Nothing at all.  Why link them in this way?  Presumably because the Conservatives want to restrict employment rights and the LibDems want to encourage share ownership, and so they've come up with this surreal hybrid policy.  But it's a bit like introducing a law that says you can use more force with burglars in your home, but in return you can't claim relief for pension contributions of more than £25,000 a year.  What have those two things got to with each other?  Nothing.  Exactly.
2. The boast is that the owner of the shares won't have to pay Capital Gains Tax on them.  But you don't pay CGT on sales of shares in any case until you make more than £10,000 of profits on shares and the like in a tax year.  If your employer gives you £2,000 worth of shares in their company, are you likely to sell them for more than £12,000?  It's possible but unlikely.  In large part, the CGT part of this is just something that the government knows is of minimal cost but sounds impressive.
3. In any case, who are you going to sell the shares to, even if you want to?  A tiny parcel of shares in a small limited company will be of minimal worth to anybody - even if they are dividend paying, there's no guarantee that will continue into the future.  Finding a third party to buy them is likely to be tricky to impossible.

With plenty of sensible things the government could do that people *are* asking for, introducing things like this that nobody seems to want at all is just bizarre.

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Reflections on the "Cash in Hand" debate

As I'm writing this, the day's tax avoidance/evasion/whatever story is the question of whether paying someone in cash when you know it's being done to avoid tax is immoral or not.  There's been plenty of views on either side.  In particular, there's been lots of obfuscation on the grounds that sometimes cash is being used for very good reasons (reducing credit risk, making it easier to pay for costs later in the day, reducing banking fees etc etc) - and that somehow because sometimes cash is fine, it's impossible to identify cases where it's not above board.

All of this is pretty feeble, really.  Obviously there are loads of occasions when cash is used for perfectly good reasons.  Equally, there are some when it's used to evade taxes.  Most of the time both parties know which of those situations they're in (and it may even have been prompted by the purchaser, not the seller).  Whether to accept an offer to pay in cash is a moral issue for the buyer of services, and morals are personal.  Personally, I wouldn't do it, and if someone I know does it I like them a little less.  That's just what I think and I wouldn't particularly try to impose my views on anyone else.  But all the distraction around "Well, sometimes it's OK because of..." or "How am I supposed to know if the seller's paying his taxes?" is really pathetic.  You'll almost always know the score.  Make your own moral decision and go with it - but don't pretend you're in the dark.

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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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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The power of headlines

The same story was presented today as:

Telegraph - "1.2 million owe tax after HMRC error"

Accountancy Age - "PAYE reconciliations show sharp improvement"

The latter is much the fairer headline.  HMRC are supposed to check each year whether those on PAYE who don't have to submit a tax return have underpaid or overpaid tax.  Over the last few years they've done a horrible job of this.  For 2010/11 they seem to have done miles better.

The existence of a lot of people who didn't pay the right amount of tax via PAYE doesn't in itself constitute an error on the part of HMRC.  Sometimes they just don't have sufficient information to sort someone's tax out until after the year's finished. That's completely normal.

So, on this occasion, HMRC are right and the Telegraph headline is wrong - though it should be noted that the content of the Telegraph story doesn't really match up to the headline, being more even handed.

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Budget spin on beer

In his budget speech, George Osborne announced that there would be no additional tax on beer.  That's technically true - there will be no tax rise apart from the ones that were already scheduled.  As Pete Brown points out (and if you're interested in beer and the pub trade, his blog should be one you check out regularly) we'll still have a 7.2% increase in duty, because the coalition is sticking with the duty escalator put in place by the last government.

Still, that's they way it goes in politics - say things that are technically true but utterly misleading, in the knowledge that most people won't notice until it's old news.

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