The View from No 50
K P Bonney & Co
Chartered Accountants and
Chartered Tax Advisers
Ilkley LS29 6JA
Tel: 01943 870933
Fax: 01943 870925
WHAT’S GONE WRONG WITH THE TAX SYSTEM?
Just like I don’t expect to have to understand how my car works, so most taxpayers consider they shouldn’t have to understand how their PAYE tax code works. They expect HMRC to get it right. It has come as a nasty surprise to many in recent weeks to find HMRC gets it badly wrong.
How has this happened?
It has happened because HMRC has operated a filing system centred around employers and pension providers rather than one centred around individual taxpayers. Further, the system has been fragmented and communications between the twelve regional computers has been less than perfect.
For people having a single source of employment or pension income the old system coped well. The problem came when people took on multiple employments or pensions. Then HMRC had the challenge of preparing PAYE tax codes allocating the various tax allowances between the various sources. It wasn’t always successful. Some taxpayers were given insufficient allowances. Others were given multiple allowances.
HMRC has now introduced a new computer system. It is a national system. Everything is now centred around the individual taxpayer. Under this system the taxpayer will be given the right allowances across all his sources of income resulting in the right amount of tax being collected through PAYE.
It is the transfer of the old records onto the new system which has revealed the extent to which taxpayers have been given the wrong amount of allowances in the past.
Those affected can expect to receive tax calculations over the course of the next few months.
It is only right and proper that those who have paid too much should be repaid.
It is only fair (to the general body of taxpayers) that those who have paid too little should now make good the underpayment.
Perhaps on the grounds of economy, HMRC has decided not to pursue those whose underpayments do not exceed £300.
Those who owe between £300 and £2,000 will, where possible, pay the tax through PAYE during 2011-12.
Others will be contacted by HMRC with a view to agreeing a payment timetable.
It is most unsatisfactory that this situation should have been allowed to come about in the first place. Some public services like health and education attract support. Others are Cinderellas. PAYE is one such. There are no votes in campaigning for better tax collection systems.
Good news. If you complete a self assessment tax return every year you are not affected by this debacle. Your tax has been worked out to the penny every year.
Our Advice: If you are on the receiving end of an unwanted tax calculation get in touch with us. There are certain circumstances in which HMRC can be persuaded waive the tax they are owed.
DO I HAVE TO LIVE IN A HOUSE TO MAKE IT MY
This is another question I am regularly asked. And why am I asked it? Because a gain made on the disposal of a main residence is exempt from capital gains tax whereas a gain made on a house which is not a main residence is chargeable to tax.
But actually the question I am being asked is the wrong one. The period of time you occupy a house can be important but that is not what determines whether your gain is exempt or not.
Whether a gain on the disposal of a residence is exempt or chargeable depends on what purpose is in your mind at the time you buy.
If you buy with a view to making the house your home then, provided you take up occupation, any gain you make on disposal is exempt from tax.
If you buy for other reasons the gain you make on disposal is not exempt.
It doesn’t matter how short your period of occupation might be. Provided your intention when you buy the house is to make it your home any gain on disposal is exempt.
What if the tax man challenges my view?
So long as you have the evidence to support your assertion that you bought with a view to making the house your home you should be OK. Such evidence might include
Notifying third parties of your change of address.
Registering as a voter at the address.
Furnishing the property.
Whether your family joined you in living there.
If you cannot reach an agreement with the tax man you can take the matter to the tax tribunal where the evidence will be considered and the matter decided on the balance of probabilities.
Don’t overlook the one vital feature in all cases like this. In order to claim exemption you must actually live in the house.
In the recent tribunal case of Mr Paul Flavell, the taxpayer could not furnish any evidence to show he had actually lived in the house for which he claimed exemption. In the absence of evidence his appeal was dismissed and he had to pay tax on his gain.
Our Advice: If you buy a house with a view to making it your home, make sure you hang on to the evidence to support your intention and to prove you actually lived there. If your circumstances later change, forcing an early sale, you may find the tax man taking an interest in your affairs and you might need this evidence to rebut his contentions.
PAYING NO TAX – HOW DOES THAT GUY
Hard working families.
The squeezed middle.
Sometimes we get the feeling we are in a minority carrying the rest of society on our shoulders.
When we hear accounts of people who operate in the hidden economy and who seem to get away with it we wonder whether it is they or us who are the fools.
The greater the size of the hidden economy the higher the amount of tax the Treasury has to extract from the rest of us.
Our Advice: If you have evidence of activity in the hidden economy contact the tax evasion hotline.
A Rangers and a Celtic fan are involved in a nasty car accident. Both vehicles are wrecked but amazingly neither driver is hurt.
After they crawl out of their cars the Celtic fan says, "So you're a Rangers fan. That's interesting. I'm a Celtic fan. Wow! Just look at our cars. There's nothing left but fortunately we are unhurt. This must be a sign that we should meet and be friends and live together in peace for the rest of our days."
The Rangers fan replies, "I totally agree! And look at this. Here's another miracle. My car is completely demolished but this bottle of whisky didn't break. This must be a sign that we should celebrate the fact we are alive and well."
He hands the bottle to the Celtic fan who nods his head in agreement, opens it, takes a few big swigs, then hands it back to the Rangers fan.
The Rangers fan takes the bottle, immediately puts the cap back on and hands it back to the Celtic fan.
The Celtic fan asks, "Aren't you having any?"
The Rangers fan replies, "Nah...I think I'll just wait for the police......"
Copyright: K P Bonney & Co LLP 2010. 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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