Tax Credits Hell

You've all seen or heard the recent television or radio adverts encouraging you to renew your tax credits application before the end of July.  What you won't have heard about is the growing number of taxpayers who are being pursued by HMRC for overpayment of tax credits, in most cases running into thousands of pounds and usually as a result of an error by HMRC.

One particular mistake that can occur, and can greatly accelerate overpayment, relates to jobseekers allowance.  This is extremely relevant at present given the current econimic climate, and the high unemployment rate.  As you may, or may not, be aware there are two type of jobseekers allowance, the first is "contributions" based and is usually a low fixed amount, the other is "income" based or "means tested".  Unfortunately, HMRC's tax credits system doesn't differentiate between the two, and it is almost never explained by them.  So, very often if you have told HMRC that you are in receipt of jobseekers allowance you are treated as being in receipt of the "income" based benefit.  This basically overides the system and applies the maximum amount of tax credits to your claim.

I would like to say that this is the only area where errors can be made, but unfortunately that is not the case.  Tax credits as a system has always been flawed, and shows no signs of improving in the near future.  This gives rise to an issue that will not then surface for two to three years until HMRC figure out an overpayment has been made, following which they will usually pursue the claimant for repayment.  Therefore, should you find yourself in this position, the first thing you must do is dispute the overpayment and contact HMRC to find out the exact facts of your case.  These are not supplied upfront, and you will not be able to dispute the overpayment without them, so make sure you get all the relevant dates and figures before lodging your dispute.

Finally, its worth noting that HMRC are only keeping file notes on tax credits claims for three years, which is somewhat ironic given that the rest of us have to keep our tax records for at least six! 

Unity boost for Sutton and Lichfield businesses

An initiative uniting professional business communities and boosting entrepreneurship in Lichfield and Sutton Coldfield has been launched by a legal firm which has offices in both centres.

The HCB Solicitors group, which recently opened offices in Sutton and 12 months ago took over long-established Lichfield-based law practice Sharrotts, is aiming to bring professionals closer together to strengthen business in the two communities.

The project was kicked off with a networking event at Don Diego’s Spanish tapas restaurant in Sutton, attended by over 30 representatives from the legal, accounting, financial services and banking sectors.

Don Diego’s is a new business in Sutton and photographs were taken by David Boynton, who runs db Photographic, a fledgling company in the Walsall area, while local corporate entertainer Paul Brook, who performs a psychological/mind reading act, entertained the guests.

Steve Holden, tax director of the HCB Solicitors group, said: “From the reaction of the guests it was obvious this was a much-needed initiative. Bringing the professions together will strengthen the business communities and that’s a major benefit for companies in both centres.

“We see this as the first of a number of get-togethers at improving business relationships”.

Michelle Dean, a HCB director who helped organise the event, said: “The feedback was very encouraging. We were told in no uncertain terms by everyone who attended that they not only found it useful from a getting-to-know you perspective, but that getting all the professions to meet in informal surroundings was a positive move towards business unity.”

The next one is on Thursday June 14 at Apres in Lichfield and they will take place each month after that alternating between the two locations.

Happy New Tax Year

The 6th of April is here again, and as we look forward to a new tax year I thought I'd share a collection of quotes from famous names on the subject of tax.

Rob Knauerhase
Isn't it appropriate that the month of the tax begins with April Fool's Day and ends with cries of 'May Day!'?

Albert Einstein
[on filing tax returns] This is too difficult for a mathematician. It takes a philosopher.

Winston Churchill
There is no such thing as a good tax.

John Maynard Keynes

The avoidance of taxes is the only intellectual pursuit that carries any reward.

Plato 
When there is an income tax, the just man will pay more and the unjust less on the same amount of income.

Albert Einstein
The hardest thing in the world to understand is the income tax.

Winston Churchill
We contend that for a nation to try to tax itself into prosperity is like a man standing in a bucket and trying to lift himself up by the handle.

Calvin Coolidge
Collecting more taxes than is absolutely necessary is legalized robbery.

  

Will Rogers

The difference between death and taxes is death doesn't get worse every time Congress meets.

Roger Jones
I guess I think of lotteries as a tax on the mathematically challenged.

Mark Twain
The only difference between a tax man and a taxidermist is that the taxidermist leaves the skin.

Hope the New Tax Year brings you success and prosperity in 2012/13!

Year end tax planning 2011/12

The end of the tax year is looming large, so if you want to make the most of your annual tax-free allowances, you'd better get a move on.  Sorting out your finances now is essential, especially as there are some important changes coming into effect at the start of the new tax year.

Personal Allowance

Everyone in the UK is entitled to earn a certain amount of income each year before paying tax, this is the personal allowance. This tax year, we each have a personal allowance of £7,475, with higher allowances available to those aged 65 and above.  This increases to £8,105 next year.

If you are married and one partner is not working, it makes sense to transfer savings accounts to them, so that you pay less tax as a couple. You cannot carry your personal allowance forward to the next year if it is unused.

Individual Savings Account (ISA) allowance

ISAs allow you to save money free of income tax and capital gains tax. This tax year, you are allowed to put £5,100into a cash ISA, and the same amount into a stocks and shares ISA, or you can put the whole £10,200 allowance into stocks and shares.

From April, you will be able to invest £5,340 in a cash ISA, and £5,340 in a stocks and shares ISA. Alternatively, you can invest your whole £10,680 ISA allowance in stocks and shares. Any allowance not used by the April 5 deadline will be lost forever.

Top up your pension

For every £80 a basic-rate taxpayer put into their pension this tax year, the government will top it up by £20, so that the total contribution to your pension is £100. This is because you get basic rate tax relief on pensions at 20 %. Higher rate earners do even better because they can get up to 40 % tax relief, so £100 paid into a pension will only cost £60, and top rate taxpayers receive 50% on their contributions - that is £1 from the government for every £1they save.

From April, however, the maximum amount that savers can put into pensions and claim tax relief on will be reduced from £255,000 to £50,000. That means if you want to make a big lump sum payment into your your pension you'd do well to do so before the end of this tax year.

Inheritance Tax Planning

If you haven't done anything about inheritance tax planning, you should do so now. Currently, inheritance tax (IHT) is charged at 40% on anything you leave over £325,000 when you die.

Most importantly, you should write a will, making it clear who you want to leave your money and possessions to when you die. You may then want to try and minimise any potential inheritance tax bill by giving regular small gifts away.

You can give away a lump sum of up to £3,000 in each tax year without paying inheritance tax - known as your 'annual exemption', or £6,000 this year if you haven't used last year's allowance.

You can also give away surplus income totally free of inheritance tax, provided you can demonstrate that it is not affecting your standard of living.  The end of a tax year is always a good time to assess this position.

Reduce Capital Gains Tax

Capital Gains Tax is a charge that arises from the sale of assets, such as shares or buy-to-let properties, charged at18% for lower and 28% for higher-rate tax payers. Every individual has an annual capital gains tax free allowance, which stands at £10,100 for the current 2010/11 tax year.  The limit applies to each individual, so if you are married or in a civil partnership you each have an annual exemption.

Get advice

Tax planning can be complicated, so seek professional independent advice if you aren't sure of how to proceed.

Take AIM for good tax advice...

No, I'm not talking about Alternative Investment Markets (although they can form part of tax planning).  Rather I'm looking at the three key components that should be involved in any tax advice that you receive, which are the three steps of the process to make sure that good advice actually works for you, rather than just being good advice.  It was Oscar Wilde who said "I always pass on good advice, it is rarely of use to ones self.".

A) Of course, the first step on the path to mitigating your exposure to any form of taxation is advice, and its usually where the process for many clients starts, and unfortunately ends.  Good advice should look at your tax affairs in the round, and not just the tax problem you thought you had when you walked through the door.  Almost all of the direct taxes (income, capital gains, inheritance) and some of the indirect taxes (VAT, stamp duty) interact at some level on any transaction, and you ognore the other areas of tax at your peril.  If your accountant or tax adviser isn't doing this, get a new one.  Also, rather than focussing on the problems, is the advice you're getting offering solutions rather than just telling you what the bill is?

I) Okay, if you got to this step we've established that you're getting the right advice.  I stand for implementation.  Normally, after seeking out the tax advice, part of the solution you have is to put in place some sort of structure, be this a will, a trust, a company or another legal entity.  So, what happens next, your tax adviser sends you off to your lawyer, or recommends one to you.  You need to make sure that your tax adviser and lawyer are talking to one another so that the advice is correctly interpreted and implemented by the lawyer.  Also, is your lawyer a specialist in that field?  If not, I heartily recommend you seek one out.

M) Right, we've done to most what seem like the most important parts of the process in tax advice, time to put your feet up now yes?  Wrong, the most important part of dealing with a tax issue is M for management.  If the advice you receive isn't reviewed from time to time, it might no longer work, or have been rendered irrelevant by retrospective legislation.  If you don't fulfil the legal requirements of say a trust, it can be shown to be a sham by the tax authorities (or worse by the divorce courts).  Its important to ensure that you keep getting the right advice, as tax advice isn't a band-aid one time fix, its a constantly evolving process that involves your accountant, tax adviser, lawyer and financial adviser.

Even if all of these steps are in place, you can still hit rocky shores if your advisers don't talk to each other, or simply don't understand what one another are trying to acheive.  Where possible try and include all parties in the initial advice, or better yet look for someone who can fulfil the role within one firm (we are out there!).  So in order to ensure that your aims and desires are followed through, make sure you take AIM at your tax affairs and act on the advice you receive!

5 top tips to help you save Inheritance Tax

1. Utilise your tax free gifts reliefs
Lifetime giving can over time reduce your estate substantially, however there are limits to what you can give and to whom tax-free. The individual allowance is £3,000, and if you have not used this in the preceeding year, you can claim that too, so potentially £6,000. This is per person, so a married couple/civil partners could gift up to £12,000 tax free in one year. There are some other tax-free gifts such as wedding gifts, small annual gifts of up to £250 per recipient, and last but not least gifts out of income that are normal expenditure that do not affect your standard of living. This last one has the potential to stop your estate growing, by giving away, rather than saving surplus income.

2. Reduce your estate by making potentially exempt transfers

Potentially exempt transfers (PETs) are gifts in excess of the tax free limits set out above, but these larger lifetime gifts may escape IHT if you live for seven years after making them. If you do not survive the seven year period, they are added back into your estate if they 'fail'. So your beneficiaries are no worse off than they would have been had you not made the PET.

3. Consider using trusts
Sometimes giving away larger assets can be a problem, because there may be substantial capital gains involved in making such a gift. One way to get around this is to settle the assets you wish to make a gift of into a family trust. Provided that neither you, nor your spouse/civil partner can benefit from that trust, you can defer any capital gains arising from the gift. The same IHT savings can then be made without incurring a CGT bill. Two words of caution though, first make sure you get proper advice on how to set a trust up, and two, if you put more than £325,000 into a trust the excess will suffer IHT at 20%. Plan carefully though and they're still a useful tool for minimising IHT.

4. Make gifts to charity
Gifts to charity are exempt from IHT, and so you can use them to reduce the size of your taxable estate in much the same way as the tax free reliefs mentioned above. Also, from April 2012, charitable bequests made through your Will can also reduce the rate of IHT your heirs have to pay. If you give at least 10% of your estate to charity, the rate of tax levied on the rest will be reduced by 10%, from 40% to 36%. This does not have to be a recognised charity, indeed if your estate is sufficient you may even wish to leave a charitable trust as a legacy that can then contribute to local charitable purposes.

5. Finally, claim a partner's unused IHT allowance
It is possible now for the executors of married couples and civil partners to claim any IHT allowance that their deceased partner has not used, currently set at £325,000 per person. If the first partner has made no use of their nil-rate band (by leaving everything to their spouse, for example), the second partner effectively has a double allowance of £650,000. If the first partner used part of their allowance, the unused proportion is carried over to the second - and applied at the rate in force on second death.

Steven joins HCB Solicitors

One of the Midlands’ leading law firms is further developing its corporate and personal financial offer to clients by appointing new Tax Director Steven Holden.

Steven, an experienced tax professional specialising in working with trustees and private clients, has joined fast expanding HCB Solicitors to broaden the scope of advice available to all their clients. HCB has offices in Solihull, Walsall, Stratford upon Avon, Redditch and Lichfield and has recently opened another in Sutton Coldfied. Steven will be providing tax advice to clients in all six areas.

Well-known on local radio and television as a regular commentator on tax affairs, Steven previously worked for two of the top ten accountancy and business services firms in the UK, and has also spent much of the last ten years in the legal sector. He has an extensive specialist knowledge of trust taxation, accounting and administration as well as charitable trusts and also deals with tax compliance from assisting clients in tax repayment claims or tax returns to handling enquiries from HMRC for them.

A member of the Association of Taxation Technicians (of which he currently sits on the Membership committee), he acts as a volunteer for the charity Tax Help for Older People giving free tax surgeries to pensioners on low incomes and is also a local school governor.

Steven said: “HCB has proved itself as a successful and developing law firm with a growing number of partners specialising in all aspects of corporate and personal law, and that leads naturally into the tax affairs of their many clients. “By offering clients the whole package of legal and tax advice we are able to develop the customer friendly ethos of the company over a large area of the West Midlands. “I will be advising our clients on straightforward issues such as tax returns to advising on and setting up more complex matters like offshore trusts and company structures”.

Mike Gahan, chief executive of HCB Solicitors, said: “Steven’s appointment is a logical step in the firm’s development. He brings extensive knowledge and expertise to our portfolio in an area which is an attractive addition to our clients”.

Beware tax rebate scam e-mails

A warning to taxpayers to be vigilant as there have been several reports of HMRC scam emails, and no I don't just mean those letters asking you to pay your taxes!

Where taxpayers believe they may have been the victim of an email scam they should report the matter to their bank/card issuer as soon as possible. HMRC have previously advised that that those providing their details have had their accounts emptied and credit cards used to their limit. Victims are also at risk of having their personal details sold on to organised criminal gangs.

If in doubt, take the following actions:

• Check the http://www.hmrc.gov.uk/security/fraud-attempts.htm to see if the email you have received is listed.
• Forward suspicious emails to HMRC at phishing@hmrc.gsi.gov.uk and then delete it from your computer/mail account.
• Do not click on websites, links contained in suspicious emails or open attachments.

Simple Tax Savings Tips

1. Use your tax allowances: Everyone, regardless of age or status has a tax free personal allowance for income tax purposes (currently £7,475 minimum in 2011/12).  Also, if your spouse/partner isn't using all of their personal allowance, look into whether some of your joint incomes (such as savings or rental receipts) can be allocated to them to minimise your tax exposure as a couple.


2. Claim tax refunds: Most people who are due a repayment of tax are not aware that they are able to claim one.  This could be a result of having the wrong tax code applied to your earnings, or having tax deducted from savings.  If the latter simply filling in an HMRC R85 form can ensure you get your interest tax free.


3. Check your tax code: If you are employed or have a pension, HMRC will issue you with a tax code based on the information that they hold for you.  Your employer or pension provider uses this to calculate the amount of tax they deduct from your earnings.  If HMRC's information is incorrect, you could be paying the wrong amount of tax, so check it out and report it to HMRC if there is an anomaly.


4. Tax efficient savings and investments: Savings schemes are a great way to minimise your exposure to income tax. Simple steps like using up your ISA allowance can cut significant amounts off your tax liabilities. There are also other insurance backed investment schemes that can be used to draw a tax free "income" and minimise your exposure to income tax.


5. Do you have a pension: Contributions into pension schemes are tax exempt. Therefore, by putting extra cash into your pension, or starting one if you don't already have one can reduce your income tax bill.


6. Selling assets and investments: Transfers between spouses and civil partners are tax neutral, so before you sell assets that are likely to realise a capital gain (i.e. shares and property), look at whether it is worthwhile sharing that gain with your spouse/civil partner by transferring ownership of the assets.  As you both have a capital gains tax annual exemption of £10,600 (2011/12) you could easily save almost £3,000 in tax!


7. Making gifts from income: A lot of inheritance tax planning can be, or at least seem, complex.  A simple tip though, is that where you have income above and beyond that which you need to maintain your standard of living you can give it away completely free of inheritance tax, there isn't even a minimum amount of time to survive after making the gift.


8. Claim tax credits: If you have children or work on a low wage, then you could be entitled to claim help from the £3.7 billion of tax credits on offer.  To see if you are eligible, check this out http://bit.ly/7sJH4e


9. Sort out your tax return: Under the self assessment regime, if you have not filed your paper tax return by 31 October or electronic tax return by 31 January following the end of the tax year you will receive a £100 penalty fine, followed by another £10 per day thereafter that it remains outstanding even if you don't owe any tax!


10. Get a Tax Adviser: Using a good Tax Adviser is going to save you money, especially if your tax affairs are in any way complex. At first glance it can seem expensive, but a knowledgeable tax expert will pay for themselves many times over.

Do you need help understanding tax?

Tax is for most a daunting subject, as understanding how it affects you can be complicated, whether its filing a tax return, or organising your affairs to help minimise inheritance tax.  Getting good advice and help can not only help you achieve this, but also allow you to sleep easier at night knowing someone with a detailed knowledge of tax is looking after you.

I have been working in the tax arena for more than ten years now, spending time in both the financial and legal sectors.  This has given me a great insight into not only offering tax advice, but being able to actually implement and manage those solutions for my clients too.  I also have a specialist knowledge of trusts, and the peculiar tax and legal requirements that apply to them, allowing me to guide trustees through the running of their trusts and ensuring they meet their legal obligations.