Some people seem to regard autumn as a melancholy time of year. Not surprising when it gets dark at 4 o’clock in the afternoon.
Writing about tax in a Square Circular can also be a melancholy business, always having to give warnings about this or that problem. That’s why we’ve included an exciting brief note about pensions – if pensions can be exciting – and a novel suggestion for dealing with the UK’s ever burgeoning tax code.
If you want more details about any of the matters we’ve mentioned in this issue, or indeed, about any of the matters we haven’t mentioned please do contact us on 0161 832 4841.
The Chancellor’s Autumn Statement is scheduled for 3 December. That’s more the headline stuff. The draft clauses for Finance Bill 2015, the small print that gets us accountants really, really excited – yes, really! – will be published on 10 December.
Remember we’re due a General Election in 2015, you may find that the complicated and controversial stuff gets shelved in the interests of getting Parliamentary business done and may or may not be subsequently introduced depending upon who the new “masters” are.
Talking about a General Election, have we gleaned any details about the tax policies of the two major parties from the recent party conferences. Not a great deal is the answer, and who knows what will change when and if they get into power.
Labour seems keen on a mansion tax on homes worth over £2m and also seems set to scrap the “shares for rights” scheme. That’s the relatively new one where employees can sacrifice certain employment rights in exchange for shares in the employer company, although it must be said that these rights can be contractually re-introduced. The Liberal Democrats are with them on both those ideas. Labour also seems committed to re-introducing the 50% tax rate for income over £150k (currently 45%) and possibly scrapping the proposal to reduce the rate of Corporation Tax from 21% to 20% in 2015.
The Conservatives have gone relatively quiet. No more wild ideas like we heard a few years ago about raising the nil rate band of Inheritance Tax to £1m. Rather they’re talking about raising the tax free personal allowance and the threshold at which the rate of income tax goes up to 40%. Perhaps they want to show they’re the Party of people earning £50,000 per year rather than the Party of people owning £1m worth of assets. Having said that, they did have the really “big idea” about pension reform, about which, more later.
No time like the present to talk about pensions.
Square Circular Issue 46 mentioned the important new rules for drawdown as a possible replacement for an annuity. The latest proposals are to abolish the 55% pension “death tax”.
Currently you can only pass on a pension to the next generation as a tax free lump sum if you die before age 75 and haven’t drawn any tax free cash or income. Otherwise the fund is subject to a 55% tax charge. From next April whether you die before or after age 75 you can pass on the pension pot tax free to your beneficiaries as long as they keep the money in a pension. If they decide to make any withdrawals, they’ll only have to pay income tax at their highest marginal rate if you die after age 75.
In the summer Issue of the Square Circular we were a little sceptical of the so called far-reaching pension reform which just provided drawdown possibilities in place of an annuity. However, coupled with the abolition of the 55% death tax charge the whole picture is beginning to look a bit different. Instead of a pension being a hole into which you sink money and eventually extract an unattractive annuity it’s beginning to look like a tax free investment vehicle (up to the lifetime allowance) which you can either draw on with flexibility or else pass on to the next generation in a tax efficient manner.
Finally, a word of warning. Pensions are a tricky subject. Whilst you may need to review your pension arrangements, you do need to review them with first class advice such as that afforded by Paul Stones of our sister organisation, Pareto Alexander. If you get in touch with your usual contact partner, he’ll make the necessary arrangements with Paul.
BIG BROTHER IS WATCHING YOU
It goes without saying that you should never follow a course of action on the basis that “HMRC will never find out about it”. First, that might well be tax evasion and a possible consequence is that one of Her Majesty’s hotels may be inviting you for a short stay. Secondly, they will find out about it because of “Connect”.
Connect is HMRC’s computer system. Originally designed by BAE Systems it has been in operation by HMRC for a few years and is becoming more and more accurate. It searches unrelated information and detects otherwise invisible relationship networks. The data could be from Companies House, Land Registry, Benefits Agency, electoral registers and bank accounts onshore or offshore to name but a few sources of information. It’s been compared to a spider’s web creating links and connections which together can spot taxpayers who are under-declaring income.
There are benefits all round. It helps HMRC piece together in minutes information it might otherwise have taken months to connect. It helps us because we don’t get so many pointless fishing expedition type HMRC enquiries into innocent clients. The downside is that innocent clients and accountants (yes, even accountants) can make mistakes in communicating information so when it comes to signing a Tax Return, do double check before signing.
CHILD BENEFIT LETTERS
Did you hear, a couple of months ago, about the confusion caused by HMRC indiscriminately sending out letters to higher rate taxpayers receiving child benefit suggesting that they might owe tax because they hadn’t paid the High Income Child Benefit Charge (HICBC). The individuals didn’t owe anything because their spouse or partner earned the greater amount and had already paid the HICBC.
It’s an understandable mistake. HMRC aren’t necessarily going to know who your life partner is. Wonder why they didn’t use Connect to link up all their information.
Apparently, between April and September, 74,743 fake emails were reported to HMRC. Typically, they promise a tax refund and ask for the recipient’s date of birth, bank and credit card details, passwords, mother’s maiden name etc. to supposedly facilitate the refund. Apparently there are many variations on the theme, for example, asking customers to verify their identity, asking customers to re-register because of problems with their current records and many more. You can see these with examples on HMRC’s website.
This is something we’ve mentioned in the past but it is worth repeating from time to time. The correct procedure dealing with these emails is to report them to HMRC and then delete them, if you’re an unrepresented taxpayer. Those who are represented by agents are a bit more protected when it comes to determining whether an email is fake because contact with HMRC is more likely to be through the agent rather than directly.
If you do get dubious emails from HMRC tell Anne or Linda in our tax department.
Do you remember a brief note about IR35 in the Spring 2012 issue of the Square Circular telling you about the specialist units set up to deal with HMRC’s IR35 customers and the (then) new business entity tests to risk score companies on IR35.
The news now is that HMRC have withdrawn the risk score tests. We’re not really sure whether this is good or bad. Risk scores do tend to dumb down issues but on the other hand low risk businesses might miss losing the assurance that they are temporarily safe from review.
If IR35 is an issue for your business it may be worth having contracts reviewed and the conclusions documented. Those documents could then be supplied to HMRC in the event of investigation.
We said in our last issue (see Issue 46 on our website) that we’d talk more about rented properties. A large number of our clients and new enquiries are involved in property rental or come from property investment companies, especially those involved in residential lettings.
A perennial issue is the distinction between capital expenditure and repairs. If you repair the structure of a building it is an allowable deduction from the rental income. It doesn’t make it capital just because you call it a refurbishment rather than a repair and it costs a lot. So refurbishment of a fitted kitchen or a bathroom or redecorating could well be a repair. Capital expenditure has the connotation of improving or extending the property. Not that such expenditure is a dead loss; you may, one day when you sell the property, be able to claim it against your Capital Gains tax liability so you need to keep a record of this expenditure just as much as if you were claiming a repair against your rental income.
In truth, it’s more complicated than we’re suggesting but a Square Circular is not the place to go into complications such as whether the property was newly purchased and was habitable before the refurbishment or whether the price paid for the property reflected the work required. If we’re preparing your Tax Return all you need to do is bring larger items of relevant expenditure to our attention and then answer the questions which we need to ask you in order to get it right.
In our next issue we hope to touch some other aspect of property rental but if you’ve a burning question that can’t wait feel free to call 0161 832 4841 and speak to Anne or Linda or John or Simon in our tax team.
Apparently the UK’s tax code now stretches to 17,000 pages. In 2007 it was only 11,500 pages.
The CBI’s Chairman of its tax committee is reported to have said in a panel discussion at the Public Accounts Committee.
“We’ve got to 17,000 pages of tax code – surely the only possible solution is to set it on fire”.
We hear. We hear you.
Church notice board
“At the evening service tonight, the sermon topic will be “What is Hell?”
Come early and listen to our choir practice.