FEBRUARY 2006 NEWSLETTER
Contents:
Inland Revenue apologises
Problems with late payments?
Arctic Systems latest (Section 660) update
Retirement fund crisis
Bringing French celebrities home
HMRC ISSUE HALF A MILLION APOLOGIES
A Committee of Public Accounts report has revealed that HM Revenue & Customs made almost half a million mistakes in the 2003/2004 tax year. The report describes how they miscalculated the amounts owed by taxpayers in 5% of cases, resulting in a staggering £30M of tax being overpaid and £65M being underpaid.
It gets worse! 30,000 people had automatic penalties for
late submission of tax returns wrongly imposed and there were
£2M worth of PAYE coding errors. That all adds up to
a lot of administrative firefighting - and a lot of apologies!
Taxpayers going to the wire
Far be it for us to defend HMRC, but we do accept that the customary pattern of eleventh hour tax returns obviously contributes to these errors. The investigation reported that taxpayers were waiting far longer to fill in their forms, with many waiting until the last few weeks ahead of the January deadline. This results in a major peak in the department's workload with a congruent risk of official error. The report recommended that the department revise their approach; bring forward the filing dates, or introduce distinct filing dates for different groups, thereby spreading the workload.
The chairman of the committee, Edward Leigh, said "Taxpayers are increasingly going to the wire when it comes to filing their tax returns, despite HMRC's advertising campaigns. The department has to process a lot of returns in a short time, leading to more official errors. Different filing dates for different groups of taxpayers would spread the load."
More positively, the report acknowledged that the department was developing improved IT systems and systems management, which should help to reduce coding errors by about a third. Significantly, the report also found that around 30% of completed tax returns contained errors made by taxpayers themselves. These kinds of errors alone could lead to around £2.8bn of revenue being lost. According to HMRC the most common mistakes when completing a tax return are:
- Failing to complete a separate page for each individual
job.
- Failing to complete the self-employed pages.
- Detailing information on separate attachments and entering
vague notes such as "per accounts" or "information
to follow" - instead of entering the actual figures
on the return.
- Failing to indicate whether a repayment is required if
it is due.
- Failing to sign the return; it will be rejected immediately.
Initial figures for 2004/2005 confirm that submissions are getting later. A total of 9.8 million self assessment tax returns were issued for the year, which should net over £16bn for HMRC. Although the total number of self assessment returns received by 31st January will not be known for some weeks, (the paper returns have to be processed manually) it is already known that nearly 2 million on line returns were received by the deadline. That is a 38% increase over last year and a three fold increase compared with 2003. The HMRC website processed 719,913 self-assessment returns during January alone, including more than 336,000 during the deadline week; more than 216,000 in the four days leading up to January 31st. The influx of online returns peaked during the mornings of Monday 30th and Tuesday 31st, when around 8,700 returns were processed each hour. That works out at nearly 150 a minute; a final mad dash as taxpayers scrambled to meet the deadline and avoid the £100 fine. Sir David Varney, Chairman of HMRC said: "We've been pleased to see further growth in online filing this year. Almost a quarter of all returns were submitted online.
The penalties for late submission
Of course it should come as no surprise that hundreds still left submitting their returns until the very last minute; literally. 2,300 forms were received between 11.00PM and the witching hour on Tuesday January 31st!
Late tax returns attract a £100 fine - and its non
negotiable! Worse, if the tax balance is still outstanding
by 1st March, a surcharge of five per cent will be levied.
Worse still, a further surcharge of five per cent will be
levied if the tax balance remains outstanding by 31st July
2006; on which date the tardy taxpayer will incur an additional
£100 penalty!
In February 2005 there were 998,000 £100 penalty notices
issued for late filing for the 2004/2005 tax year. In July
2004 there was £1.1bn of income tax still outstanding
from overdue returns for the previous tax year.
Should the tax system be reformed?
As it currently stands, operating the self-assessment system costs around £200m a year. It takes about 8,000 staff years to process the returns; and a further 1,800 staff years to chase outstanding returns and manage debts. The department objective is to reduce this by around figure during 2005/2006.
So what of the future? Well, the Forum of Private Business (FPB) is calling for a reform of the tax system, which it claims is inflexible and unfair to many small businesses which would benefit from increased flexibility. For example, under the present system, individuals and businesses must pay their tax in two lump sums in January and July, or risk the inevitable charges and interest. That might be manageable for money-in-the-bank organizations who can afford to budget for the unexpected and the taxman; but it's hardly ideal for cash starved companies whose cash flow is susceptible to variation!
The FPB's Chief Executive Nick Goulding said: "It may be trite but it is absolutely true - cash is king in small businesses. So having to pay out so much cash in two big hits disrupts cash flow and can cause businesses serious problems. Businesses should be given the option to pay monthly in arrears as well as in two lump sums."
The CPM Solution
The good news is that CPM can steer you clear of the whole messy business! CPMTax is a low cost, no hassle service for Freelancers and agencies, covering everything from basic tax returns, through queries and repayment claims, to tax advice on complex issues. We'll ensure that your tax return is accurate and on time, and that you claim ALL your legal entitlements. We'll also provide tax relief on expenses processed in the payroll. For agencies we'll ensure that there are no HMRC investigations into payment of Freelancers without deduction of National Insurance and tax. Moreover you won't have to accept responsibility for monitoring the tax status of self employed Freelancers.
WILL YOU GET PAID ON TIME?
Well, if you're signed up with CPM you know the answer is yes. Paid on the dot. Without fail. Phew! But a recent report by Experian, the global information solution company, has indicated that UK companies are still taking as long as two months to settle their bills! This shows no improvement over figures quoted in a corresponding report last year. In fact, it shows an actual decline of two days since the Late Payment of Commercial Debts (Interest) Act was passed seven years ago, ostensibly to speed up payments! On this evidence it hasn't been very successful so far!
Small, medium and large companies alike are taking longer to pay; but, with an average settlement period of 80 days, the larger companies are taking, on average, 21 days longer to pay than everyone else.
Phil Cotter, Managing Director of Experian's Business Information division, said: "While the agreed payment period must also be taken into account when looking at how long companies take to pay their bills, there is no escaping the fact that companies are taking longer to pay. This could be the result of larger companies imposing longer payment terms on their suppliers, who are often not in a position to refuse. But this has a knock-on effect, with companies lower down the chain experiencing cash flow problems as companies up the chain wait for payment before they pay their suppliers. This in one reason why corporate insolvencies rose in the final quarter of last year for the first time in two years."
We all know that cash flow is critical; we've already heard that "cash is king" for small businesses. For Freelancers too, poor cash flow can make the difference between business survival and insolvency. That is why, CPM guarantee you'll be paid on time - all the time. No exceptions.
ARCTIC SYSTEMS: SENSE PREVAILS - OR
DOES IT?
In our last Newsletter we celebrated the fact that the UK Court of Appeal had overturned the High Court ruling in the Arctic Systems Case. Our celebrations were, as expected, short lived.
HMRC have sought leave from the House of Lords to appeal the case; it is being predicted that a final verdict might not be given until this time next year, continuing to throw self-assessment cases into further chaos in the meantime.
Commenting on this development, Professional Contractors Group (PCG) chairman Simon Juden said, "Geoff and Diana Jones set up their family business in the normal, routine way, as recommended not only by their accountant but also, until very recently, by the Government. The unanimous verdict of three of the most senior judges in the land was that, given that the Joneses shared the burdens and hard work of running their business, they were both entitled to share in the reward. This is consistent with the clear intention of Norman Lamont when introducing the independent taxation of spouses, as well as normal practice in the divorce courts. Appealing to the House of Lords will exacerbate and prolong the uncertainty caused by HMRC's initial attempt to move the goalposts by changing their interpretation of 1930s legislation and announcing that they were doing so only after the fact. If the Government wishes to extend the scope of the settlements legislation to include these normal family businesses, the honest way to proceed would be - as the judges in this case stated - to legislate openly and clearly. We are profoundly disappointed that HMRC has chosen to expose hundreds of thousands of businesses to yet more uncertainty, especially with regard to their self assessment positions, rather than accept the common sense verdict delivered in this case."
James Kessler QC, the leading tax barrister who helped PCG fund the case, believes that the Revenue argument in the Arctic case is not only legally flawed, but also unfair to small family businesses. "They are asking people to value the contribution of their spouse," he said. "That is an almost impossible exercise and will vary from year to year, depending on individual circumstances. As a tax lawyer, I want to see the tax system operated in a way that is right in law, and fair and workable in practice. PCG and the Joneses have my full support." Well said indeed.
The Tories have also taken an interest in the case; in particular they've questioned why HMRC have stoutly refused to treat it as a test case. Mark Hoban, shadow financial secretary to the Treasury has been quoted as saying he can't understand why HMRC haven't been treating Arctic Systems as a test case, and will be endeavoring to find out!
Giving test case status would not only reflect the obvious interest from, and implications for freelancing couples; it would also require that both sides' costs be paid by HMRC! At present their costs are being met by the PCG and assorted benefactors.
HMRC are resolute - Arctic Systems does not qualify as a test case. However, read between the lines and it appears there's a growing school of thought suggesting HMRC are more malleable on this point than they're letting on. If the decision goes against them, then they'll continue to refute test case status. If, on the other hand it goes in their favor….
Well, we'll just have to wait and see.
RETIRMENT FUND CRISIS
The retirement age is on the up, pensions forecasts are on the slide; and Britain is unprepared for the long, dark days ahead!
It's all down to the youth of today, apparently! New research from IFA Promotions has warned that free spending single Britons under the age of 34 are spending now and worrying about the consequences later. About 70% of 25-34 year old singletons admit to having little knowledge, and as little interest in their finances. One in four of them don't stop to think about the long term impact of their buy-now lifestyle.
A combination of lavish living and a putting-their-future-on-hold ethic means that young men and women are entering their thirties unmarried and as yet, unencumbered by mortgages. The average age of the first time home owner now stands at 34. And therein lays the problem. Putting off buying a house and marrying later in life is giving youngsters plenty of buying power, but no regard for responsibility, leaving them unable to save for the future. Being saddled with a mortgage often kick-starts people into managing their cash more effectively, according to IFA.
The researchers cite an epidemic of financial naivety, caused in part by the inherent difficulties in buying a house and paying off existing debts. Now as many as 24 million of us are unprepared to cut back on spending to save for the future. A further three quarters of us believe that even if we had the desire to save, we just couldn't do it. The result: just 28% of all taxpayers feel they've set aside enough money for retirement. That is compared with around 40% of respondents in a similar survey last year.
"Retirement seems a long way off when you are in your late twenties or early thirties but if you don't start planning for your pension in time it will have a serious effect on your future lifestyle," said David Elms, CEO at IFA Promotions.
"We are delaying important life events such as marriage and mortgages until later in life but this doesn't necessarily mean we want to work into our dotage because we can't afford to retire. The only sure-fire way to solve this dilemma is to take some responsibility for your long term finances now and get saving."
On a slightly more positive note, the research also showed that married people and home owning singletons are likely to have a good grasp of their financial affairs, which should sustain them through the difficult days ahead.
CELEBS COME HOME!
Okay, so they haven't quite paid their dues, but at least they've served their time; French tax émigrés could be about to come home in a landmark show of political savoir-faire.
The French tax system has long been renowned as a bastion of Socialist intent that, whilst big on fraternity, did very little for the rich and famous. Remarkably, that is about to change in what can only be described as an astonishing reversal.
For years, the highest earning singers, film stars and leaders of industry have been decanting themselves all over the EU; scattered among the more lenient tax climates of England, Ireland, Belgium and Switzerland. But now they're being enticed back.
French PM Dominique de Villepin has instituted the change that cuts the top income tax rate from 48% to a comparatively painless 40%. (Even if there are a number of other levies and 'hidden' charges underneath.)
As might be expected, it hasn't met with compete approval. The tabloids have denounced the scheme as a concession to high earners who don't need it, rather than a salve for the over taxed middle classes - who do.
Whether or not it brings the stars back from self imposed exile remains to be seen, but the move has at least been met with approval outside of France. However, financial observers have pointed out that whilst it may help to aid the ailing French economy, it's just the beginning; there are surely tougher reforms ahead.