Tax Evasion or Tax Avoidance?

Ever since the last Budget there has been a lot of commentary on tax avoidance and following on from last night’s BBC Panorama show 'the truth about tax' I thought I would share my comments and understanding on the difference between Tax Evasion and Tax Avoidance.

Tax evasion is in quite simply unlawful and can expose the taxpayer to penalties. Examples include giving inaccurate information or describing a transaction as something different from what it really is. It is basically a form of deception.

Tax Avoidance however has developed over a number of years in to what we have today in artificial schemes by which a sequence of transactions is undertaken for the sole purpose of mitigating a tax burden much like what was shown in the panorama show.

I have taken a quote from the judge in the tax case Duke of Westminster 35 that perhaps sums it up the best "A taxpayer may have a choice between two or more alternative methods of achieving a desired result. He is entitled to select the method, if lawful which avoids altogether or reduces the tax he would pay on another alternative. He is not to be taxed on the basis that a more normal method would attract a heavier tax burden. The selection of a tax effective method is called tax avoidance"

The best analysis on tax avoidance does come from case law and taken from the 'Ramsay' case the courts came up with a strategy to look at tax avoidance.

1. There must be a per ordained series of transactions

2. Into which are inserted steps which have no commercial purpose except the avoidance of tax

3. In which case the court may disregard the inserted steps in deciding how the transaction should be taxed.

4. Look at the end result.

This is the basic form the courts have been using over the past 20 years to tackle these artifical tax avoidance schemes however many sophisticated schemes have been winning. I believe now along with the Chancellor's Budget we will see more anti avoidance measures put in place potentially starting with stamp duty mitigation and in a fairer society this can only be seen as a good thing. Although how strict these provisions are remains to be seen and I suspect the highly intelligent people operating these schemes will find a way around it.

It is very hard as a tax practitioner to tell a client who wants to minimise his tax liability and has taken part in these various schemes that it is unethical and to me goes against certain principles. I believe others have to suffer and pay more tax whilst people are working within the tax avoidance legislation to sometimes not paying tax at all. However whilst it is still 'law' and the legislation has not been amended then as a practitioner you have to accept the schemes. HMRC of course operate the general anti avoidance provision. Where the scheme must by notified to HMRC by its promoter to obtain a reference number to go on the tax return. There is a £5,000 penalty for failure to notify.

Tax Avoidance is a term that should not be used loosely and can’t be interrupted in a number of ways. Whilst I would not promote any artificial schemes I am all in favour of tax planning to minimise the client’s liability and here are some examples:

1. Income bearing assets should be held by the spouse with the lowest marginal rate to tax.

2. The use of pensions can reduce tax in the years of high income working whilst making provisions when the marginal rate is lower

3. On the sale of a business there is some scope for allocating the price between different assets to reduce the tax burden

I have many more what we call 'lawful' tax planning tips.

I hope you have found this useful and provide a clearer picture of tax evasion and tax avoidance and if you would like any help with your tax or have any questions please email me mitch@ljd.uk.com


Mitch the Tax Man

Tax Tips - May 2012

It has been a while since I issued some Tax Tips, so here are 5 important tips you should be aware of for the month of May.

1. Submit your 2011 Tax Return. If you have not submitted last year’s tax return HMRC will now start charging daily penalties. Where a client has not filed a Tax return 3 months from the return due date Daily penalties will start to accrue for a period up to 90 days at a rate of £10.00 per day, the rate is fixed and cannot be changed (except by legislation) and in the majority of cases this will be an automatic process

2. HMRC has wrongly sent penalty notices to taxpayers who no longer have to submit a tax return. If you have received a penalty notice and no longer need to complete a tax return then you can write to HMRC appealing this notice.

3. Do you operate through personal service companies? If so you may be subject to IR35 rules and it is important to have a meeting with a tax advisor to see if any potential liability can be mitigated.

4. Do you operate takeaway food outlets and are you operating the present VAT rules correctly? The new proposals state VAT should be charged on all hot food takeaway except freshly baked bread.

5. End of year PAYE Employers' Return is due in by 19th May. You will needs to submit the P35 & P14 forms online by this date or face a penalty between £100 - £3,000. Even if no tax have been deducted. To avoid unnecessary penalties tell your PAYE office by May 19th that no return form is required.

I hope you found these tips useful and if you require any assistance please do not hesitate to get in touch.

Being the start of the tax year I am looking to speak with newly self employed individuals.

Have a great weekend




Mitch the Tax Man

Mitch@ljd.uk.com
@mitchyoung27

How to avoid paying Capital Gains Tax on the sale of your property?

Good morning everyone, Mitch Young from Lerman Jacobs Davis the young dynamic accountants who are committed to saving our clients hassle and money.

Well here is one for you. How can we avoid paying capital gains tax on our home?

This was a question a reader of the Daily Express asked and you can read my answer that appeared  in the National Paper 2 weeks ago below,

 “Approximately 15 years ago my parents put their bungalow into my name in the belief that if they had to go into care they would not have to sell their home to cover the cost.

My father has since passed away and my mother still lives in the property. I have been informed that, because my husband and I own our house, when my mother dies the bungalow will be classed as a second property and I will have to pay Capital Gains Tax on it.

If this is so, is there anything I can do to prevent this? I have been given lots of different advice, but nothing definite - such as putting the property back into my mother’s name (may have to pay CGT), or moving into the property and living there for six months after she dies.

Would this help, or is there anything else I could do to avoid paying this tax?”

If you sell the property and make a gain then this will be chargeable on both you and your husband. You will have to pay capital gains tax at 18% or 28% depending on your total income for the tax year. However, the good news is that the gain will be split between you and your husband meaning that both of you will be entitled to an annual capital gains exemption of £10,600 each. This will result in a total exemption of£21,200, subject to any other gains and losses you may have in the tax year.

There are ways that you can potentially reduce the gain. One way is if you and your husband move into the property for a period of time after the death. You will need to make sure that the property becomes your residence for long enough for it to be treated as your principle private residence. As a result you will benefit from capital gains tax relief of 36 months of ownership.

Also, after becoming your principal private residence, if you were then to move out and rent the property out, this would enable you to take advantage of lettings relief. This gives you a capital gains tax exemption calculated in one of three ways: the lower of the actual gain or the amount qualifying for principle private residence relief or £40,000.

It is important to point out that the actual cost of the property used for the capital gains calculation will be the market value of the property when it was transferred to you and not the original cost when your mother purchased it.

This is the 4^thtime in 6 months the Daily Express have asked me to contribute to their National Paper and this shows that they trust our knowledge, advice and proves we are a respectable, up to date young dynamic firm of accountants. I have written further articles which should appear in the near future as well.

As you know it is the start of the tax year so I would love to hear from anyone you who requires help with their tax affairs, to include freelancers, landlords and footballers.

Please contact me mitch@ljd.uk.com

Thank you for reading and have a great weekend

Mitch the Tax Man

Budget Summary 2012

I felt quite patriotic as we watched the Chancellor deliver a Budget Speech designed to encourage investment back into the UK. In today's post I will just provide you with the main points to take away from the speech however HMRC release detail notes, guidance and additions that were not mentioned in the speech itself. These get released tomorrow so Friday I will update the blog again to inform you of aspects such as pensions, SEIS and further tax reliefs mentioned in the proposed first draft of the legislation.

Main points to take away from the Budget Speech are as follows:

• From April 2013 Personal Allowance will be increased to £9,205
• The 50% tax rate is to be reduced to 45%
• Age Related Personal Allowance is to be phased away
• Child Benefit will be gradually tapered away for those that earn £50,000 at 1% deduction for every £100 over the limit, resulting in when someone earns £60,000they will not be entitled to child benefit
• Main rate of Corporation Tax to be reduced to 24%
• Stamp Duty Land Tax increased to 7% on properties valued at £2 million or over.
• Stamp Duty Land Tax charge of 15% on properties bought under a 'corporate envelope' i.e. a company
• Single Tier Pension of £140 to be brought in, consultation on this over the summer
• A general anti avoidance law to be brought in, consultation on this over the summer
• £50,000 capped amount of income tax relief available at 25% of overall income total. More details to follow on the guidance of this

The personal allowance increase is good but in reality you only will be getting around £20 pounds a month.  The phasing out of age allowance means middle tier pensioners will be hit harder as this will not keep up with inflation and the stamp duty land tax charges may see foreign suitors stop investing in UK attractive properties

As mentioned above before giving a detailed tax review I need to wait till HMRC release their budget guidance tomorrow.

Thank you for reading my blog and please feel free to pass it on !

Mitch the Tax Man

mitch@ljd.uk.com

My Predictions for the 2012 Budget

Very exciting times in the tax world as the budget approaches for yet another year. The Chancellor will unleash the budget one week from today (Wednesday 21st March) but what does he have in store for us? Today's blog post I will focus on 5 key topics I predict the Chancellor to bring up:

1. Pension

One can still obtain higher tax relief on pensions and the current 3 year carry back rule mean an individual can benefit from £50,000 contributions over a 3 year period and get relief on this. I predict Osborne to reduce the limits on pension contributions and potentially restrict the relief to 20%.

2. SEIS

As mentioned last month in my blog the new SEIS tax relief will be announced. The first draft of the legislation restricts the amount an investor can invest to £100,000 or £150,000 over 2 years but I have a sneaky feeling the government may relax these rules even further. The investor will be able to get an astonishing 50% tax relief/tax deduction on their investment. If you know of any start-up companies start investing!

3. Stamp Duty Land Tax Avoidance

I have been approached to get involved with these schemes over the past year but I have always turned down the opportunity because I believed it was only a matter of time before the government will crack down on them and that is exactly what I predict to be announced in the budget. HMRC will start issuing investigations into all these schemes.

4. Real Time Information

This is going to come in and Businesses need to be aware of it. "Real Time Information (RTI) is a priority Government programme aimed at improving the operation of Pay As You Earn (PAYE). It will make the system better for individuals and easier for employers and HM Revenue & Customs (HMRC) to operate. It also supports the introduction of Universal Credits." HMRC. They want every form submitted online on a monthly basis to do with your employees and PAYE operation. More will be announced in the budget

5. Child Benefit Allowance

I believe the original plan to stop child benefit allowance for households that have to total income of just over £40,000 is too tight and has already caused some unrest. I predict there will be a restriction on child benefit allowance but they might increase the total household income to nearer £60,000.

I am excited for this budget and as stated I am interested to hear more of the 50% tax reliefs and other tax incentives the government might have for us.

I will be analysing the budget next week on my blog

Thank you for reading

Mitch the Tax Man

My Second Article in the Daily Express

It is amazing what can come from some twitter banter. As my regular regular readers know I am trying to build up my own client base at the moment. I use Twitter as a marketing tool and when I asked Annie Shaw (@cashquestions) to retweet my blog she responded with some sarcastic remark. We had some exchanges on twitter that eventually led to emails and now she has helped get my second article in the Daily Express. I will forever be grateful to Annie and it just goes to show keep trying and you will succeed.

I thought this week I would share the subject of the article in case you missed Wednesday’s edition of the Express.

Q I am selling part of my garden so a bungalow can be built. The land is worth about £150,000. What tax would apply to the sale?

A Mitch Young from LJD Chartered Accountants in Elstree, Hertfordshire, says: “You may not have to pay tax on the sale but this will depend on the size of the land.

“The capital gains tax exemption for a main residence includes grounds not exceeding half a hectare (about 1.25 acres) or a larger area which is appropriate to the size and character of the house.

“If you sell some of the land, perhaps for development, the sale may be covered by the exemption if the land was used as part of the garden and grounds and is sold either before the sale of the house or at the same time.

“If your garden and grounds exceed half a hectare you are unlikely to be entitled to relief for all of it. The area for which you are entitled to relief is called the permitted area, which is that part required for the reasonable enjoyment of your dwelling as a home. The size and character of your dwelling house is taken into account.

“If the portion of the land does not qualify for the exemption then you are likely to be subject to capital gains tax on the gain, at either 18 per cent or 28 per cent, depending on your total income for the tax year.”

I am hoping for more opportunities with the Express and I am working on pitching for a regular tax tips column. Watch this space.

In the meantime I would love to speak with any football agents out there. Do you have any contacts you could introduce me to?

If you have any questions or require tax assistance please get in touch mitch@ljd.uk.com

Thank you for reading, have a great weekend

Mitch the Tax Man

Do you need to complete a tax return?

I have had a decent week meeting potential new clients all around London. I have been dealing with quite a number of city bankers recently and a question that I often get asked is "do I need to complete a tax return if my I am taxed at source"? I thought it would be a good idea to simplify the answer in this week’s blog post.

If HMRC has written to you with a request to complete/file a tax return then quite clearly you need to complete one aside from that obvious one here is a list of the most common situations where HMRC require you to register for self assessment:

1. Self Employed
2. Company Directors
3. Income is above a certain level from savings, investments and property
·         £10,000 or more income from savings and investments
·         £2,500 or more income from untaxed savings and investments
·         £10,000 or more income from property (before deducting allowable expenses)
·         £2,500 or more income from property (after deducting allowable expenses)
·         annual trust or settlement income on which tax is still due (even if you’re only treated as receiving this income)
·         income from the estate of a deceased person on which tax is still due
4. Income from Overseas
5. Claiming certain reliefs such as EIS/VCT
5. Capital Gains arising
6. Trustees
7. Aged over 65 and have a reduced age allowance
8. YOU EARN ABOVE £100,000

This list is not exhaustive but provides you with the most common scenarios.

The one I want you to focus on is number 8. The majority of people I come across that earn above 100k and are taxed at source do not complete a tax return because they believe they do not have to register. Well you do!! Register ASAP to avoid further penalties and surcharges.

Last week I helped my new client register and file his tax return before the end of the month managing to avoid him an additional 5% surcharge.

If you know of anyone earning above 100k or people in the banking industry that may benefit from a chat with me please pass them on my details as I would love to help them.

Don't wait for HMRC to find you bring your tax affairs up to date today

Thank you for reading my blog and have a great weekend



Mitch the Tax Man