UK: Weekly Tax Briefing

Tax 25 August 2000

The Inland Revenue has just published, in this month's Tax Bulletin, a welcome clarification of the rules on making carry back claims under Income Tax Self Assessment.

If the taxpayer makes (for example) a trading loss or personal pension payment in one year, and carries it back to the previous year, relief is given without (as a procedural matter) reopening the self assessment for the previous year. Nevertheless, consequential claims for the previous year can still be made.

The Tax Bulletin gives some examples of cases where carry backs can give rise to possible consequential claims even though the self assessment is not reopened.

• The taxpayer makes a carry back which reduces total income for the previous year. The taxpayer thereby becomes eligible for age-related personal or married couple's allowance (MCA) for that year.
• The taxpayer makes a carry back claim which reduces the previous year's total income, freeing up some of the rate band below higher rate. This is taken into account in computing capital gains tax for the previous year.
• The taxpayer makes a carry back claim which reduces income for the previous year to such an extent that the entitlement to MCA cannot be used. Surplus MCA can be transferred to the taxpayer's spouse.

The Tax Bulletin says: 'If people have had consequential claims etc of this kind refused local tax offices will be pleased to reconsider them in the light of the views set out in this article.'

The Tax Bulletin article also notes some cases where this principle could work the other way.

• It applies where farmer's averaging, literary spreading or the carry back of post-cessation receipts increases income in earlier years.
• It also applies where the carry back reduces net relevant earnings for the purposes of relief for personal pensions or retirement annuity contributions. Relief is clawed back and excessive personal pension contributions have to be refunded.
• For further information, please speak to your usual KPMG tax contact.

A recent survey by the Association of Chartered Certified Accountants (ACCA) reveals that taxpayers' compliance costs have risen steeply in the past three years. ACCA members in practice are spending up to 60% more time completing tax returns for their clients than in 1997. The increase in compliance costs imposed by the tax system is not restricted to Income Tax Self Assessment; it also applies to corporation tax, PAYE, Working Families' Tax Credit, IR 35 and the new Construction Industry Scheme.

The ACCA survey independently confirms the complaint expressed by the Tax Faculty of the Institute of Chartered Accountants in England and Wales (ICAEW) in its discussion paper Towards a better tax system. The fourth of the ICAEW's Ten Tenets is: 'The tax system should be easy to collect and to calculate.' Commenting on this, the ICAEW observed: 'It is important that tax is easy to collect. Compliance costs for taxpayers and administrative costs for the tax authorities should be minimised as far as possible. Increasingly, the burden of collecting tax has moved from the revenue authorities to the taxpayer or his employer.' The ICAEW notes that further burdens for employers will arise in the administration of the Scottish Variable Rate and student loans repayments.

This is a serious matter for the community as a whole, because compliance costs are regressive. Large businesses and employers enjoy economies of scale which small businesses and employers cannot. Therefore, if compliance costs increase, the burden on those less able to bear it grows even heavier.

Accordingly, the Low Incomes Tax Reform Group (LITRG) of the Chartered Institute of Taxation has been lobbying for the tax system to be made more user-friendly for those in the community who are least able to afford tax advice. The LITRG has identified that the tax system bears down heavily on older people, on people trying to sustain themselves in work and moving between the ranks of the employed, the self-employed and the unemployed, and on students receiving minimal support from the State.

What can be done to reverse the trend and reduce the tax compliance burden?

The problem is complex, and needs to be tackled at several levels.

The Government needs to take account of the level and incidence of compliance costs when reviewing the working of the tax system and especially when promoting tax reforms. This is particularly important when, as with IR 35, the new legislation will mainly apply to smaller businesses.

The tax authorities need to assist taxpayers to comply with their obligations at minimum cost. In fairness to Customs and the Revenue, they are well aware of this; for example, they are taking part in the Small Business Service, a DTI-led initiative co-ordinating service to small business as part of 'joined-up government'.

Specific areas of concern need to be brought to the tax authorities' attention. As indicated above, the professional bodies are performing a valuable service here.

Taxpayers can also take steps to avoid incurring compliance costs unnecessarily; 'a stitch in time saves nine.' To take a simple example, if you are an employee your income tax affairs will probably be straightforward (thanks to PAYE), but if you also happen to be a higher-rate taxpayer you will have received a tax return to complete anyway. If you gather the necessary information and send in your tax return by 30 September, the Inland Revenue will calculate your tax for you. If you delay and miss that deadline, you will have to calculate your tax yourself - incurring unnecessary compliance costs, which may be financial (if you engage professional assistance) or may take the form of inconvenience and anxiety (if you do not).

However, not all ways of avoiding unnecessary compliance costs are that obvious. For example, it is possible for employers to negotiate with the Revenue a P11D dispensation, whereby items such as expense refunds need not be entered on the employees' P11Ds if they give rise to no income tax liability. However, each case is different, and it is therefore worth calling in experienced advisers when negotiating - or renegotiating - a P11D dispensation to ensure that the most favourable deal is secured. For assistance with your P11D dispensation - or for other suggestions for ways of avoiding unnecessary tax compliance costs - please speak to your usual KPMG tax contact.

Inland Revenue - corporation tax on chargeable gains - indexation allowance, July 2000

The value of the retail prices index, as published by the Office for National Statistics, for July 2000 is 170.5 (January 1987 = 100).

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