Monday 30 July 2012

FSA investigate Barclays chief

Barclays’ finance director, Chris Lucas, is under investigation by the Financial Services Authority (FSA) over the fees paid when the bank undertook two rounds of fund raising during the height of the financial crisis, in order to avoid a state bailout.
In a statement, Barclays Bank said that the FSA probe involves four current and former senior employees, including Lucas, and relates to ‘the sufficiency of disclosure in relation to fees payable under certain commercial agreements and whether these may have related to Barclays capital raisings in June and November 2008'.
In June 2008, the bank raised £4.5bn through an issue of new shares, including £2bn from the Gulf state of Qatar, while in November 2008 it raised a further £6.8bn from another group of Middle Eastern investors.
According to the Guardian, the FSA is looking at key paragraphs in documents linked to the June 2008 fundraising, which cite ‘an agreement for provision of advisory services’ by Qatar Investment Authority to Barclays in the Middle East and ‘to have agreed to explore opportunities for a co-operative business relationship’ with Sumitomo Mitsui Banking Corporation.
The document also states that ‘Barclays and Qatar Holding have entered into an agreement for the provision of advisory services by Qatar Holding to Barclays in the Middle East’.
The total fees disclosed for the June fundraising were about £100m, while for the November 2008 fundraising, the bank provided five separate disclosures of fees that amounted in total to around £300m.
In a statement, Barclays said it ‘considers that it satisfied its disclosure obligations and confirms that it will co-operate fully with the FSA's investigation’, which is expected to last for several months.
(Accountancy Live, 30 July 2012)

Company car calculator

HMRC has updated the company car and car fuel benefit calculator to reflect the increase in the car fuel benefit multiplier from 6 April 2012.
When a company car is made available for the private use of an employee a 'benefit in kind' value is calculated in relation to the car, and the fuel if that is also provided for private use.
This calculator:
allows you to calculate the 'benefit in kind' value of a company car and, if appropriate the car fuel benefit
provides an indication of the Income Tax you would be liable to pay for the provision of company car and car fuel benefit
Further details are available from HMRC.

Friday 27 July 2012

Triple dip?

http://www.accountingweb.co.uk/article/economy-contracts-shock-07/529920

Tuesday 24 July 2012

Cash in hand

http://www.bbc.co.uk/news/uk-18964640

More anti avoidance

The Government is to ramp up its assault on the tax avoidance industry with a new arsenal of weaponry set to be unleashed against ‘cowboy’ promoters of contrived and aggressive tax avoidance schemes.
Among the proposals revealed by David Gauke, Exchequer Secretary to the Treasury, include toughening up the Disclosure of Tax Avoidance Schemes (DOTAS) rules by giving HMRC stronger powers to force promoters to tell them about avoidance schemes and who is using them. It will also tighten rules to make it easier to impose penalties for failing to provide information to HMRC about a scheme.
The Government will also promote warnings about tax avoidance schemes that are being mis-sold and make it easier for taxpayers to realise when they “are on the receiving end of a hard sell by a less reputable promoter”.
David Gauke said: “Some might say that consultation documents on tax administration are an effective cure for insomnia, but this is one that will keep the promoters of aggressive tax avoidance schemes awake at night.
“We are building on the work we have already done to make life difficult for those who artificially and aggressively reduce their tax bill. These schemes damage our ability to fund public services and provide support to those who need it. They harm businesses by distorting competition. They damage public confidence. And they undermine the actions of the vast majority of taxpayers, who pay more in tax as a consequence of others enjoying a free ride.
The DOTAS regime has already helped HMRC close down around £12.5bn in avoidance opportunities, Gauke revealed, adding that it would continue to adapt with the shifting avoidance landscape.
Since DOTAS was introduced in 2004 and the end of March 2012, 2,289 avoidance schemes have been disclosed to HMRC leading to over 60 changes in tax law to close down avoidance schemes.
At Budget 2012, the Government announced a range of anti-avoidance measures to bring in around £1bn and protect a further £10bn in future revenues from the tax avoidance ‘industry’ over the next five years.
More details are available from HMRC.

Anti avoidance

HMRC has begun a 12-week consultation period on publication of Lifting the Lid on Tax Avoidance Schemes. It seeks to consult on measures to improve the information available to HMRC and customers about tax avoidance schemes and the risks of using them. These include proposals to revise and extend the Disclosure of Tax Avoidance Schemes (DOTAS) regime, which requires promoters and users of tax avoidance schemes to provide information to HMRC. The closing date for comments is October 15 2012.
HMRC is also seeking views as to whether proposals to revise and extend the DOTAS ‘hallmarks’ (the descriptions of schemes required to be disclosed for income tax, capital gains tax and corporation tax purposes) are too widely or narrowly drawn, and on their impacts upon compliance costs and administrative burdens.
Comments from representative bodies, tax agents and scheme promoters, as well as businesses and individuals who may receive marketing and advice about tax avoidance schemes are being sought.
More details are available from the HMRC website.

Monday 23 July 2012

Penalty suspension

A penalty for careless misstatement in a tax return can be suspended even if relates to a one-off event such as redundancy, a tax tribunal ruled.
In the lower tax tribunal case of Philip Boughey v HMRC (TC/2011/09901) Philip Boughey had mistakenly claimed a tax exemption for a £30,000 redundancy payment in his self-assessment tax return when relief had already been given through PAYE. HMRC charged a 15% penalty for careless error.
Boughey accepted that the penalty was due but appealed against HMRC’s refusal to suspend it. He argued that no suitable condition of suspension existed – citing paragraphs 14 to 17 of schedule 24 of the Finance Act 2007.
Paragraph 14 of schedule 24 says that the respondent may suspend all or part of a penalty for careless inaccuracy but “only if compliance with a condition of suspension would help [the person] to avoid becoming liable to further penalties under paragraph 1 for careless inaccuracy.”
The tribunal ruled against HMRC, which it held had proceeded on an “erroneous legal basis”. The judge, Geraint Jones, noted the appellant’s co-operation ( “material consideration”) and that his mistake was due to carelessness “rather than anything more serious”.
The judge commented: “It is clear... that the decision maker proceeded on the erroneous legal basis that any condition of suspension must be designed to ensure that, in the future, the appellant correctly declared the receipt of any redundancy payments. That was far too narrow a view and discloses a highly material error of law.”
In agreeing to a two-year suspension, the judge applied a condition that Boughey’s tax returns must be completed on his behalf by a chartered or certified accountant.
In her 16 July AccountingWEB tax podcast, Anne Fairpo confessed to mild indignation that chartered tax advisers were not included in that list.
However law firm Pinsent Masons said the tribunal’s decision was “welcome confirmation that the suspension provisions can be used to set a condition which is not specific to the tax return] inaccuracy.”

Spain's woes

http://www.bbc.co.uk/news/business-18950896

Tax avoidance

http://www.bbc.co.uk/news/uk-politics-18949788

Immigant chaos

http://www.bbc.co.uk/news/uk-18945047

London traffic chaos

http://www.bbc.co.uk/news/uk-england-london-18953088

IR35

The government’s attempt to deflect criticism of senior civil servants using personal services companies to avoid tax symbolises why the UK tax system is so chronically complex.
“As if IR35 is not complicated enough, they need to introduce another layer of complexity to deal with controlling persons,” said ICAEW Tax Faculty chairman David Heaton at the Wyman symposium on tax simplification on Wednesday night (18 July).
Heaton, a tax partner with Baker Tilly who specialises in employment, explained that similar rules were rejected when IR35 was first proposed back in 1999, “But I doubt anyone’s still around from then,” he said.
Personal services companies exist because clients don’t want to take on the extra risks of hiring employees or run the risk of status enquiries. And the differential treatment of dividends and earnings only served to encourage the practice. Instead, Heaton argued that a lot of the problems IR35 is designed to deal with would go away if dividends in close companies were taxed at a higher rate.
“Higher NICs would discourage people from forming limited companies,” he said. “Then you could repeal IR35 and drop this controlling persons nonsense.”
Is it possible to achieve simplification?
With AccountingWEB tax editor Rebecca Beneworth chairing proceedings, Heaton anchored a three-way discussion with Office of Tax Simplification (OTS) policy chief John Whiting and Robert Maas from Blackstone Franks on whether or not it was possible to achieve simplification.
Maas played devil’s advocate, arguing that simplicity is in conflict with certainty and fairness.
“Simplicity is a myth that is incapable of being achieved,” he said. To illustrate his point, Maas waved a small bundle of documents in the air and said he was holding all of the Finance Acts from the 1950s, which ran to 625 pages. In contrast, the Finance Act that was given royal assent on Tuesday was 687 pages long.
On the controlling persons rules, Maas commented: “It’s hard to see how IR35 doesn’t apply to a person who is part and parcel of an organisation.” One of the reasons why tax legislation has been expanding rapidly, he added, is that it’s cheaper for the government to legislate new rules than to litigate to enforce rules that already exist.
“Patches on patches on patches makes legislation disjointed and hard to follow. They militate against simplicity,” he said. The sad fate of the OTS was that it was only being asked to look at redundant reliefs and pick away at legislative patches.
“I feel sorry for John. I think he’s taken on an impossible job. The real job isn’t tax simplification. What George Osborne wants is someone to peel the hot potatoes so that John can be blamed for changes that are difficult for Chancellors to propose.
“If George Osborne is serious, he should ask the OTS to look at something serious. Until he does that, there’s not the slightest hope of simplification.”
In the context of a formal debate, Whiting may not have helped his case by confessing, “I don’t think we can ever get to simple. Life is complex. Life has got a lot more complex since the 1950s.”
Instead, Whiting posed a series of thoughtful questions designed to solicit feedback from the profession about what kind of simplification the OTS should work towards, and where it should compromise with legal and political realities.
In most people’s minds, the OTS is about technical simplification - “tearing pages out of the Yellow book” as he put it. But was administrative simplification a more viable target? “If we can make the system easier to deal with I think we can make progress,” Whiting said.
“Who is the tax code aimed at? We’ve got to simplify it with those people in mind.”
Whiting said that Chancellor George Osborne and Treasury minister David Gauke were serious about simplification, “but they’ve got bigger fish to fry”. Against that backdrop, he asked whether the OTS should keep tinkering away with incremental simpilification.
“Do we keep chipping away at the barnacles on the hull of taxation, or do we need a complete rebuild of the ship of state?”
His next question tackled the patching challenge: “How can we get to a situation where the process of making new tax law doesn’t make things worse?”
Having acknowledged the Maas argument that simplicity and fairness were pulling the law in different directions, Whiting asked: “Which takes precedence, fairness or simplicity? Would you take some rough edges to get simplicity?”
In his defence, Whiting said the OTS had made some progress, for example by excising around 100 pages of old, mainly unused reliefs from the statute books. “But whether we’ll ever make a dent in the Yellow Book, I don’t know.”
Simplification manifesto
It was obvious that all of the speakers yearned for simplification, but the evidence they presented confirmed just how intractable the problem was. Along with the IR35 controlling persons rules, Heaton presented a litany of examples where “even those responsible for the law lose track in the maze over time”.
He praised the OTS for its work on simplifying pensions for taxation and for identifying redundant legislation, but pointed out that that was shortening the law, not simplifying it.
“I suspect it’s going to be a hard, neverending struggle without a change of mind at ministerial level,” Heaton concluded. “If ministers are serious, it’s easy. Stop it. Now.”
At the end of the symposium, Rebecca Benneyworth called for an electronic vote on whether simplification was possible; 59% of the audience said no, 39% said yes, but the proportions was almost unchanged from earlier in the evening. Like tax simplification itself, there looks to be little hope of shifting the profession’s pessimistic outlook.

Law firms in trouble

Over 2,000 law firms are set to go the wall in the next 12 months. That’s the doom-laden prediction of R3 - the Association of Business Recovery Professionals - which claims the twin perils of partners’ tax liabilities and the Legal Services Act will be the death sentence for many firms.
By the end of July, partners in law firms must make their second tax payment for the year. Unlike many other businesses, Limited Liability Partnership (LLPs), partnerships and sole practitioners are not directly assessed for tax on the business’ profits but will commonly arrange to settle individual partners’ liabilities. Ideally, a tax reserve fund will have been maintained for this purpose but this is not always the case.
Lee Manning, R3 President, said:
‘This requires very careful planning and steps should be taken to apply for a reduction of payments on account if earnings are expected to reduce over the coming year. This time of year is known to put real cash flow pressure on firms and more often than not we see a spike in banks being asked to fund taxation liabilities.’
‘The legal services sector is a very crowded market and so firms that are not competitive are unlikely to thrive. Careful planning and management of taxes can help give businesses an edge and make this time of year less daunting.’
Adding further fuel to legal pyre, research by R3 using data from Bureau van Dijk’s ‘Fame’ database, finds that over 2,000 law firms are at risk of failure in the next 12 months – this equates to 29.1% of firms in the UK and Ireland, higher than the cross sector average of 21.8%.
A key challenge for them is The Legal Services Act – dubbed ‘Tesco Law’. It legislates for Alternative Business Structures (ABS) - to make legal services easier to access by allowing non-lawyers to invest in and own legal businesses. But it poses a real and tangible threat to the legal services market - particularly for small high street firms.
Lee Manning continued:
‘Traditionally a firm would practice a range of different areas of law. With the introduction of "Tesco law", new specialist firms will begin to emerge and they will be difficult for the high street to compete with, partly because small practices cannot afford the level of branding and marketing that these new firms will be able to take advantage of. It is also unlikely that they will have the resources or the technology to compete with these Alternative Business Structures.’

Friday 6 July 2012

French homes

The worst nightmare of 200,000 Brits who own second homes in France looks set to be realised after newly-elected French President François Hollande announced he will increase taxes on foreign-owned second homes.
Tax on rental income is set to leap from 20% to 35.5%, while capital gains tax on property sales would rocket from 19% to 34.5%.
And the inheritance tax-free allowance between parents and children of about €160,000 (£134,000) - available to any child of the deceased – is expected to be slashed to €100,000.
The rise in tax on rental income will be backdated to Jan 1 this year while the capital gains tax hike will kick in from the end of July, giving shell-shocked owners virtually no time to sidestep the tax by selling their home.
The moves are part of a wider series of increases set be voted through in parliament within the next week, designed to accrue €7.2 billion (£5.8 billion) to plug a massive budget deficit.
Graeme Perry, a partner at law firm Sykes Anderson, which advises British citizens on French residences, said: ‘If the law is introduced, the effective rate of French capital gains tax will almost double for EU residents on their French property capital gains.’
Alex Henderson, tax partner at PwC, echoed similar sentiments: ‘Tax on foreign owned second homes focuses on the wealthy and avoids hitting your own electorate. However, the plans could breach EU laws if they discriminate against other EU nationals. There's likely to be a scramble as those Britons already looking to sell their French holiday homes try to do so before the imminent capital gains tax hike.’
Hollande has publicly decreed that the financial world was his ‘true adversary’. Such a stance has fuelled concerns that France’s wealthy will flee the country to less hostile tax states such as the UK.
The French PM also looks likely to introduce a marginal tax rate of 75% on incomes over €1m (£806,000) a year.
It led to PM David Cameron saying: ‘I think it's wrong to have a completely uncompetitive top rate of tax. If the French go ahead with a 75 per cent top rate of tax we will roll out the red carpet and welcome more French businesses to Britain.’
Another key Gallic tax proposal is to increase corporation tax according to the size of the company and redistributed profits. While no definitive figure has been settled on, it is expected to be around 35%.
Hollande also plans to abolish the tax exemption for overtime hours and scrap existing plans to increase VAT by 1.6% in October 2012.

Thursday 5 July 2012

QE

Another £50bn will be pumped into the British economy by the Bank of England through its quantitative easing (QE) programme.
The latest batch of QE aims to kick start the faltering UK economy. Previous rounds of QE have already injected £325bn into the banks. The BoE left interest rates at 0.5% - the same rate for more than three years – a record low.
The UK economy is already in a double-dip recession, and has limped along for the past 18 months.

Wednesday 4 July 2012

employee share ownership

Someone obviously forgot to tell Clegg that Lehman Brothers was 30% owned by the employees. Employee share ownership is not the panacea he thinks it is..............

Nick Clegg has called for employees to have the right to shares in the company they work for, as part of his bid to transform Britain into a ‘John Lewis economy’.

A report from Graeme Nuttall - the Government's independent adviser o...n employee ownership – proposes that if at least 10 per cent of staff want to do so, they should have a statutory right to lodge a proposal for the workforce to share in the ownership. However, only businesses with over 250 employees would be considered in the first instance.

The report – by law firm Field Fisher Waterhouse - says bosses would then have to consider the request and be compelled to give reasons for refusal.

In January, the deputy PM championed the uptake of wider employee ownership, to further boost the UK’s 120 companies that have similar schemes.

The government has yet to decide if the move should be statutory.

The report’s publication coincides with the release of the annual IFS ProShare Employee Share Survey which showed over two million workers were enrolled in employee sharesave schemes last year.

A total of 378,497 workers received on average £536.37 each in free shares last year – down from £675.98 per employee given to 353,235 employees in 2010. The tax-free shares were given to employees as part of Share Incentive Plans (SIPs), often part of reward and retention packages, up to an annual maximum of £3,000 per employee.

The survey of over 451 companies, including 95 of the FTSE 100, also revealed the average monthly amount of money employees contributed to a Save As You Earn (SAYE) grew slightly, to £102 from £101 in 2010, and an increasing number of staff are saving the maximum monthly amount of £250, up 7pc to 22pc in 2011.

Employers such as BT, Aviva, National Grid and Asda all offer a range of SAYE and SIP (Share Incentive Plans) share schemes.

More details are available from the BIS website.

Benefit fraud

http://www.bbc.co.uk/news/uk-england-london-18704658

Be careful what you put on Facebook

Be careful what you put on Facebook!

With over 900 million users, half of whom access their account on a daily basis, Facebook offers a wealth of information to those who go looking.

And HMRC have started looking!

In a recent tax case, a musician and DJ was being investigated by HMRC. They discovered that he had put photos of gigs in Australia and Japan on his facebook page. However, there was no record of any income from these gigs in his books.

Not surprisingly he got convicted of tax evasion!

Tuesday 3 July 2012

Businessman jailed

A Yorkshire pensioner who helped criminals launder over £500,000 has been jailed after an investigation by HMRC. Ian David Smith from Cropton in Pickering admitted helping criminals hide their illicit profits by falsely putting them through the books of his family luxury cottage rental and horse and carriage businesses in an attempt to make the cash look legitimate.
His customers included a gang of convicted tobacco smugglers and a prolific mortgage fraudster, who he helped by buying property and vehicles using the illicit cash. Smith provided his ‘clients’ with fake invoices, putting the money through the company books to make it look as though they had paid for goods. The funds would then be paid back to the criminals at a later date, after taking a fee for his role in the transaction.
Martin Brown, assistant director for HMRC, said: ‘Ian Smith helped career criminals launder their illicit gains. He risked everything in exchange for money and as a result is paying the price for becoming involved in the criminal underworld. Money laundering is a serious crime and HMRC is committed to tackling the movement of criminal profit. Money is the lifeblood of crime and we will look to prosecute anyone involved in helping to hide dirty cash.’
Smith, who lives in a £3million farmhouse, runs a number of successful family businesses, including Beckhouse Carriages based in Stockton upon Tees, which provides luxury horse and carriages for weddings, funerals, feature films and television dramas. He also owns a luxury cottage rental business based in his hometown of Cropton, North Yorkshire.
Smith was arrested in September 2007 following an investigation by HMRC and pleaded guilty to money laundering at a hearing at Canterbury Crown Court in May 2012. Sentencing today His Honour Judge James said: ‘Without people like you criminals would not be able to hide their profits and you fell prey to temptation’.
He was sentenced to 2 years in prison and disqualified from being a company director or receiver for 5 years.
Smith was ordered to pay £199,500 under the Proceeds of Crime Act and was also ordered to pay £75,000 costs.

P11d

HMRC reminds employers that Expenses and Benefits forms P11D, P11D(b) and P9D are due by 6 July 2012. If you have not sent yours yet, you must send them as soon as possible. If you have shown on your P35 that you have no expenses and benefits returns to make, no further action is required.
Further details are available from HMRC.

RBS glitch

RBS’s recent computer woes look set to have knock-on consequences for employers who were unable to settle their income tax and national insurance contributions with HMRC.
PAYE and NIC payments that arrive late at HMRC are set to be classed as a default by the taxman.
And while companies are permitted one default per tax year, the latest deadline was only the second payment due in this tax year – leaving those that defaulted with no room for further error.
HMRC has urged those affected to pursue compensation from their banks.

VAT on football

FIVE-a-side football players at over 150 UK sites are facing a new tax on their favourite sport.
Players will now have to fork out an extra £1 on a typical £4.50 cost of a game.
The taxman is now demanding VAT at 20 per cent from the commercial sports companies that run all weather pitches.
Previously, it was understood that they were exempt from the tax because they were deemed to be encouraging people to take regular exercise. However, the Treasury says the leagues have been hiring pitches from commercial companies and are therefore liable to tax.
Former sports minister and Labour MP has condemned the move given the UK’s rising obesity levels and the fact the country is hosting the Olympics in under a month’s time.
A spokesman for HMRC said commercial sports league providers were liable to the standard rate of VAT.

Eurozone banks

The impact of the current eurozone turmoil will not be seen until 2013, with £1.6 trillion likely to be wiped from bank balance sheets, Ernst & Young has warned.

Unsuccessful short-term quick fixes for troubled European banks will, according to the firm, see non-performing loans reach record highs next year forcing financial institutions to realise their losses and cut back on lending.

E&Y anticipate a contraction of 0.6% in GDP for the eurozone in 2012 and modest growth of just 0.4% in 2013.

Andy Baldwin, leader of financial services for Europe, Middle East, India and Africa at E&Y, said: ‘Investors are frustrated with short-term quick fixes to the sovereign debt crisis and are looking for a more fundamental solution. The eurozone financial services sector continues to be hit by a combination of the deteriorating economy and the recurrent crises of confidence in the market. While the effect of this on bank balance sheets in 2012 is worrying, the real impact of this year of eurozone turmoil will not be seen until 2013, when non-performing loans will hit harder than many are expecting.’

The firm also believes that around half of any investment in the eurozone over the next 20 years could well be absorbed into pension funds.
(Accountancy Live, 2 July 2012)

Monday 2 July 2012

HMRC accounts

Funny isn't it? If any business fails to keep proper accounting records, HMRC are quick to fine them. But what about there own accounting records? Presumably they are impecable? It appears not ........

For the 12th year in a row, the comptroller and auditor general qualified HMRC’s accounts for 2011-12 for the lack of verifiable evidence concerning tax credits error and fraud.

Ever since it firs...t started pumping out billions in tax credit overpayments (estimated at £2.2bn a year in 2003-4), the Revenue has failed to produce accurate figures for erroneous payments and related fraud. The 2010-11 figures were only published this month and showed it had failed to reduce the figure to a targeted maximum of 5% for the year. The latest available estimate was 8.1%, equating to £2.3bn.

The NAO’s assessment for 2011-12 was that HMRC “has inadequate management information” on the recoverability of tax credits debt. The NAO assessment of the tax credit debt balance at 31 March 2012 indicated that the level of irrecoverable debt could be substantially higher than HMRC was estimating and led to a £638m increase in the provision for irrecoverable debts to £2.3bn by the time the final versions of the accounts were published.

Aside from that continuing multi-billion pound niggle, and £5.2bn of debt write-offs swelled by £81m for small PAYE underpayments that will not be collected following the botched National Insurance and PAYE Service (NPS) implementation, the department is showing signs of emerging from the torments of recent years.

New chief executive Lin Horner struck a breezy tone in her introduction, accentuating the positive achievements and neglecting to mention the negatives. Among their achievements, she and chairman Mike Clasper highlighted:

•£474.2bn of tax raised in 2011-12, £4.5bn up on the previous year.
•Compliance activities yielded £16.7bn, a 20% increase on 2010-11. Horner said HMRC’s progress in this area “puts us well on course to bring in an extra £20bn per year by 2015”.
•Around 12m open PAYE cases cleared (there are discrepancies in the numbers quoted), with the department “on track to clear all remaining legacy cases by the end of 2012”.
•Written off tax held to £5.2bn - a mild improvement on the figure of £5.5m last year.
•74% of calls to contact centres answered compared to 48% in 2010-11; also improved processing times for post (63.7% handled within 15 working days, up from 36.8% last year, but still short of 80% target) and tax credit/child benefit claims.
HMRC’s annual accounts statement is a big document - 200 pages (2.1MB PDF) detailing the department’s resource accounts, accounting policies, internal functions, risk management strategy and including the auditor general’s report. It is possible to put many different interpretations on the information provided, and many accountants might see a rueful irony in positive accounting figures that don't appear to reflect their personal experiences of the entity. This overview looks at some of the areas that have attracted the most attention and controversy on AccountingWEB during the past year.

Overview (governance statement)

Horner’s bright outlook sits a little uncomfortably at the head of a document which includes figures and analysis from the NAO indicating some significant underlying problems. Much of the accompanying material was prepared by other hands and as the third responsible accounting officer to serve during the financial period (after Dame Leslie Strathie and Dave Hartnett), Horner may not have been in the role long enough to grasp the scale of the challenge that lies before her.

The department’s governance statement reveals an increased emphasis on the HMRC’s risk management strategy during the past financial year, and highlights problem areas such as customer service, which has “fallen short”, employee relations and fraud.

The overall employee engagement score increased to 40% per cent in 2011 compared to 34%, but is still well short of the civil service benchmark of 56%. Acknowledging the high risk of disruptions that could undermine operational improvements, HMRC has an industrial action working group to monitor those risks. It has put effort into business continuity planning to cope with strikes and other disruptions.

Fraud by organised criminals is estimated to be costing £5bn-£6bn a year, mainly from alcohol and tobacco smuggling (£3bn) and repayment scams including missing trader intra-commuity (MTIC) fraud. The latter is being targeted with £100m of extra investment, and a new counter fraud strategy that is supported by online transaction monitoring and a new cyber crime team.

The risk profile statement claims that the department is on track to clear its PAYE backlog by the end of 2012 and addressed the tax credits debt as a major control issue, but paid little heed to NAO warnings about persistent problems in these areas.

Debt management

Partly due to the tax credits issue, debt management has been a problem for many years, but showed signs of improvement in 2011-12.

The NAO noted with approval that the value of tax debt under active management at 31 March 2012

was £13.3bn, compared with £15.0bn the previous year. The amount of overdue tax collected during 2011-12 was up nearly 14% to £37.9bn. This increase was achieved in spite of the £756m tax liabilities the department decided not to pursue (referred to as “remitted”) in the year. A portion of the losses are because the NPS underpayments below the recovery threshold as revenue losses, which was not done before 2009-10. Another £92m of the overall remitted figure was due to PAYE penalties that HMRC judged were not cost-effective to pursue.

At the same time, the department increased its use of debt collection agencies, which collected £111.3m of debt in 2011-12, which HMRC said was £70.5m more than it would have collected without the additional capacity.

Staffing levels and costs

For all the planned job cuts and redundancies, HMRC managed to reduce its core permanently employed numbers by just 744 during the past financial year. During the same period it took on 2,521 temporary staff at a cost of £49.3m.

Ironically, the total net savings on employment costs for the year of £22.3m, (less than 1% of a total expenditure exceeding £2.3bn) were offset by £29.8m in costs for exit packages - up £11.4m on the previous year.

Within its management accounts, HMRC noted a 50.6% increase in its “people” function and corporate communications costs to £37.3m (50.6 per cent). The increase was explained by the inclusion of corporate communications within this total, an increase in severance payments and increased contracting out.

Technology problems

The shortcomings of HMRC’s computer systems is a recurring theme in the NAO report, much of it stemming from the NPS system that was supposed to cure these ills. When it was installed, inadequate data cleansing generated a huge number of mismatched records.

Even with an on-going strategy to minimise the number of NPS actions required, the system produces some 20.5m work items per year. This is more than HMRC staff can handle, even with the addition of 2,500 extra temporary employees who will continue to help deal with the backlog (and answer the phones) until March 2013.

By 2014-15, HMRC expects to be able to deal with around 13.5m, still short of the reduced annual workload of 15.5m.

The NAO noted: “The department faces resourcing pressures which add to the challenge of dealing with this large volume of work. While stabilising PAYE and implementing Real Time Information (RTI), the department must also reduce staff numbers… from 24,900 to 16,400 and reduce costs by £209m by 2014-15…

“If the project does not deliver the anticipated reductions in work items, the department will have an ever increasing backlog of work items to clear as volumes will continue to exceed clearance capacity…”

The NAO was concerned that HMRC had no contingency plans for such eventuality and repeated its concerns that RTI is going to be imposed on top of an unsustainable IT workload. This has been the SNAFU scenario for years, with policy and technology changes and corporate transformation programmes making it impossible to put an effective IT strategy in place.

Horner acknowleded shortcomings in HMRC’s older tax systems when it comes to financial reporting and anticipated that a new Enterprise Tax Management Platform offers an opportunity for improvement. But, she noted, “It is unlikely that we will be able to address all weaknesses within present funding constraints which focus investment on legislative requirement or enhancing capacity to close the tax gap.”

So, don’t be surprised if HMRC continues to rack up audit qualifications in the years to come.

Sunday 1 July 2012

LIBOR SCANDAL

LIBOR.

With £350 trillion of debt linked to LIBOR - from mortgages to credit cards - you'd be forgiven for expecting LIBOR to be set by bewildering complex financial model that only two or three people in the entire world understood.

But no.

Every day at 11 am, 16 of the world's major banks meet under the auspices of the British Banking Association (BBA). They each "guess" how much interest they would pay if they had to borrow money. The BBA ignore the top four guesses and the bottom four guesses. The BBA then average the remaining eight to arrive at that day's LIBOR.

In terms of complexity, it's one notch up from a game of schoolboy spoof.

Not surprisingly, such a system is easy to rig and it's little wonder that when things got tough in 2008, a few of the banks started to manipulate their "guesses".

There have been rumours about market fixing for some years now and the BBA launched an investigation a few years back. Amazingly the BBA concluded that there was no evidence of any rigging and that LIBOR had "an enviable reputation"!

Of course, if you or I sat in a room every day with 15 of our competitors to "guess",  and then fix, the market price of our major supply, we'd be operating an illegal cartel. Before you could say "bankers bonus" we'd all be off to prison. Not so in banking it seems..............