Monday, January 17, 2011



The US IRS Oversight Board has recently released its annual Taxpayer Attitude Survey. The Oversight Board was set up some years ago by Congress when there was a concern that the IRS was abusing its powers. Its role is to look for ways to protect taxpayers from such excesses. The Taxpayer Attitude Survey asks some interesting questions and produces some fascinating answers. The statistics are given for the last 8 years so it is possible to see how attitudes have changed.

In 2003, 17% of taxpayers thought it acceptable to cheat on their income taxes, 5% as much as possible and 12% a little here and there. In 2010, only 8% thought it acceptable to cheat a little here and there but the as much as possible figure remained fairly constant throughout the 8 years. 87% of Americans feel it unacceptable to cheat on their income tax. However when this is broken down, only 69% agree that it is every American’s civic duty to pay their fair share of taxes although another 28% mostly agree with that statement. The 10% difference presumably feel that other people ought pay their fair share! Curiously when taxpayers were asked whether they should just have to pay what they feel is a fair amount of tax, 10% felt they should and another 17% mostly agreed with that statement. So 87% feel cheating is wrong but only 73% feel that they ought to pay what Congress decides! When asked whether taxpayers have a personal responsibility to report anyone who cheats on their taxes, 35% thought they did not.

When asked how important it is to taxpayers that the IRS takes steps to ensure that all taxpayers pay what they owe, 83% thought it important that the IRS chase low-income taxpayers, 95% thought it important they chase small businesses, 95% wanted them to chase high-income taxpayers and 98% felt it important that the IRS cracks down on companies.

When asked what influences taxpayers to report honestly, 64% were largely influenced by fear of an audit, 34% by a belief that other taxpayers were reporting honestly, 66% by the knowledge that third parties were reporting the income to the IRS and 92% by their personal integrity. Curiously 6% said they were very little influenced by their personal integrity and 2% did not know whether this influenced them or not!

Taxpayers were also asked what the IRS should do to help them get their tax right. Roughly 80% felt a toll-free telephone helpline was very important although less than 60% said they would use such a helpline. Similarly with the IRS website, around 70% thought it important that the website provides information but only about 52% said they would actually use it.

A statistic I find astounding is when asked how long people would be prepared to hang on the telephone to wait to speak to an Officer, 46% said up to 5 minutes, another 27% said 6 to 10 minutes and a further 24% said 11 to 30 minutes. 2% were prepared to hang on for up to one hour and 1% for over an hour. I find it hard to imagine that UK taxpayers would be so tolerant.

38% of taxpayers were very satisfied with their interactions with the IRS and another 39% fairly satisfied. However 32% felt that the IRS devotes too much of its resources to enforcement and not enough to customer service. 58% felt that the IRS ought to receive extra funding for enforcement activities and 61% felt it ought to receive extra funding to assist more taxpayers over the phone or in person.

From 1 January 2011, it is illegal for anyone to be paid to assist with the preparation of a Federal Tax Return without being registered with the IRS – and from the middle of the year, it is necessary to pass an IRS competency test and meet continuing professional education requirements in order to obtain such registration. Taxpayers were asked whether it was important that tax return preparers be required to meet standards of competency. 75% felt this very important, 19% somewhat important and a surprising 6% unimportant. However 79% felt it important that tax return preparers be required to meet ethical standards and a further 15% felt this somewhat important.

It would be interesting to know how the UK figures would compare with the US ones. I suspect that the figures for taxpayer honesty would be fairly similar albeit that in the UK there is far less third party reporting. I am sure UK taxpayers will be far less willing than the US counterparts to wait for their phone call to be answered.


Wednesday, January 12, 2011



Is my memory going? I am intrigued at the media reaction to the VAT increase from 4 January 2011. It seems that there is a serious risk that this will destabilise the economy, lead to mass unemployment and push the country into recession.

What puzzles me is that a year ago VAT increased by 16.67% from 15% to 17.5%. At that time the economic situation struck me as far more risky. If the current 14.29% increase from 17.5% to 20% is as damaging as the media tell me, surely the earlier increase ought to have been far more damaging as it took place at a time when the economy looked far more fragile. In fact it seems to have had little, if any, impact on the economy. So why should the latest increase be any different?

What I find equally puzzling is that I cannot recollect widespread warnings of doom in the media at the end of 2009 similar to those at the end of 2010. My recollection is that it was generally accepted that the increase to 17.5% would not be damaging. So if a 16.67% increase was not thought damaging, why should a 14.29% one be so much more disastrous? After all in January 2010 the effect of a VAT increase was unpredictable, as we had not had one for many years. In January 2011 we had the experience of 2010, which was that the increase did not seem to have had any impact on the economic recovery.

But the media – and those trade associates which have berated the increase – seem to have wholly ignored this experience. I do not understand why. I would have expected the doom-mangers to have differentiated this year’s increase from last year’s and explained why the experience of 2010 is not an appropriate pointer to what is likely to happen in 2011.


Friday, January 07, 2011



I am a bit disquieted by the First-tier Tribunal decision in Express Food Supplies v HMRC. The case was argued by Mr Al-Faham, the proprietor of Express. It is often difficult to judge whether a taxpayer in person has been disadvantaged by his lack of knowledge of tribunal procedures, so the usefulness of such cases as precedents is often questionable.

In May 2009, when the April VAT return fell due, Express’ accounts administrator was on holiday and a temporary employee who had been recruited to cover her absence completed the VAT return. This showed a VAT repayment due to Express of £21,660. HMRC asked Express to verify that the repayment was indeed due and asked to see the invoices. Express asked its accountant to have a look at the return. He found two categories of error

a) a small batch of zero-rated purchase invoices had been incorrectly entered with nothing being shown in the “net” column and the amount of the invoice in the VAT column, and
b) some sales invoices had been posted late so were omitted from the VAT return.

The accountant calculated that the refund due was only £1,082. He explained to HMRC that Express had been restocking with standard-rated packaging products and because of this had been expecting a VAT refund for the quarter so that return did not look out of the ordinary.

HMRC duly repaid the £1,082 and everyone lived happily ever after? Well, not quite. HMRC demanded a penalty of £3,086 – getting on for three times the VAT repaid. I should stress that they were being generous. This is 15% of the tax initially wrongly claimed, which is the absolute minimum penalty that parliament has specified for a mistake that is discovered by HMRC and results from a failure to take reasonable care.

I wonder what parliament expected a small business to do? In this case Mr Al-Faham was conscious that the VAT return needed to be submitted. He engaged a temporary employee to do the requisite work. He expected a VAT repayment and the return claimed one. He is not an accountant; he is, I assume, a food wholesaler. Surely parliament could not have expected him to do more than he did. What did he – or indeed the temporary, inexperienced book-keeper – do carelessly?

HMRC said that the largest VAT repayment that Express had had in the past was £5,504. Accordingly a claimed repayment of almost four times that amount would have rung alarm bells in the mind of a reasonably conscientious person. That seems to me questionable. The VAT payments/repayments for small traders can fluctuate wildly. The amount depends on when invoices happen to be issued and when the trader needs to incur capital expenditure or to stock up on particular items. Most of us do not remember all of our prior VAT returns!

Unfortunately Mr Al-Faham shot himself in the foot because at the Tribunal hearing he agreed that he had been careless. As his only escape from the penalty was to demonstrate that he had not been careless, the Tribunal had no option but to uphold the penalty.

MPs of all parties often pay lip-service to small businesses being vital to the economy. I carry around a card from the Federation of Small Businesses that tells me that there are 1.6 million VAT registered small businesses in the UK, that micro-businesses (i.e. businesses with under 500,000 euro of assets, under 1 million euro turnover and less than 10 employees) account for 94.7% of total UK businesses and 30.6% of total UK employment. The card is a few years out of date but I doubt that the figures have changed much. Hitting a conscientious small business with a £3,086 fine in these circumstances does not suggest to me that parliament cares about small businesses. This is not a party political issue. Chancellor Gordon Brown introduced this penalty but no-one in any of the opposition parties spoke out against it during the Finance Bill debates. It is a shame that politicians do not have the guts to say that they believe small businesses are a nuisance and ban people from setting up in business unless and until they are sophisticated enough to be able to run a medium-sized one, as they obviously see no role in 2011 for the traditional new businesses where the budding entrepreneur gets on with generating profits and growing the business without first getting an accounting or legal qualification or an MBA. Expecting a tiny business to be capable of achieving the standards of a larger one is so unrealistic that I cannot believe that any MP seriously thinks that is how the world works.