Tax planning remains an important part of your financial plans

HMRC keep turning the screws
This year’s party conference season saw the main parties staking out their positions on tax. None offered any hope of tax cuts, but all promised more tax for the wealthy. Even the Conservatives were told by George Osborne that he was ‘very clear that the rich will have to make a contribution to closing the budget deficit’. However, while the politicians talked, the tax screws have already been tightened.

HMRC Affluent Unit
The HMRC Affluent Unit was launched in October 2011 to apply ‘new and innovative risk assessment techniques to identify areas where wealthy individuals are avoiding or evading taxes and duties’. You were part of its initial target audience if your net worth was at least £2.5m. At the Liberal Democrat Conference this September, Danny Alexander, Chief Secretary to the Treasury, announced a reduction in the net worth threshold to £1m. As a result the number of the Unit’s ‘customers’ will rise by two thirds to 500,000.

Probate property valuations
An interesting example of HMRC squeezing more money from the taxpayer emerged recently following a Freedom of Information (FOI) request from a firm of accountants. HMRC was asked how much additional inheritance tax (IHT) it had collected by successfully challenging property valuations contained in probate applications.

For 2011/12 the answer was £88m, £18m more than the previous year. The average IHT uplift for HMRC was in excess of £27,000. That suggests that around one in five taxable estates were affected, based on other generally available HMRC statistics. The chances are that most of the estates also suffered HMRC penalties for the valuation errors and possibly interest on late tax. Penalties are not small beer – they are now up to 100% of the additional tax payable.

Court cases
Over summer HMRC won three important court decisions on complex tax avoidance schemes. One of the schemes, which was set up in early 2005, had all the ingredients of an exotic tax avoidance package. For example, there was overnight borrowing of £36m from a Jersey Bank against collateral of government bonds of a similar value, themselves borrowed from a British Virgin Islands company. The aim was to create a £1.2m tax loss out of a legislative loophole and thin air.

HMRC won that case in both the First-tier Tribunal and, on appeal, in the Upper-tier Tax Tribunal. The victory saved the Exchequer ‘around £100m’ according to HMRC because the scheme had been used by over 100 individuals, all of whom now face a large tax bill with seven years’ interest.

It is inevitable that, under continued pressure to raise revenue without increasing tax rates, the government will encourage HMRC to focus its efforts where it can get most bang for its anti-avoidance buck. That means the more wealth you have, the more important it is to keep your tax affairs in order and, unless you enjoy court cases, treat any aggressive tax planning ideas with great caution.

And don’t forget..
…that if you have not already submitted a paper tax return for 2011/12 you received in April, then you must now submit your return online. You have until 31 January 2013 to do so. A day later and you face a £100 penalty, even if HMRC owes you tax.

If you did not receive that much unloved brown envelope this year, do not assume that you will be ignored next spring. HMRC estimates that next April it will be issuing 500,000 more tax returns than in 2012 as a result of the new Child Benefit tax, which starts on 7 January 2013, i.e. in the current tax year.

If you have any questions regarding financial planning and tax planning, please contact us on 020 3865 2379


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