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Employee car ownership
Approximately one year ago, HMRC began a review of employee car ownership schemes and the interaction with company car tax and mileage payments. They are now looking at possible ways that the current structure of approved mileage allowance payments might be changed. They are looking in particular at whether:
- the rates and threshold can be adjusted to better reflect differing costs of drivers using their own cars for business;
- the structure can be changed to encourage drivers to be more environmentally aware; and
- the tax and National Insurance rules can be aligned for mileage payments.
HMRC are considering three possible approaches:
- linking mileage payments to carbon dioxide emissions;
- amending the rates and thresholds;
- combining the two suggestions for a more composite approach linking both environmental issues and more.
They welcome comments on how these might work in practice and how they might affect the administrative burden. Comments should be sent by 31 July 2007 to Product and Process Directorate PAYE & NIC Group, Benefits and Expenses, 100 Parliament Street, London SW1A 2BQ, e-mail: pa.harris@hmrc.gsi.gov.uk. See also Update, 4 January 2007, page 5, and 18 May 2006, page 178.
For more details see www.hmrc.gov.uk/cars/amap-ecos.pdf.
Contributions relief
HMRC have recently published further guidance which governs how and when employers receive tax relief on contributions to registered pension schemes. The clarification particularly affects owners and controlling directors of companies.
As part of the A-day changes, HMRC deemed that any employer pension contribution would only receive corporation tax relief if it were 'wholly and exclusively' for the purposes of the business. The original guidance confirmed that the vast majority of pension contributions will receive full tax relief.
The further clarification concerns payments on behalf of controlling directors and connected people. It confirms that if a controlling director or owner takes a remuneration package up to the level of company profits, this should be acceptable as the profit reflects the value added by that individual. That remuneration package can be any combination of pension or salary.
This new guidance can be found in HMRC's Business Income Manual, paras 47105 and 47106
Andrew Tully of Standard Life Assurance Ltd says that the 'clarification is good news for owners of companies and their advisers'. He says that HMRC have confirmed that in the case of controlling directors and owners, 'it is very likely that tax relief will be given'. Furthermore, 'for connected people such as spouses, pensions contributions comparable with unconnected employees is acceptable'. Mr Tully says that 'if there is no comparable employee, a contribution which aims to provide a reasonable benefit at retirement, e.g. a benefit equivalent to two-thirds of salary, should not give HMRC any cause for concern'.
www.hmrc.gov.uk/manuals/bimmanual/BIM47106.htm
Tax credits — again
Another damning report on HMRC's operation of tax credits has been published by the House of Commons Committee of Public Accounts.
The report states that HMRC have paid £47 billion under the current tax credit system in the first three years since it was introduced in 2003. However, many claimants have received overpayments, totalling around £5.8 billion in the first three years. HMRC cannot always recover these overpayments, and have so far written off over £500 million and are unlikely to recover a further £1.4 billion of debt. Changing the disregard from £2,500 to £25,000 will reduce the level of overpayments, but increase the overall cost of the scheme by some £500 million each year.
Tax credits suffer from the highest rates of error and fraud in Government, the committee found. In 2003-04 between £1.06 billion and £1.28 billion (8.8 to 10.6% by value) was incorrectly paid to claimants. The committee recommended that HMRC demonstrate to taxpayers that they set targets for reducing the level of error and fraud and produce routine estimates to validate their performance against the targets. But HMRC say that they will only set targets when they will have been able to calculate error rates for 2004-05.
In addition, HMRC failed to ensure that their tax credit internet system complied with mandatory guidance issued by the e-envoy. Following attacks by organised criminals, they had to close the tax credits internet site in December 2005 and are unlikely to re-open it before the summer of 2008.
The report concludes that the cost of tax credits in terms of the unforeseen level of overpayments and the scale of error and fraud continues to be significant and well beyond the levels that Parliament was led to expect. In their efforts to make the scheme accessible to claimants, they relied too much on detecting false claims after payment had been made. They are now increasing the testing of claims before they are paid, focussing on those considered to present the highest risk. The effectiveness of this approach demands appropriate risk criteria, and the ability to identify emerging trends in the claimant population. The committee recommends that HMRC should supplement this work by testing a sample of claims below their risk threshold to confirm that their risk assessment criteria are soundly based.
The number of tax credits compliance staff was increased from 1,200 to 1,400 in 2006-07, allowing it to examine a further 20,000 claims. The increase in the number and the change in focus of compliance tests by HMRC in 2005-06 resulted in significantly increased yields.
The committee noted that HMRC apply the same risk assessment process to all tax credit claimants, without distinct procedures for migrant workers, despite the latter presenting an additional risk of failing to notify HMRC when they leave the UK and cease to be eligible for tax credits. It would helpful for HMRC to have a gateway to request information held by the Home Office on migrant workers who are claiming tax credits, as this would assist them in verifying information provided on income and circumstances. The committee suggested that HMRC explore with the Home Office the scope for receiving information held on migrant workers.
Finally, the committee said that the administration of tax credits has not been effective and MPs continue to receive too many complaints about the quality of service provided. Administrative errors made by HMRC continue to generate incorrect payments but they do not know how much is involved. The committee points out that this type of information is routinely prepared by the Department for Work and Pensions in connection with its administration of benefits, and therefore HMRC should calculate and publish equivalent information.
ACCA is alarmed at the report's findings that overpayments, fraud and the complicated administrative procedures which have caused the tax credits system so many problems in the past are still widespread.
Chas Roy-Chowdhury of ACCA said: HMRC's lack of timely and relevant information about tax credit overpayments is very disappointing. It means HMRC cannot assess its effectiveness in combating tax credit fraud and errors. The UK taxpayer has a right to know how much this system is costing them'. He added that HMRC's lack of information and lack of accountability was 'shocking' and that the committee's recommendations should be carried out in full as soon as possible.
PAYE deadline
Further to the news item '19 May', Taxation, 17 May 2007, page 539, HMRC have effectively extended the deadline for returns (see the What's new section of www.hmrc.gov.uk, 15 May 2007). They acknowledge that some agents have experienced difficulty sending their clients' returns in early May and apologise 'for the inconvenience that caused'. HMRC 'confirm that we will not charge a late filing penalty if we get a return by midnight on 28 May [see Extra-statutory Concession B46]. And if you still cannot send your return by then, we will consider discharging any late filing penalty if you can show that you could not send a return on time for reasons outside of your control'.
This announcement has been some time coming and, welcoming it, Paul Aplin of AC Mole says 'the failure of the PAYE on line system to perform adequately for the third year running is simply unacceptable. It has wasted significant amounts of practitioners' time and caused a huge amount of frustration. Sadly but inevitably it also threatens to undermine the success the self assessment on-line system demonstrated this year, taking a very significant increase in volume of returns filed in its stride. A thorough post mortem is required'.
