5 things you need to know about recent tax developments
2011 ended with a flurry of developments which all contribute to keeping the tax adviser on their toes. Here are five things you need to know:
1. What is ‘reasonable excuse’?
‘Reasonable excuse’ is not defined in statute but it has been the subject of several tax cases. The law does specify two situations that are not reasonable excuse:
- A shortage of funds and
- Reliance on another person e.g. a professional adviser or agent.
Interestingly, in a number of recent cases the tax tribunal has criticised HMRC’s guidance on the issue (for self-assessment see SAM61320 Interest, Penalties And Surcharge: Penalties: Late Payment Penalties Grounds For Reasonable Excuse) which simply says that taxpayers would have a ‘reasonable excuse’ from filing their tax return late when some unforeseen or exceptional event beyond their control has prevented them from filing on time.
The tribunal says that HMRC’s interpretation is too narrow particularly in saying that the reason has to be an ‘exceptional’ event. The guidance remains on HMRC’s website even though it has admitted in some cases heard before the tribunal that it is an incorrect definition.
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In any event make sure you encourage clients in appropriate cases to contact HMRC immediately if they are late with a payment or filing because of a potential reasonable excuse. This is most important when a penalty has been charged by HMRC. HMRC will expect:
- Client’s name
- Your name as agent and contact details
- Reference number
- Full details of why the return was filed late
- The date on which you tried to file the return on line with details or a copy of the IT system error message
2. HMRC Trusts & Estates Newsletter – December 2011
Frist of all, do bookmark the following web address to ensure you keep up to date with relevant HMRC information http://www.hmrc.gov.uk/inheritancetax/solicitors-advisers/news-index.htm
If you follow this link you will find the latest edition of the Newsletter which contains information on the following:
- HMRC’s updated guidance on the effect of pre-owned assets on home loan schemes – the outcome of which is that HMRC now view none of the schemes as mitigating IHT in the way intended. Litigation is on-going as to the income tax treatment and HMRC recommends that any one still paying income tax as pre-owned assets is to continue to do so until the outcome of the litigation is made known.
- As part of a pilot project on working with tax agents HMRC has identified the need to reduce the number of occasions it is necessary to submit revisions to information returned on the IHT 400 – watch this space for further guidance and tools to make it easier to calculate the tax due and reduce time on dealing with amendments
- Don’t ask for IHT reference numbers where there is no tax to pay – HMRC will allocate a reference following receipt of the paperwork from the Probate Registry
- A reminder that no receipts are issued on the payment of IHT so if you pay by cheque do not ask for a receipt. All IHT banking operations were transferred to HMRC Banking at Cumbernauld in 2008 and Nottingham has no facility for issuing receipts. HMRC recommend making payments electronically.
- Various IHT forms and accompanying guidance notes have been amended as have the IHT Manual and the Trusts, Settlements & Estate Manual. The latter has new guidance on foreign law trusts, ownership and income tax; and property held jointly by married couples/civil partners.
3. The Finance Bill 2012
The draft Finance Bill was published on 6 December 2011 and it and the accompanying explanatory notes and consultation documents can be found at http://www.hm-treasury.gov.uk/d/overview_draft_legislation_financebill2012.pdf
The consultation process on the draft continues until 10 February 2012 and then the actual Finance Bill will be published on 29 March 2012 following the Budget on 21 March 2012.
Areas of interest include:
- Taxation of non-domiciled individuals
- Gifts of pre-eminent objects to the nation
- IHT reduced rate for donations to charity
- Incapacitated persons: a modern approach
Please note that the Statutory Residence test has been deferred until 6 April 2013.
With regard to the IHT reduced rate for donations to charity the total amount left to charity will be compared to the 10% threshold to see if the estate qualifies for the lower IHT rate. If the estate qualifies the lower rate will apply automatically but the PRs or others will be able to elect for the lower rate not to apply. Where an estate includes additional assets such as jointly owned assets; trust asset and property subject to a gift with reservation the estate will be divided into three component parts and the 10% test will be applied to each component separately and the lower rate will apply to each component that passes the test unless any election is made to opt out or an election is made to combine the component parts. It will also be necessary to notify any charity who becomes a beneficiary for these purposes by virtue of a Deed of Variation.
With regard to the incapacitated persons provisions, the draft Bill removes the current definition of incapacitated person from the Taxes Management Act 1970 and linked provisions which confer certain rights and obligations on those which represent an incapacitated person. As a result there will no longer be a tax-specific legal framework for incapacitated persons. Instead the general legal framework for appointing people to assist those who lack capacity will continue to operate in relation to tax.
4. Administration & effectiveness of HMRC and the ‘Agents Project’
Various site visits took place last year by agents to HMRC offices and by HMRC staff carrying out structured visits to offices of practitioners and charities with a view to helping improve processes for post handling; non-self-assessment repayment claims, PAYE coding notices and issues relating to deceased estates.
The following are some of the helpful tips which arise out of this initiative as ways in which you as agent can help your clients:
- Always include in the heading of a letter a description of the outcome sought e.g. complaint or repayment etc and not just the client’s name as vast amounts of post are received daily which has to be sorted into 18 different categories. It will speed up the process if the staff do not have to read the whole letter to know which team at HMRC should receive it.
- Cases are no longer designated to particular officers so a matter may start off with one office and be dealt with at the next stage by another one. If you need to refer to previous communications in your current letter attach copies otherwise there will be a delay while HMRC retrieve the letters referred to.
- Always quote the client’s National Insurance number (NINO) and up to date address in all correspondence.
- The time limit for repayment claims is now four years (reduced from six) – too many claims ask for six years worth of repayments.
5. Remind clients of planning tips before 5 April 2012
Britons worked 149 days to pay their taxes in 2011 – which was three days longer than 2010 according to the Independent. Depending on your area of practice consider some of the following to pass on to your clients:
- Minimise their exposure to the higher rates of income tax by contributing to their pension or making charitable gift aid payments; equalise income with their spouse or civil partner; invest for growth and pay CGT at 28% instead of income tax at 50%; structure borrowing tax efficiently
- From April 2011 the annual pension allowance was reduced to £50,000 but for some it is possible to carry forward unused allowances for three years so encourage clients to investigate whether this might apply to them so as not to lose unused allowances from 2008/09 which will go after 5 April 2012.
- Encourage clients to keep records of charitable donations to maximise their claims for Gift Aid or simplify matters by having a Charities Aid Foundation account
- For those clients with holiday let property they need to check whether it will still count as a furnished holiday letting once the changes come in on 6 April 2012
- Review investments to maximise any annual exemptions and losses taking into account spouse/civil partner’s position
- If a business client is contemplating retirement or sale of their business review the conditions for entrepreneur’s relief with them to ensure the application of the relief is maximised and so reduce the rate of CGT from 28% to 10% on gains up to £10million
- Check the extent of the client’s potential exposure to IHT and encourage judicious use of exemptions and reliefs; which in the case of normal expenditure out of income will need exemplary records to be kept
Practical developments are in train to improve the poor service tax practitioners are experiencing from the reduced number of civil servants working in HMRC and from processes and procedures which may be out of date and not flexible. This comes with responsibilities too for tax agents to keep up to date with change so as not to waste HMRC’s time and client’s money in asking for things like receipts or repayments which are no longer available or no longer something which a client may be entitled to.
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