RTI

The pending introduction of Real Time Information will transform PAYE and with only three months to go, HMRC is working hard to generate interest and ensure that employers are ready for the most radical change to employee taxation admin for 70 years. So forget the demanding new administrative burden and test your knowledge on the PAYE system. There may even be a few items on the taxman’s list you never knew about PAYE.

Back in 1944 only 15m people were registered for PAYE; today, over 30m have the pleasure of being taxed at source.

The person who piloted PAYE – Sir Kingsley Wood – died unexpectedly on the day it was due to be announced to parliament. Let’s hope the same does not befall the inventor of RTI.

Back in the 1970s employers actually had to physically attach National Insurance stamps to a card, but the whole system was modernised in 1975 when NI was incorporated into PAYE

Not to state the obvious, but the world of work has changed beyond recognition. Who would even want to stay with the same employer for life these days? As HMRC helpfully points out, ‘when PAYE came in most people remained with the same employer they started working with for most of their working lives. Today people move jobs and change employers much more frequently’.

Every year HMRC receives incorrect or incomplete information from employers. A recent study found that 128 staff were entered as Mr, Ms or Mrs Dummy, while 40 people were apparently 200 years old after incorrect dates of birth were submitted to the PAYE system.

Over 80% of errors in employee data are due to an incorrect name, date of birth or National Insurance number so next time you change jobs, make sure your employer is reporting the correct information; or your savvy accountant may be in for a surprise at year end.

Winston Churchill was Prime Minister when PAYE first came in – now we have the joys of coalition government under David Cameron and Nick Clegg.

From 1 April 2013 all employers will be required to submit tax information in real time.

Go to the related articles below for comment and insight into the implications for business.

Detailed guidance information is available from the HMRC website.

HMRC to target people earning over £150000 pa

HMRC ’s ‘affluent compliance team’ is to recruit an extra100 tax inspectors in its bid to clamp down on wealthy tax avoiders.

The unit will target taxpayers earning over £150,000 and with wealth of between £2.5m and £20m, as well as those with wealth in the range £1m to £2.5m.

Exchequer Secretary David Gauke said: ‘HMRC set up the new affluent teams from some of the £917m we made available in 2010. The team has made a great start by bringing in £75m in additional tax that would otherwise have been lost to the country.

‘The vast majority of people pay their way. Dodging tax is immoral, illegal and unaffordable and the minority who cheat are increasingly finding that, thanks to the work of the Affluent Team, they have made a big mistake.’

By the end of December the unit had brought in an extra £75m in tax - well ahead of expectations – with a target of £586m by the end of 2015.

Roger Atkinson, HMRC’s affluent teams director, said: ‘In September 2012 the Government announced an additional investment of £5m, enabling us to recruit an extra 100 inspectors. We will recruit from within HMRC and externally and the new team will be fully operational by April and focused on delivering an additional £75m a year.

‘We want to recruit people with external experience and appropriate qualifications for inspector and lead case director roles. We want people with recent commercial and corporate experience in personal tax to help us understand our customer base. This is an exciting opportunity to work at the forefront, tackling those who do not pay the right tax.

‘Good quality intelligence is central to catching the cheats and so we are expanding our Affluent Intelligence Unit fourfold. This is very good news for all honest taxpayers.’

Share schemes

The Office of Tax Simplification (OTS) has published its final report on unapproved employee share schemes.

The report sets out a package of measures for simplifying this area of the tax system, including recommendations on the general taxation of unapproved share schemes, administration and internationally mobile employees.

The OTS recommendations stem from calls for a simpler, fairer tax system for share plans that do not qualify for tax advantages and are designed to make unapproved share schemes simpler for employees, employers and HMRC, so people get the most out of them, while ensuring they are correctly operated.

John Whiting, tax director for the Office of Tax Simplification, comments: 'We have spent a lot of time talking to the people that use the schemes, and found that whilst employers saw real benefits of offering share-based rewards, they had difficulties with managing the schemes within the tax rules.

'At the same time we have been very mindful of avoidance risks in this area. We think we have a balanced package of recommendations that will simplify processes, increase fairness and encourage employers to offer these ownership options without creating new avoidance opportunities.'

The key recommendations are:

• Create a “marketable” security – Instead of employees being taxed on the value of shares before they can sell them, the OTS recommend that employees are given the option of whether to pay tax on acquisition, or when the security can be sold for cash.
• 
  
  Alignment of tax for international assignees – to help those companies with international employees, the OTS recommend aligning the tax treatment of international assignees with the tax on other general earnings.
• 
  
  Creation of an employee shareholding vehicle – to encourage wider employee ownership, the OTS recommends an introduction of a vehicle to enable companies to better manage their employee share arrangements.
• 
  
  Simpler valuation of shares – to address the confusion and uncertainty with valuation, the OTS recommends increasing the availability of pre-transaction valuations, better provision of valuation information, and more flexibility for companies on non-recognised stock exchanges.
• 
  
  Administrative simplification – the OTS recommends simplifying PAYE deadlines and the main annual report, Form 42.

While these recommendations could be implemented separately, the OTS says that implementing the full package would provide the greatest benefit.

The OTS is also due to publish the final report on simplifying pensioner taxation later in January 2013.

The recommendations have been submitted to the Chancellor in advance of Budget 2013.

SEIS

HMRC has revealed that the Government will extend capital gains tax (CGT) relief for investors in early stage enterprises for a second year.

The extension looks set to boost the numbers of those reaping the rewards of the Seed Enterprise Investment Scheme (SEIS) - launched by the Chancellor in Budget 2012 - and designed to help small, early-stage companies raise equity finance by offering a range of tax reliefs to individual investors buying new shares in the companies.

The scheme complements the existing Enterprise Investment Scheme (EIS) which continues to offer tax reliefs to investors in higher-risk small companies. It also aims to recognise the particular difficulties which very early stage companies face in attracting investment, by offering tax relief at a higher rate than that offered by the existing EIS.

Kathryn Robertson, HMRC’s senior policy adviser on venture capital schemes, announced the move during a presentation to investors at the Google Campus in East London, the FT reports.

Robertson said that CGT can effectively be sidestepped on funds invested in companies before April next year, through a “carrying back” process, although there would be a limit on the investment levels that can be carried back.

She said that even when the CGT relief does expire, investors can still claim 50% income tax relief on early stage investments as laws underpinning the scheme will continue until 2017.

SEIS applies for shares issued on or after 6 April 2012. The rules have been designed to mirror those of EIS as it is anticipated that companies may want to go on to use EIS after an initial investment under SEIS.

IR 35 again

Pressure is mounting to force the government to amend Section 58 of the Finance Act 2008, a retrospective tax which could affect thousands of contractors.

Around 60 cross-party politicians met in Parliament on Wednesday to hear the campaign team 'unveil new evidence which casts doubt on the reasons given by HMRC for acting retrospectively'.

The MPs are being urged by the ‘No to Retrospective Taxation’ (NTRT) campaign - representing around 3,000 consultants, freelancers, IT professionals, healthcare workers and property developers – affected by s58, to amend it in the next Finance Bill.

The NTRT wants the legislation to be amended so that it only applies from March 2008 – the date the new rules were first announced – and not retrospectively.

Alistair Cliff Renshaw, NTRT chairman, said: ‘The evidence presented in parliament raises serious questions about HMRC’s conduct in persuading MPs to pass unannounced retrospective legislation.

‘HMRC told MPs the tax arrangements were aggressive and abusive – despite parliament making a considered and deliberate decision to allow them to exist.

‘They told MPs that they had never accepted the tax arrangements worked, but did not tell MPs that they had actively accepted claims for relief.

‘HMRC told the minster only a small number of people would be affected – but we now see that thousands face bankruptcy simply for following the law as it stood at the time.

‘It is clear parliament was misled into passing Section 58 retrospectively when there was no case for doing so and that MPs would not have acted retrospectively had they known the full facts.

‘I am pleased that there was such a high turnout of MPs at our meeting and that HMRC’s conduct in this unfortunate affair is coming under much closer scrutiny.’

The campaigners claim HMRC knew about the arrangements for over 20 years before recommending legislation to shut them down – 'in clear breach of their own principles for closing tax loopholes'.

The MPs at the meeting were informed that the minister at the time, Jane Kennedy, who announced s58 on Budget Notice 66 (BN66) had since 'stated in writing that she was told by HMRC that only a very small number of people would be affected, and certainly not the thousands that have been impacted'.

You have to suspect that, whatever HMRC frustration led to the imposition of s. 58 retrospectively, behind it all at the time was a view that the tax schemes involved could well stand up to scrutiny by the Courts. The “new evidence” now uncovered by campaigners, argued to show that HMRC were misleading the debate at the time, perhaps goes to confirm that.

This has been a long-running saga. Mark Cawthron, CCH corporate tax specialist, said: 'These historic tax schemes may not have been – in the current buzzword – in any sense “moral”, but there remains that fundamental principle.

Should not taxpayers be taxed on the law as it stands at the time, and not as the government later decides it would prefer it to have been?'

Tax avoidance settlement scheme

HMRC has published the terms of the settlement opportunity open to participants in certain tax avoidance schemes which seek to exploit Generally Accepted Accounting Practice (GAAP).

On 3 December 2012, the government announced additional investment in HMRC to clamp down on tax avoidance and evasion. HMRC is now inviting some participants in certain schemes to settle their tax liabilities by agreement, without the need for litigation.

GAAP partnerships are those which have sought to create a loss through the write-off of expenditure or the value of rights or assets through Generally Accepted Accounting Practice.

HMRC has set out the following terms of settlement:

• Loss relief against other income will be allowed in an amount equivalent to your contribution to the partnership personally contributed by you as the cash contribution, less any element expended on unallowable fees.
• The balance of the loss claim will not be allowable.
• Loan interest will only be allowable to the extent that it represents the allowable expenditure paid out of the initial cash contribution.
• Any share of income attributable to the cash element of expenditure will be taxable in full.
• Any share of income attributable to the loan financed element will only be taxable in so far as it represents investment income over and above the return of the initial capital.

The settlement opportunity is open to partnerships, individual partners, company partners and sole traders who have used certain schemes. The settlement opportunity extended to partners is restricted to the specific circumstances of the schemes covered by this settlement opportunity. It is not open to partners in any other partnerships.

HMRC is also prepared to settle with individual partners, irrespective of whether or not the partnership itself continues to disagree with HMRC's view.

HMRC has published a dedicated page on its website which will be updated with details of opportunities available for specific schemes. HMRC is aiming to contact all those who are eligible for the offer by the end of January 2013.

Further details are available from HMRC. http://www.hmrc.gov.uk/press/settle-opp-tax-avoid.htm

300,000 famalies in the dark over Child Tax Credit

HMRC has admitted that it failed to contact around 300,000 families about imminent changes to child benefit payments that could see them lose the valuable subsidy.

The taxman had previously said that it would contact 1.1m people to alert them to the fact they will lose the right to claim child benefit from Monday, when it will be means-tested.

The letters were set to tell better-off families that they should either opt out of the system or have to repay the money through higher taxes. Just 784,000 people received the letters, leaving around 300,000 claimants uninformed of the changes.

Under the new rules, anyone now claiming child benefit will have to fill in self-assessment tax returns or face the prospect of being fined.

From 7 January, families with one parent earning over £60,000 a year will lose the right to the benefit, currently £20.30 a week for the first child and £13.40 a week for each subsequent child.

Families where one parent pulls in between £50,000 and £60,000 will see the benefit reduced on a sliding scale.

But in a bizarre anomaly, double income families where both parents earn up to £49,000 – just below the £50,000 threshold - will be able to keep their benefit, while households with one parent on £60,000 and the other not working will lose all theirs.

HMRC said it couldn’t alert everyone as it didn’t have all the information it needed for some people following changes to their relationship status, address or income.

An HMRC spokesman said: ‘There may be cases where people's circumstances have changed, for example their income may have increased or address may have changed, and we will not yet have up-to-date information. However, to ensure people know about the changes, we are also using extensive advertising, media and online activity, as well as written communication.

‘Our target audience will have seen the adverts five times on average, and there has been extensive media coverage of the change. Over 1m hits on the guidance section of the HMRC website and 100,000 uses of our online calculator show that the message is getting through.’

HMRC and RTI

Employers are being urged by HMRC to get set for major PAYE changes that come into effect in three months’ time.

In April 2013 employers will have to start sending PAYE returns electronically, using RTI-enabled payroll software, to HMRC each time they pay their employees as part of routine payroll processes. The returns will include details of all employees’ pay, tax and deductions. This new process will replace sending a separate return at the end of the year.

HMRC urges employers to visit its website for comprehensive information about RTI, including how to prepare, payroll software options and hints and tips to help avoid some common pitfalls.

It also suggests acquiring new or updated payroll software and to start checking and updating employee information.

Ruth Owen, HMRC’s director general personal tax, said:

‘To avoid a last minute rush it’s vital employers act now, if they have not already done so. Employers will need to send their first return – called a ‘Full Payment Submission’ or ‘FPS’ for salary or wage payments made to employees on or after 6 April – and if they have 250 or more employees they will have to send an Employer Alignment Submission before the first FPS.’

‘Although reporting PAYE in real time will be straightforward for most, some preparation is needed. There is more to it than simply buying or updating software – although this is key. Employers may need to add employees such as casuals or those below the Lower Earnings Limit to their payroll system and must think about their payroll practices to make sure that they work for real-time reporting.’

More details are available from HMRC.

150000 earners give up child benefit

High-earning child benefit recipients have until 6 January 2013 to decide whether to stop receiving the benefit.

The High Income Child Benefit Charge (HICBC) starts on 7 January. The new charge will apply when a taxpayer or their partner’s income is more than £50,000 in a tax year, and if they or their partner receive child benefit.

‘Over 155,000 people have already decided to stop receiving child benefit. There is easy to use information and a calculator on our website which will help families come to a decision,’ said Lin Homer, HMRC chief executive.

For those with income of more than £60,000, the tax charge is 100% of the amount of child benefit. For income between £50,000 and £60,000, the charge is gradually increased to 100% of the child benefit.

Those affected will need to decide whether to keep receiving child benefit and pay the tax charge through Self Assessment, or stop receiving the benefit and not pay the new charge. If a couple wish to stop receiving the benefit, the child benefit recipient should contact HMRC before the new charge starts on 7 January. If their income is less than £60,000, the tax charge will always be less than the amount of child benefit.

Tax schemes targeted

HMRC has announced an opportunity for participants in certain tax avoidance schemes to settle their affairs and pay the tax due, or face the prospect of costly litigation.

The taxman aims to contact all participants by the end of January 2013.

HMRC said that taxpayers making use of film partnership sale and lease back schemes; and interest relief schemes which result in a claim to interest relief under S353(1) ICTA 88 - which is used as a deduction against general income - will not be included in the current campaign.

It follows the government's announcement earlier this month that it would provide an additional £77m to HMRC to help it clamp down on tax avoidance and evasion.

A spokesman for HMRC said: ‘Following this announcement, we are inviting some participants in certain schemes to settle their tax liabilities by agreement, without the need for litigation.

‘We believe that this settlement opportunity offers both the taxpayers and HMRC the best opportunity to resolve these disputes in a way which is cost-effective and consistent with the law.

‘Where people decline the settlement opportunity, we will increase the pace of our investigations and accelerate disputes into litigation.

‘We aim to contact all those who are eligible for the offer by the end of January 2013,’ HMRC said.

The settlement opportunity is made in accordance with HMRC's Litigation and Settlement Strategy.

HMRC said it will advance all available arguments if disputes are litigated.

‘As well as continued uncertainty, delay in resolution, additional costs and potential reputational damage, taxpayers who choose the litigation route may end up with a worse tax result than they would obtain under the settlement opportunity’, the spokesman added.

While full details have yet to be released, HMRC said the settlement opportunity will be offered to participants in ‘schemes which seek to use Generally Accepted Accounting Practice (GAAP) to write off expenditure or the value of assets to create losses either for sole traders, or individuals or companies in partnership’ and ‘schemes seeking to access the film relief legislation for production expenditure’.

Another option is for ‘schemes seeking to create losses in partnerships through reliefs such as first year allowance, payments made for restrictive covenants, specific capital allowances’.

Accenture tax avoidance

Global consultancy firm Accenture – which also performs outsourced work from HMRC - has avoided tens of millions in corporation tax, paying only 3.5% of its profits in tax.

According to the Sunday Times, the firm’s accounts show that it paid no UK corporation tax in the previous years on profits of over £180m and paid £2.8m in corporation tax on nearly £82m in profits in the 2011 financial year. The accounts also reveal £12.7m in deferred tax – which it may still be liable for.

Headquartered in Ireland, Accenture’s 2009 accounts reveal it paid no corporation tax on £64m in profits and its 2010 accounts reveal it paid no corporation tax on £123m in profits.

The firm claims several reliefs on CT, including partly paying some of its staff in share options and ‘adjustments’ from previous years. The share options relief slashed £22m from its tax bill last year.

The firm’s accounts, which are audited by US tax authorities over cross-border deals of its various subsidiary companies which are able to shift profits into tax havens and low-tax jurisdictions, may come under questioning by the Public Accounts Committee.

PAC chair, Margaret Hodge, said:

‘It is absolutely absurd if HMRC are doing business with companies that are not paying their fair share of tax.’

Accenture declined to comment on whether it paid royalty fees to its parent company in Ireland. It also declined to answer questions related to payments made from the British firm to low-tax jurisdictions, telling the Sunday Times that its arrangements complied fully with UK regulations.

HMRC get tough

HMRC has sent out a ‘warning shot’ to users of a perfectly legal tax avoidance scheme, encouraging them to leave before it is too late.

The letters, distributed to 1,500 individuals, are seen as a pre-emptive strike by the taxman prior to a legal challenge of the unnamed scheme in court.

According to the BBC, four different versions of the letter have been sent out, with one stating: ‘You are in the small minority of people who have made the deliberate choice to avoid tax. We focus our resources on this small minority. The choice that you have made changes the way we view your tax affairs.’

It is understood to be the first time HMRC has sent out correspondence concerning a currently legal scheme, and it is hoped that a potentially lengthy and costly legal battle can be avoided by the users choosing to opt out voluntarily.

An HMRC spokesperson issued the following statement: ‘The letters are designed specifically to get those using a marketed avoidance scheme to contact us and settle up. We are acting on behalf of the vast majority of people who don't try to get around the rules. We are cracking down hard on tax dodging. ’

Tax investiagtions backlog

There may be some £10.2bn at risk of being lost to the Treasury unless HMRC manages to successfully investigate its backlog of 41,000 cases of avoidance by private individuals and companies.

The stark figure was revealed by the National Audit Office (NAO) today in its report, Tax Avoidance: tackling marketed avoidance schemes by the National Audit Office, which looked at the effectiveness of the scheme that the government introduced in 2004.

The NAO revealed that more than 100 schemes had been disclosed under DOTAS but could not find evidence that the scheme has discouraged aggressive promoters or individuals from pursuing extremely complicated methods of avoiding paying their tax in full.

HMRC was also criticised for failing to monitor the costs of its work to tackle avoidance, as its approach is to identify and respond to all the risks it identifies to the effective collection of tax.

The report said:

‘Investigations into suspected non-compliance may or may not reveal that avoidance has taken place, or may uncover evidence of illegal tax evasion rather than avoidance. HMRC therefore does not collect management information on the resources it commits to tackling avoidance specifically. This limits its ability to make informed decisions about how it should best allocate resources to maximise its impact.’

In addition, the NAO has said that HMRC has been unable to enforce compliance with DOTAS on promoters determined to avoid disclosure as some promoters go to some lengths to avoid disclosing a scheme if they perceive an advantage in doing so.

The NAO stated:

‘Where a promoter has obtained a legal opinion that a scheme does not require disclosure, it can claim this represents ‘reasonable excuse’ and no penalty is applicable. Since September 2007, HMRC has opened 365 enquiries where it suspected a promoter had not complied with the disclosure rules, in most cases concluding that there had been no failure to comply. It has applied 11 penalties over that time, each of £5,000.’

The report does however recognised that DOTAS has helped HMRC to change tax law and prevent some types of avoidance activity, evidenced by 93 changes to tax law designed to reduce avoidance.

The NAO said that DOTAS had also helped to change the market of tax avoidance schemes, with the result that the larger accountancy firms are now less active in this area.

NAO head Amyas Morse has urged HMRC to ‘push harder to find an effective way’ to tackle the promoters and users of the most aggressive tax avoidance schemes.

Morse said:

‘Though its disclosure regime has helped to change the market, it has had little impact on the persistent use of highly contrived schemes which deprives the public purse of billions of pounds.’

‘It is inherently difficult to stop tax avoidance as it is not illegal. But HMRC needs to demonstrate how it is going to reduce the 41,000 avoidance cases it currently has open.’

The report is available from the NAO.

Undeclared income

HMRC has launched an advertising campaign warning tax evaders to declare all their income before it is too late.

 

The campaign is running for two weeks from 12 November. It uses outdoor advertising with the slogan “We’re closing in on undeclared income”. There will be publicity in the national media including radio (but not television).

 

HMRC notes that most people pay the right tax – the campaign is aimed at those who don't. It has set up a website www.gov.uk/sortmytax to help those who want to sort things out and pay the correct tax.

 

David Gauke, Exchequer Secretary to the Treasury, said:

 

“Most people play by the rules and pay what they owe, but HMRC is cracking down on those who don’t. Using the £917m the Government has made available to tackle avoidance, evasion and fraud, HMRC is closing in on tax cheats.

 

“It always makes sense to declare all your income and tax dodgers are simply storing up trouble for the future; getting caught means higher fines, and in the most serious cases criminal prosecution. There is an alternative. Simply visit the new website and make a fresh start.”

Tax avoidance?

A trio of executives were met with disbelief, distrust and disgust by MPs from the powerful Commons Public Accounts Committee (PAC) over explanations about the controversial tax arrangements of their employers.

Troy Alstead, the global CFO of Starbucks – the US company which paid no UK taxes for the past three years, despite sales of £1.2bn faced the wrath of PAC chair Margaret Hodge when he said Starbucks had made a profit just once in the 15 years of trading in the UK.

An incredulous Hodge replied:

‘You have run the business for 15 years and are losing money and you are carrying on investing here. It just doesn't ring true.’

‘I assure you we are not making money,’ Alstead told MPs. ‘It's very unfortunate. We're not at all pleased about our financial performance here. It's fundamentally true everything we are saying and everything we have said historically.’

The Starbucks exec, denied the company was engaged in aggressive tax avoidance measures but admitted that his corporation had signed a highly favourable- but secret - tax agreement with Dutch authorities.

A Reuters report last month revealed the coffee chain’s UK operation had made a loss of £52m in its 2009 accounts field at Companies House, despite it telling investors that the UK company was ‘profitable’.

Next up to give evidence was Andrew Cecil, Amazon's director of public policy.

Amazon – the UK’s biggest online retailer – amassed sales of over £3.3bn in the UK last year, yet paid no corporation tax on any profits. The company is currently being probed by HMRC.

He said that despite the fact that Amazon UK had 15,000 employees it was headquartered in low-tax Luxembourg, where it had just 500 staff.

An increasingly frustrated Hodge told Cecil he was not a ‘serious player’: ‘We need proper answers to proper questions’, after he repeatedly said he would have to revert back at a later date with the information requested by the MPs.

This included the value of Amazon's sales in the UK, the European company’s pre-tax profits and the ownership structure of the European company.

Search engine giant, Google paid just £6m of corporation tax in the UK last year on a UK turnover of £395m.

Its chief executive of Google northern Europe, Matt Brittin, was quick to admit that its European HQ was based in Ireland because of its 12.5% corporation tax rate – almost half that of the UK’s 24%.

He added that until very recently, the Irish company was paying a fee to a Dutch-registered company within Google in a bid to slash its tax burden.

He said the rights to Google’s non-US intellectual property rights were held in the sun-kissed tax haven of Bermuda, to minimise costs to shareholders.

Brittin told the committee his employer was behaving perfectly legally.

Hodge duly retorted:

‘We're not accusing you of being illegal, we're accusing you of being immoral.’

The former Trinity Mirror executive said the firm’s primary driver of commercial “value” was the 17,000 California-based engineers who create the company's innovative technology and not the selling of advertising via Ireland.