We've been a little quiet of late owing mainly to the paper filing deadline on 31st October. For those of you that missed that deadline, all is not lost: you can still file electronically until 31st January. Better still, let us take the pain out of it and make sure you're claiming all the available reliefs. Register here for a flat fee quote and an excellent service. No more spiralling bills from accountants working on a time and expense basis.
We digress! As we've been a little quiet, here is a round-up of what's been going on in the world of UK tax over the last 2-3 weeks. We’ve compensated for our silence of late with a longer than usual piece. Happy reading!
Comprehensive Spending Review (CSR)
The coalition government announced the conclusion to their CSR a few weeks ago. It was fairly brutal but not unexpected and the papers waxed lyrical about the impact of the various cuts etc. In terms of tax, the major announcement was a further cut to HMRC resource.
To put this announcement into perspective a little background helps: HMRC came into existence in 2005 through a merger of the Inland Revenue and Customs; a merger that in retrospect probably should never have happened. At the time of the merger there were in total about 105,000 employees spread across 300 locations. Since the merger (and in line with their well publicised "efficiency" drive) over 25,000 staff have now been cut.
So that's a 24% cut in staff numbers between 2005 and today; a huge cut in anybody's book. To make matters worse, this has been pushed through in the face of an increasingly complex tax code which is now apparently the longest in the world. Bravo!
The consequences should be fairly obvious: Every year since 2005 reports and articles have been popping up on the increasing mayhem at HMRC. Most worrying though? 1) these consequences appear to have been totally unexpected by senior management and 2) in the face of mounting evidence still nothing was done to curtail the cuts.
If you want to read more detail about exactly what damage the last 5 years have wrought, Tax Research LLP issued an excellent report in March of this year under the title: "Tax Justice and Jobs: The business case for investing in staff at HM Revenue & Customs".
So where does CSR leave us? As mentioned above, HMRC is on the block for another 15% cut in real terms. It's not tough to draw your own conclusions as to how that will affect service but before you do so it may be helpful to reflect on the events of the last 6 months to see how well HMRC is coping at current staffing levels (see our blog posts for the detail).
On thing which is worth taking the time to stress again: we deal with the staff at HMRC every day and can confirm that they are of the highest quality. The problem lies not with the front line staff (as it seldom does); it lies with those whose "vision" has taken us to where we are today.
Anyway, in an unsurprising move, and as reported in Accountancy Age, the Union which represents HMRC staff has indicated that strike action is now unavoidable unless the intended cuts are reversed. No doubt morale within HMRC, which has been declining for years (for obvious reasons), is plumbing dark, new depths.
Cuts or strikes: It's been one slow death spiral into despair since 2005 so why should it stop now.
HMRC Bad Debts
Something else which has been making the news is the increase in HMRC's bad debts. UHY Hacker Young reported recently of a 40% rise in the level of bad debts owed to HMRC to over £6 billion. A lot of this is probably the result of the recession and the "time-to-pay" initiative which allowed some taxpayers to spread their tax payments rather than having lump sum payments on 31st Jan and 31 Jul each year.
Of course, "time-to-pay" is no assurance that the companies involved will avoid going to the wall (as many did) and now HMRC is on the hook for the tax they intended to pay but didn't. At the end of the day, you have to feel sorry for HMRC taking the pressure on this one. The fault lies not with HMRC but with the old Labour Government for making up policy on the hoof and using tabloid headlines as their guiding light. The initiative was a result of a populist move to appease voters during the recession. You reap what you sow.
One thing which has passed a lot of people by, and which HMRC is responsible for, is the move to using private debt collectors to collect tax arrears. The Revenue has signed contracts with Commercial Collection Services, Credit Solutions, Fairfax Solicitors and iQor Recovery Services (source: FT). Apparently the pilot scheme they ran on this was sufficiently effective to roll this out nationwide. It’s a sign of the times….
HMRC - Treasury Sub Committee
The treasury sub-committee has recently announced an inquiry into HMRC. This will be the third time HMRC has had to come before a panel to answer for it's failings since the start of the summer. So far the Treasury Select committee and the Public Accounts committee have called HMRC to answer questions. Now the Treasury Sub committee intends to inquire into HMRC’s administration and effectiveness.
Labour MP George Mudie, chairman of the new Treasury sub-committee, commented: “HMRC was criticised heavily over the end-of-year reconciliations. Like most government departments, it will have to make sizeable cuts in administration. We will examine how HMRC is doing its job, whether it can do it better and what the future holds following the spending review settlement.”
Vodafone - Death and Taxes
Vodafone are feeling the public wrath at the moment due to a settlement reached with HMRC amounting to c. £1.2 billion. So what's the problem? Some believe that the settlement is far too low and that HMRC has left hundreds of millions on the table. HMRC disputes this assertion but that has not stopped protestors from picketing Vodafone shops across the UK. Some premises have even been forced to close temporarily. Vodafone has felt the need to issue a public statement on this settlement (an irregular move I would say). You can find It here.
The settlement relates to a dispute with HMRC over the application of Controlled Foreign Companies (CFC) legislation which is a fairly complex piece of anti-avoidance legislation aimed at preventing companies from getting a tax advantage by structuring their business through (so-called) tax havens. The irony is fairly acute here actually as the taxation of foreign profits is an area which has been under consultation for 3 years and which is set for change as a result of the European Court of Justice's (ECJ's) ruling in Cadbury Schweppes plc v. Commissioners of Inland Revenue which basically concluded that, except in limited circumstances, the CFC rules are contrary to EU Law.
The timing of this settlement is unfortunate as Vodafone has also just had a nasty surprise from the Indian Tax Authorities to the tune of $2.5 billion. This is a completely separate case which relates to the company's 2007 purchase of the Indian telephone assets of Hong Kong conglomerate Hutchison Whampoa. Vodafone says the $11bn transaction was exempt from tax because it took place between two offshore entities but the Indian tax department now says that Vodafone must pay the capital gains tax, and has handed the company its first formal tax demand.
The final piece of news worthy of mention here is the Panorama programme aired Monday last on the HMRC PAYE coding notice fiasco.
If you are caught up in this mess and have underpaid tax, the Low Incomes Tax Reform Group (LITRG) has advice available here; this is an excellent resource and we would like to take this opportunity to commend the Chartered Institute of Taxation for all the work they put into this initiative.