BLOG 88

MY BUDGET ADVICE TO GEORGE OSBORNE


George Osborne is going to give his emergency Budget on 22 June. Prior to the election he said that a Conservative government would use the Pre-Budget report to expose for comment the vast majority of its tax legislation. I hope that pledge has not got lost in the negotiations for the coalition.

Accordingly my Budget advice to George Osborne is –

1. Increase VAT as that is the one thing that can easily be done during the course of a fiscal year, and

2. Leave all the other changes that you would like to make for the Pre-Budget report in November.

Why increase VAT? An increase to 20% will raise £11 billion a year or £55 billion – roughly a third of the deficit – over the five-year life of the parliament. VAT does not hit the very poor. Two of the three generally accepted essentials of life – food and accommodation – are both exempt from VAT and the third, heating, is taxed at a 5% reduced rate so will not be affected by an increase in the standard rate. Clothing (except for children) is VATable and so are some of the expenses that the poor need to incur. However to forgo £55 billion because a tiny fraction of it will be paid by the poorest members of society is akin to throwing the baby out with the bathwater. It is far more sensible to collect the £55 billion and increase social security to compensate for the extra cost that it will impose on the poor.


ROBERT MAAS

BLOG 87

LET’S USE THE PRINCIPLES FOR A GOOD TAX SYSTEM!


A bit over 10 years ago the ICAEW Tax Faculty published its Ten Tenets for a Better Tax System. This was intended as a set of principles by which tax policy ought to be judged.

Last February the Treasury published a consultation document, “Tax Framework for Business” (At least it was called a consultation document. Unlike other such documents it did not call for comments but simply gave as a footnote an e-mail address to which comments could be sent “ahead of the budget”, i.e. in contempt of the then government’s own three-month standard consultation period). The tax framework set out six principles against which the then government would consider changes in tax policy. It is to be hoped that the present government will also endorse these principles as they are remarkably similar to the Tax Faculty’s Ten Tenets.

Ten Tenets Tax Framework

Statutory -
Certain ) stability and certainty
Constant )
Simple Simplicity
Easy to collect and calculate Tax administration/compliance costs
Properly targeted -
Subject to proper consultation -
Regularly reviewed -
Fair and reasonable Fairness
Competitive (Competitiveness
(Minimum distortions to commercial
(decisions.

The above are in no particular order. It is perhaps not surprising that the Treasury omits “Statutory”, i.e. that Tax Legislation should be enacted by statute, not enacted by the Treasury in the form of secondary legislation (statutory instruments) or by HMRC in the form of guidance or tertiary legislation (binding instructions). Proper consultation, although not in the Treasury’s list was probably omitted as being a given. In the last 10 years there has been, if anything, too much consultation, although it is questionable how much of it met the “proper” objective.

I doubt that many in the Tax Faculty would suggest that tax legislation over the last 10 years has paid much attention to the Ten Tenets. The corollary is that it has not paid much attention to the Tax Framework either. There is an old saying, “actions speak louder than words”. I hope that George Osborne will not, like his predecessors, simply pay lip service to the Treasury’s Tax Framework but will both adopt it and keep to it. Perhaps the Regulatory Impact Assessments introduced by Gordon Brown – which in practice very few believed as the government’s assessment of the costs to businesses of proposed tax changes always seemed wildly understated – could be replaced by a Tax Framework Assessment showing to what extent proposed tax changes conform with the Framework.

Of course no change can be expected to tick all of the boxes. For example, simplicity and fairness are poor bedfellows as, almost by definition, simplicity is likely to lead to unfairness in many cases. Fairness requires legislation to foresee all of the circumstances in which the legislation is likely to impact and ensure that it impacts fairly in each. Simplicity inevitably is likely to mean dealing only with the most common situations.

The Tax Framework also omits, I suspect deliberately, what has probably been the major driver of uncertain, complex, often poorly-targeted and sometimes unfair legislation in the last 10 years. This is Combating Tax Avoidance, which probably constitutes over 50% of the tax legislation over that period. This is set to continue whatever government we have. Tax avoidance by its nature militates against either simplicity (as complex legislation is needed if the legislation is to be properly targeted) or certainty (which in recent years has on several occasions been jettisoned by the introduction of mini general anti-avoidance provisions (GAAR) (or Targeted Anti-Avoidance Provisions as the last government preferred to call them) although targeted in this context meant no more than that a general provision applied only in a specific situation).

Although many people put simplicity at the top of their list of principles, indeed the Conservative Manifesto pledged some sort of Simplicity Commission, most businesses would actually put certainty far ahead of simplicity. People want to know the likely tax effect of their transactions before entering into them. A simple system that gives HMRC a high degree of discretion to challenge transactions that they decide they do not like, which is what a GAAR is, may look superficially attractive, but makes doing business extremely difficult.




ROBERT MAAS

BLOG 86

MONEY WELL SPENT?


In Blog 77 I expressed surprise that HMRC had sponsored the TV series, “The Business Inspector”. My friend, Mark Lee, has since enlightened me. Apparently HMRC put £370,000 of our (taxpayers) money into the programme “to raise awareness among small businesses that they need to keep good records”. I am out of touch with HMRC’s salaries, but I would guess that in order to spend that £370,000 HMRC had to dispense with employing 10 Officers to carry out enquiry work for a year.

So was it taxpayers’ money well spent? I watched all of the programmes but the message about keeping good records never came through to me. Did it get through to you? One of the slogans/mottos/or whatever, thrown into the HMRC’s ads in the second programme was, “Getting the numbers right is important to success in business”, and another was “accurate paperwork is important to success in business”, which I suppose indirectly has something to do with record keeping. But it did not register with me that that was what the programmes were about from HMRC’s point of view.

Personally I very much doubt that it is possible to convey any message about record keeping for tax purposes in a handful of soundbites. The legislation requires a person to “keep all such records as may be requisite for the purpose of enabling him to deliver a correct and complete return”. It goes on to say that these must include records of all amounts received and expended in the course of the trade, profession or business and the matters in respect of which the receipts and expenditure take place, and in the case of a trade involving dealing in goods, all sales and purchases of goods made in the course of the trade”.

So which does this actually require? What records must a business keep? The answer is that it depends on the business. Every business is different. Suppose for example Joe Bloggs, a market trader in perishable goods, keeps his takings in a tin and banks the amount in the tin every night as he goes home. Suppose also that he pays small expenses in cash out of his own pocket, jots the amount down on the back of an envelope and at the end of a week tots up the six envelopes, draws a cheque for the total and put the envelopes in a box. For large items he pays by cheque, marks on the invoice the date of payment and then puts the invoice in the box. He gets his bank statements weekly and writes on the statement the payee of cheques. If he receives odd receipts he banks them separately to his daily takings and marks on the bank statement the source of the receipt.

What records does he need to keep to satisfy his statutory obligation? In my view he needs to keep his bank statements and his box of papers. That is all that he needs to deliver a correct and complete tax return. He need keep no other records.

I suspect that neither HMRC, nor Hilary Devey, the Business Inspector, would agree with me. Why do I think that? Firstly, I think that most HMRC Officers confuse the statutory requirement with HMRC’s desire to find an “audit trail” that they can check. Secondly, I think that most HMRC Officers cannot get their heads around my personal concept that the right records for a small businessman to keep are those that he is comfortable in writing up. I used to act for the manager of a singer who kept a book in which he noted incomings and outgoings. He noted outgoings on the left hand side and incomings on the right. It frustrated the singer’s accountant unbelievably because the accounting convention is to put income on the right and payments on the left. But so what? I was happy to let the client use his own idiosyncratic system because it recorded all of the necessary information that I needed to prepare his accounts.

I mention this because in the case of Joe Bloggs, I suspect that HMRC would label him as high risk – and thus with great suspicion and at a large risk of being the subject of an HMRC enquiry – because they would regard his records as inadequate. I also suspect that if he were to keep a cashbook in which he were to enter his bankings and his cheques every day, or even every week, he would be regarded as low risk and left alone by HMRC. But if my suspicion is right, surely that is ridiculous. What Joe Bloggs has done is delegate his book-keeping to his bank. It would be completely pointless for him to keep a cash-book which does no more than duplicate what his bank has done. Yet I think that we have somehow created a tax system that says that if he wastes time doing such pointless work, that will be regarded as “a good thing”, even though commonsense would indicate that it is “a bad thing”.

I suspect that Hilary Devey would be critical of Joe Bloggs’ accounting system because she has never been a sole trader setting up in business. I readily admit that Hilary is a multi-millionaire and I am not, so her view ought perhaps to carry far greater weight than mine. However her background was working for a large company before setting up her own less large one, whereas at least part of mine is advising people who started one-person businesses from scratch. Is there a real difference? Yes indeed. Although the State requires a business to keep records because it has a stake in the profits and wants to be able to check that it receives its just due, the better reason for a business to keep records is that the records should enable the proprietor to be aware of how well (or badly) the business is doing. The one-man, no staff, business does not need records for his own benefit. He knows how well or badly he is doing because he knows what his outputs are and what money he has received from clients. As a business grows he loses touch with every transaction and needs to rely on others. Accordingly he needs records to see the overall picture that he is no longer creating on his own.

When self-assessment was introduced, HMRC issued a booklet, SA/BK3, “A guide to keeping records for the self-employed”. To my mind this is still the best guidance on record keeping for small businesses that I have come across. Sadly HMRC seem to insist on reinventing themselves every few years and self-assessment is now well over 10 years old. A 10-page booklet (which is what SA/BK3 is) is no longer in keeping with their current philosophy, which seems to me to be that most people have a short attention span and only want to read a half page of guidance. They may be right. But it seems to me that if 10 pages provides real guidance, as SA/BK3 did – and still does as the law has not changed – the sensible solution is not to scrap it but rather for the short (and in my view unhelpful) guidance to suggest that those with a 20-minute attention span would be well-advised to read the whole 10 pages.


ROBERT MAAS