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Donald Parbrook’s May Tax Blog
After a flurry of tax news in March, I decided to wait a few weeks before writing another tax update. Tax has, in the last few weeks, featured highly in the media as the 10% debacle was played out.
10% DEBACLE....AND TAX GETS POLITICAL!
Our Prime Minister has been a little unlucky I suppose in that he cannot escape any blame for the 10% mess – to the tax profession it does appear that he spent his early years tinkering to create 10% rates for corporation tax and income tax and his last years removing them. He really can’t complain if people feel cheated and lose faith that there really is a direction to the thought process.
In any case, I am writing this on May 2nd, after Labour’s mid-term council elections in England revealed the depth of current Labour unpopularity. As regular reader’s of my blog know I try to mix some useful comments with some observations about the direction of Government on taxation. I keep telling people I will be equally cynical about the opposition and about the "tartan tax" idea.
It has interested me that in the last year our tax journals have had increasingly “political” contributions from otherwise perfectly normal (for tax) people. Political articles are being written in particular in respect of the changes being put in place with regard to non-domiciled persons living in the UK and the moves to increase the amount of global profit that is taxed in the UK if your HQ is here (the rush to Dublin!).
The “proof of the pudding is in the eating” and if media reports are correct then many global FTSE companies are considering if “shareholder value can be improved" via emigration of the HQ to Eire or another EU state.
Eire taxes profits earned locally at 12.5% and although it has a 25% rate for passive income they do not have the draconian rules the UK has on the taxation of foreign subsidiaries. So, with an Eire HQ, many companies can hope to avoid 28% UK corporation tax – whilst the subsidiaries may pay foreign tax the rate is now often well below that so keeping it away from 28% in the UK seems a good plan. For Dublin, excellent flights, a stable social and legal landscape and an English speaking culture make resistance to the move harder. International Power are looking at moving according to today’s papers. Yesterday the rumour was that Astra Zeneca and Aegis are looking into it and the day before was confirmation that WPP are thinking about it. Shires Pharmaceuticals and United Business Media are definitely going. I hear Glaxo are to do it too.
What has our Chancellor done? ….set up a new committee to look into it. Frankly, that is pointless. One meeting with the emigrant Finance Directors and Tax Advisers would do it – UK is taking too much tax from them and the Chancellor needs to wake up and realise that people can “shop around” for the lowest tax environment in today’s more mobile world. Not only that, but an article in last week’s Tax Journal (which was contributed by a partner in the firm advising Shires) suggested that a fundamental lack of trust and belief in the UK's commitment to fair taxation is behind some peoples' motivation to move. Whilst the comment was not directly attributed to Shires, this comment is consistent with the feelings the tax community have had for some time.
The public statements about tax avoidance and being steadfast (my words) really seem to hide the truth which is that many of the most extreme tax avoidance measures taken are actually anti-business.
In any case, the 10% income tax debacle appears to be the media focus and the image of a PM and Chancellor in disarray that it creates can’t have helped the Labour party in the local elections yesterday. To avoid this blog appearing like a political rant it must disappoint many that the Tories don’t appear to offer any radical shake up or alternative. However, before 1997 Labour wasn't selling themselves as offering massive state handouts via tax credits .... maybe there is a secret agenda to shake things up a bit....
I was in Jersey this week and it struck me how like Scotland it might be if we had taken a different route in the 1970s when we (my parents anyway) voted on independence. Jersey (like Guernsey and the Isle of Man) is a Crown Dependency with its own government and tax system. It appears to have grown wealthy by offering a strong base from which to centre your business operations and for those with wealth to retire. They are not in the EU and you could almost sense that they are free of many of the burdens that come with that membership. If Alex Salmond persuades us that we should be independent I think the Scots might do well to look at Eire and the Channel Islands to learn how wealth for the nation and not just the minority can be created through less taxation in certain areas. It may be that a "non-EU" route actually offers more in line with our friends in IoM etc.
A final comment before I raise some tax planning issues of the day, and that is that when Gordon Brown became PM, his opening speech to the House said,
“As I have travelled around the country and as I have listened and I have learned from the British people – and as Prime Minister I will continue to listen and learn”.
Today, in response to the council election results, Harriet Harmon was sent along to the BBC and Sky to do the media interviews and said -
“We've got to be more focused on listening to people”
Then the BBC website reported this morning ……..
“Mr Brown insists his party will learn lessons, reflect and move forward”
Does it all sound familiar to you too? Lot’s of listening and learning but, in tax terms, no change in strategy – which appears to be to milk money out of every corner of society. The average family in the UK now spends 15% of net pay on fuel – and 75% of that goes to the Exchequer.
I guess blaming the recent Grangemouth strike over pensions on Gordon’s 1997 £5BN raid on pension schemes for tax credits would be slightly extreme, however the rush for the exit by multinationals is certainly caused directly by our current tax system singularly failing to make the UK competitive – in the 80s every Scot can remember that the dark post-industrial years were tempered by Asian and American inward investment – not only does that seem to have disappeared but now we’re seeing the long established UK multi-nationals follow them to the exit….not good news for UK PLC. There is a feeling amongst tax professionals that the recent tax changes are all ideas Gordon had some time ago and that Tony rejected (certainly on non-dom changes that is the rumour) as too anti-business for his tastes.
VAT
Some of you may be aware that Marks & Spencer once ran a case through the courts to decide if tea cakes were cakes or biscuits – such a strange question determining the vat treatment! In any case, as a follow up in conjunction with other cases there is currently a position where Customs have had to accept that the 3 year “cap” they put on reclaims where vat has been over-paid or under-reclaimed is illegal.
Whilst it will be reinserted into law correctly next year we currently have a situation (accepted by HMRC) where clients who have had a VAT reclaim can go back far further than the 3 year window. Car dealerships with Demo models, business mileage claims generally and vat on staff entertainment mistakes are typical areas where we can get a good claim.
If you believe you have had a reclaim in the past let me know.
We have recently set up a new VAT support arrangement from a Glasgow based independent firm of “ex-big 4” full time VAT specialists led by Gary Moore and we are hopeful that this arrangement will ensure further vat opportunities are highlighted more regularly and provide additional client benefit.
LOW EMISSION CARS
I continue my mission to encourage clients to use the tax rules in this area for their benefit. Not only do certain models (120g/CO2 and less) only have a 13% of list price benefit in kind calculation, if the car has 110g/CO2 or less output you can often write off the full cost against your tax bill in one year. If you are interested in this area let me know. One or two clients are considering using it to get a new car for their wives – nothing wrong with that provided it is on the right tax return and p11d report. (Sorry if “wives” sounds sexist but so far none of my leading female entrepreneurs have suggested their husbands want a new Polo diesel! – there we go).
OFFSHORE PLANNING
This is an area which is increasingly difficult unless the individual is becoming non-resident.
However, some of our highest profitability clients may have heard that some businesses in the UK have been using Isle of Man trusts to reduce or remove their corporation tax bills and to protect against Inheritance Tax.
Such tax planning is generally regarded as fairly aggressive but, if structured carefully and implemented well, there is technical merit in some of the structures.
We are currently arranging for a firm of third party specialists in this area to present the current leading tax planning ideas using offshore trusts to clients on a “one on one” basis and if you are interested in learning more please contact your regular partner, or me.
The fees for the specialists in this area tend to be 10% of the potential saving and there is also a substantial minimum. As such, clients who have profits or capital of under £1M would not be suitable. For many clients a combination of good UK planning and pension arrangements will be sufficient and suitable. However, we have to recognise that the market place is offering these schemes and ensure clients who are interested have the chance to learn more about them from the third party providers.
PROPERTY
The Scottish market news doesn’t seem as bad as down south but it’s still an uncertain time. In terms of taxation, I always like to remind clients with holiday homes and buy-to-let property that tax planning is vital. Although capital gains tax is now 18% this can be substantially reduced if the property has been a main residence of the owners. In some cases, moving house is worthwhile simply to get the tax bill down.
I would also like to remind clients that as HMRC can access land registry and carries out checks with letting agents there is no sense in trying to forget about your rental flat when doing your tax return simply because “it doesn’t make money anyway” – it still needs to be reported and it’s much easier and cheaper to do it right than to deal with an investigation.
TAX INVESTIGATIONS
I laughed out loud two weeks ago as the EU parliament revealed they had carried out a full audit of MEP expenses and that they could confirm that there were problems - basically many MEPs claim for staff allowances and don’t employ anybody – apparently they get about £160k per annum if they claim these and aren’t asked to vouch or evidence the expenses. In any case, the report has been suppressed and the MEPs decided all such future reports will also be suppressed meaning that we can’t get access under the Freedom of Information Act etc – it’s private. In the same newspaper there was a focus on the new HMRC powers of investigation. This is something I may have written about before. If you run a business, you should be aware that not only are penalties for careless or negligent mistakes in tax getting worse but you can also be subjected to a visit to look at your books and records with only 24 hours notice. HMRC would use such a visit to check your systems on a contemporaneous basis. Now I have some issues with that. Our tax legislation says that you file your return (say a corporation tax return) and HMRC can then review it and enquire into it. That is the logic of “self assessment”. The new powers, which only require the sign off of a senior officer to say the visit is proportionate given the tax risks, are out of line here – clients are not tax experts and suppose the company book-keeping says a payment is “director wage” by mistake – HMRC will potentially try to apply PAYE in a visit! – however, at the end of the year we might have corrected the entry as being a drawing against a director’s loan account. Isn’t it interesting that the Government has the right to come in at a days notice and look at everything you are up to but as a taxpayer you are not allowed to know if your MEP is one of the ones who has defrauded the public purse by claiming for staff and expenses they can’t vouch!? And people wonder why we don’t all vote – it’s because things like this suggest the state system is operated for the benefit of those in control of it not those paying for it. If you think I’m making a political statement then maybe I am but I think my grandfather would turn in his grave at the thought that politicians can keep their expenses secret whilst the normal taxpayer now has virtually no real right of privacy from the state. Mind you, at least we didn’t have the Italian system -the outgoing government ordered the release of ALL taxpayers earnings onto a website – it was shut down within 24 hours but in the meantime everybody could check out their next door neighbour’s taxable income! And that was a Government decision, not just carelessness and the Child Benefit office over discs….
IN SUMMARY…
Sorry this has been a big one, and no doubt I’ve left some major tax news off the blog – for which I apologise. As usual, I remind you the view of the tax partner, are not necessarily shared by the other partners or staff within this firm.
Best wishes to you all for the Spring.
Donald Parbrook
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