Tax By Design
The director of the Institute for Fiscal Studies (IFS) has bitterly criticised the structure of the UK tax system.
In May, the director of the IFS, Paul Johnson, gave the annual Chartered Tax Adviser address. The essence of what he said grabbed a few press headlines in the national press but was deserving of more coverage.
Mr Johnson highlighted the “complexity and uncertainty” created by the poor tax policies introduced by the current coalition government “as well as those of its predecessor (and often earlier governments too)”. Among his criticisms were:
- The existence of a 60% income tax band, which is created by the tapering away of the personal allowance once income exceeds £100,000. This band is now £20,000 wide, after which the marginal rate drops down to 40% for the next £30,000 before rising to 45%. As Mr Johnson said, “it’s hard to make much sense of that.”
- A trend “which has fundamentally altered the nature of our system of income tax, namely a continued increase in the number of higher rate taxpayers.” Mr Johnson noted that, “Numbers have risen from less than 2 million in 1990 to nearly 4 million in 2007 and well over 5 million by 2015”, and that the change “has never been announced or properly debated.”
- The structure of Stamp Duty Land Tax (SDLT), which Mr Johnson said was “one of the worst designed and most damaging of all taxes.” At the extreme, a £1 increase in the sale price of a home can now trigger an additional £40,000 SDLT bill.
- Sharp increases in income tax personal allowances have not been matched by the threshold for national insurance contributions (NICs), a tax on income in all but name. In contrast to the politician’s emphasis on the numbers removed from income tax, Mr Johnson remarked that there were now over one million low paid workers who pay NICs, but no income tax.
A former US Treasury Secretary once said that a tax system should look “like someone designed it on purpose.” There appears little chance of that happening in the UK soon, whatever the outcome of the General Election in less than a year’s time. All the more reason to take advantage of what allowances and reliefs are on offer.
The perils of hiring unqualified accountants
UK small businesses could be inadvertently damaging their growth prospects by paying accountants who have no training.
The Association of Chartered Certified Accountants (ACCA) stated on 22 May that new research from cloud accounting software provider, ClearBooks, showed that only 8% of small businesses took an accountant’s qualifications into consideration when choosing one to handle their financial affairs.
Such practice is risky for small business owners who could be unknowingly paying someone who is neither regulated nor insured and without the necessary skills and experience to help their business grow in the best possible way.
In order to qualify with ACCA, accountants are required to undertake examinations and extensive supervised training to provide services to the public. They then have to maintain indemnity insurance, attend courses to keep up-to-date and submit to regular monitoring by their professional body. Members of the public then have recourse to the professional body in the event that something goes wrong. If an accountant is unqualified, then none of these safeguards are usually in place.
ACCA did, however, specify that there is no law preventing anyone from calling themselves an accountant. The regulatory body recommends that businesses check an accountant’s qualifications before using their services, as some members of the public only discover that their ‘accountant’ is unqualified once a problem arises.
A qualified accountant will be happy to discuss any queries you may have on qualifications.
HM Revenue & Customs tax avoidance crackdown generates record £23.9bn
The Government has raised a record £23.9 billion in additional tax for the year to the end of March as a result of the recent crackdown on tax avoidance.
HMRC made the announcement on 27 May 2014 and stated that it had secured the money, which is the highest amount since records began, as a result of its increased activity to ensure people pay the taxes they owe to the Government.
The figure is up £3.2 billion on the previous year, up £9 billion on three years ago. It is almost £1 billion higher than the target set by the Chancellor, George Osborne, in the Autumn Statement 2013, which is good news for HMRC.
HMRC said that of the total amount it had raised, more than £8 billion derived from large businesses, £1 billion from criminals and £2.7 billion from tackling avoidance schemes in courts. In total, HMRC stated that expects to secure £100 billion between the period of May 2010 to March 2015 as a result of its investigations into unpaid tax.
Exchequer Secretary to the Treasury, David Gauke, said: “The Government supports the hardworking, honest majority of taxpayers who play by the rules, and is determined to tackle the minority who seek to avoid paying the taxes they owe. We set HMRC ambitious targets to increase its yield and the figures published today demonstrate that HMRC is successfully meeting these challenges. It also sends a clear signal – HMRC will pursue those seeking to avoid their responsibilities and will collect the taxes that are due.”
You should always take advice when looking at any tax-saving schemes – they may be too good to be true, at worst, illegal.
Regulators unveil new global revenue accounting rule set
A global accounting standard designed to overhaul the way businesses record revenue on their books has been unveiled by regulators.
The Financial Accounting Standards Boards (FASB), which is responsible for writing book-keeping rules in the United States, and the International Accounting Standards Board (IASB), whose rules are used in over 100 countries, have established a simple, common approach designed to allow investors to make a comparison of how much companies from all over the world earn. compare more easily how much companies from all parts of the world earn. The standard is due to come into force in 2017.
As a result, companies will be able to recognise revenues in a way that shows the transfer of goods and services to customers that reflects the payment to which the company expects to be entitled. The revenue recognition standard “will eliminate a major source of inconsistency in Generally Accepted Accounting Practice (GAAP), which currently consists of numerous disparate, industry-specific pieces of revenue recognition guidance”, said Russell Golden, chairman of FASB.
The new standard is also intended to enhance disclosure of revenue, provide guidance for transactions that were not previously addressed comprehensively (service revenue and contract modifications for example) and improve guidance for multiple-element arrangements.
Expect to see much more on this over the next couple of years.
Pensioners lose almost a third of income to tax
Most pensioners are paying around 30% of their income to HM Revenue & Customs (HMRC), according to a report released on 30 May.
Life Insurance provider, Prudential, stated that the average household paid out around £6,400 in tax during 2011/12 from a gross income of £21,300. About £3,800 of the bill can be attributed to indirect taxes such as VAT and fuel duty.
While the top 10% of pensioner households with gross income of £47,992 or more pay 29% of their income out in tax, those at the bottom end of the income spectrum are paying a lot more.
The bottom tenth of pensioner households, receiving up to £8,259 gross income a year, pay 42%, or £3,599 in tax. The reason for this is that there is no sliding scale of income tax in retirement so everyone pays the same rate regardless of income. So those with less income pay proportionately more.
Dominic Grinstead, managing director of insurance provider, MetLife UK, said: “Pensioners need to think about the effects of direct and indirect tax on their retirement income and to plan accordingly. With 29% of gross retirement income being swallowed up by tax it is clearly a major factor to consider when planning for retirement”.
He went on to warn that pensioners should not only think about the effect of tax on their income, but the damage that inflation does over long periods of time, diminishing the spending power of the income. Inflation will have an effect on retirement – which can last 20 or even 30 years. “It is clear that savers need to consider all retirement income solutions in order to achieve a degree of certainty”, said Mr Grinstead.
Retirement planning can’t start too early, so make sure you get advice.
