The View from No 50
K P Bonney & Co
Chartered Accountants and
Chartered Tax Advisers
Ilkley LS29 6JA
Tel: 01943 870933
Fax: 01943 870925
Every year nine million of us are required to file a self-assessment tax return. Every year almost everybody complies and a small minority doesn’t. Those who miss the 31 January deadline are fined £100 by HMRC.
Given that we have the best part of ten months in which to file our tax returns is it surprising to some of us that others seem unable to manage. Surely if we can’t fill in a tax return in ten months we deserve a fine. That might just spur us on to get our act together in future.
Now it may be that we have a perfectly reasonable excuse for failing to meet the deadline. Stuff happens. The law provides that if we have a reasonable excuse the fine is withdrawn.
What is reasonable? Tricky one that. So tricky indeed that resolving disputes in this area takes up a huge amount of HMRC time.
As anyone who has tried to ring HMRC in recent times knows, the lights are on but there is nobody home. HMRC only has enough staff resources to fight whatever is this week’s fire.
In these circumstances is it really worth HMRC staff arguing the toss with Mr Useless of Ebsfleet about whether the failure of his Internet Service Provider to provide him with an Internet service at the end of January is a reasonable excuse? As a last resort is it really worth HMRC dragging Mr Useless along to (an expensive) tribunal to resolve the matter?
HMRC has decided this is not a good use of resources. It has announced it will drop the penalties previously imposed on those who filed their 2013/14 tax returns late and who made an appeal against their penalty by 31 May.
We appear to have reached the sorry but sensible position where government services and a small minority us are just so rubbish that it makes good sense to write off legitimate public revenue as it is too difficult to collect.
How wonderful it is that there is a compliant majority out there patiently carrying the burden of our rubbish, non-compliant taxpayers and our rubbish government services.
Let us all be grateful for the compliant majority.
PERSONAL SAVINGS ALLOWANCE
Chancellors love to tweak the tax system. Never a budget goes by without at least one rabbit being pulled from their hat.
Amongst the rabbits in the March budget was the Personal Savings Allowance (PSA). The main purpose of this rabbit was to get savers to vote Conservative at the election. No it wasn’t. The main purpose was to provide some consolation to savers who have suffered appalling rates of interest over the last few years.
Under the PSA a basic rate taxpayer is entitled to receive up to £1,000 of savings income free of income tax each year. A 40% taxpayer gets £500 tax free. If you are a 45% taxpayer – tough. You get nothing. There are no votes in giving obvious tax breaks to the likes of you! In any case you probably vote Conservative anyway.
The PSA comes into force on 6 April 2016.
Are there any planning opportunities here?
Suppose you have savings income of £500 per annum. Your next annual instalment of interest will be credited to your account in, say, March. As a higher rate taxpayer you pay £200 tax on that £500. But if you close that account now and open a new account which adds its first interest after 5 April 2016 you save yourself the best part of £200 in tax. On the same facts the saving for a basic rate taxpayer is £100.
Every new relief brings an opportunity for exploitation. As Margaret Hodge points out, we should be abolishing reliefs not introducing them. Alas, that will never happen. Chancellors love their rabbits.
A MUCH UNDER-USED INHERITANCE TAX EXEMPTION
In a poll of 16,000 people in 15 countries, one in five retired people said they were regularly giving money to one or more of their grown-up children. Pensioners today are keener on giving out a ‘living inheritance’, allowing them to watch their relations enjoy their gifts, while also escaping inheritance taxes.
This leads in to what is potentially one of the most generous exemptions from UK inheritance tax – the exemption for gifts which form part of normal expenditure out of income.
I haven’t banged this particular drum since my newsletter of May 2004 so a reminder is overdue.
Inheritance tax is a tax on capital. It is not a tax on income. If you, or rather if your executors, can demonstrate that what you have given away is income rather than capital then your gift escapes inheritance tax. The normal seven year rule does not apply.
In order to demonstrate your gifts are income your executors must be able to show three things. These are
· You have established a settled pattern of giving.
· Taking one year with another, the gifts are affordable out of income.
· The gifts do not cause you to suffer a drop in your standard of living.
Satisfying the first condition is not usually a problem as a settled pattern can be demonstrated by simply pointing to regular transfers out of a bank account.
The third condition isn’t usually a problem either as unforeseen later changes in circumstances can be ignored.
Families usually trip up is with the second condition. How do you demonstrate, after the donor has departed, that he or she had enough net income to cover the gifts? The income side isn’t usually a problem. Income details can be drawn easily from tax returns. The challenge is to quantify living costs. Who (but a retired accountant) keeps accounts of how money is spent each year?
Actually, measuring normal expenditure is not that hard. And time spent by the donor in doing this saves the executors a great deal of time later. So exploiting this exemption is entirely possible. Worthwhile savings can be achieved here.
Our Advice: If you are concerned about inheritance tax and would like help to put in place a plan to give away surplus income please get in touch.
CAR OR VAN?
HMRC has updated its list of car-derived vans and combi-vans, indicating whether these are classed as vans on which input tax is recoverable or passenger cars on which recovery is not normally possible.
Whether or not the VAT can be recovered on a purchase makes a big difference to vehicle choice.
Here is the list
Driving over the winding roads of the Pennines Stanley is overtaken by a speeding motorcyclist. He encounters the motorcyclist again further on, this time lifeless at the roadside with his bike wrapped around a tree.
A plan hatches in Stanley’s brain. Many years previously he lost an eye in an unfortunate welding accident at work. He bends down, removes his glass eye, switches it for a good eye from the motorcyclist and flees.
Of course the self-transplant is a failure and Stanley is full of remorse for the next 20 years. Finally, he decides to unburden his conscience and walks into the local police station to tell all.
The sergeant listening to the confession tells Stanley that he was the investigating constable at the accident scene all those years ago. Far from being annoyed he is overjoyed to learn the truth and invites Stanley to the pub for a celebratory drink.
“You see,” explains the sergeant, “I never could understand how a man with two glass eyes could ride a bike at all!”
My thanks to my client KH for that one.
Copyright: K P Bonney & Co LLP 2015. All rights reserved. No part of this publication may be produced, stored in a retrieval system, or transmitted in any form or by any means, electronic mechanical, photocopying, recording or otherwise without prior written permission of the publishers. Disclaimer: The publishers have taken all due care in the preparation of this publication. No responsibility for loss occasioned to any person acting or refraining from action as a result of any material in this publication can be accepted by the authors or the publisher.
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