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Thoughts on the Olympics

Its has been great watching team GB win a few medals, and people are now getting excited about the track and field events coming up, we are in for a good week of sport.

When the Olympics is over, its legacy will be examined, and you would expect that the costs and benefits of the Olympics will be one of the hot topics debated keenly in the pubs and clubs of the land.

Tax avoidance and tax evasion has become another high profile topic in the pubs and clubs of the land over the last couple of months, with lots of moral posturing and finger pointing by the politicians and the tabloid papers.

There is a huge link between tax avoidance and the Olympics which seems to have slipped under the radar, by default the UK Government created a tax haven in ‘London’ from the 8th March 2012 until the 8th November 2012, with the Olympics being in town.

The UK agreed to tax breaks in negotiations with the International Olympic Committee, with Athletes having special dispensations on sponsorships and earnings and corporate sponsors having exemptions on Olympic based sales.

Whilst you can see the arguement for the Government agreeing to this. Isn’t it just high profile sportspeople avoiding tax?

Make you think doesn’t it, maybe this will be thrown into the debate in the pubs and clubs?

Where is the line between Tax Evasion and Tax Avoidance?

If you watch the news or read the papers you will see stories about celebraties and sports stars using fancy tax schemes to avoid or delay payments of tax. To the average man or woman in the street this seems morally wrong, especially with the country being in such dire economic turmoil, and everyone should be seen to be paying their share. This is interesting, and takes me back to my days as an economics student studying the principals of a fair taxation system.

The politicians have sensed the mood of the people and need to be seen to addressing it.

What is tax evasion, and how does it differ from tax avoidance?

Tax avoidance is a perfectly legal utilization of the tax law to your own advantage, which reduces or delays the amount of tax that is due to be paid. It is not to be confused with Tax Evasion which is the use of illegal means to not pay tax. Most people will do tax avoidance to some degree, perhaps investing in an ISA, but not to the degree that some footballers or comedians have taken it to.

Tax code in the UK is complex and getting more so. The popular reference for Tax Advisers , Accountants and Lawyers is the Tolley’s tax handbooks which have now over 11,000 pages. So it is perhaps no surprise that one advisers interpretation may be different from another.

The lines between tax avoidance and tax evasion can often be blurry, and can often be something that is available (due to costs) to the privileged and wealthy in society which can cause moral outrage to the majority of the population.

Tax evasion should not be confused with avoiding tax by doing things such as investing in a pension or an ISA, running your affairs through a company and receiving dividends, which are all legitimate tax planning measures.

The debate between tax evasion and tax avoidance will be interesting, with many schemes such as the K2 scheme being seen as a tax avoidance scheme, which is perfectly legal but seen as morally wrong by some.

Also when the politicians start making statements such as tax evasion and tax avoidance being morally repugnant, its going to get exciting. Maybe people who live in glass houses shouldn’t throw stones, I am sure a story or two will emerge.

Any debate around tax evasion and aggressive avoidance, to have any credibility should include how the establishment use the secretive world of trusts to protect their wealth.

Will PAYE be enforced on Contractors?

The last few months have been interesting times for freelancers and contractors, mainly caused by an increased public (or media) interest in tax avoidance and evaision schemes. Politically the Government has to judge the public mood and be seen to be doing the right thing.

As a result of this the Government has targeted workers avoiding tax by running their affairs through limited companies and not paying PAYE, and has come up with the idea of senior workers being required to have PAYE deducted at source before their limited company receives any money.

This idea is only currently in the consultation process, which last until 16th August 2012, but it is expected to come into force later in the year.

The rules are expected not to apply to businesses that employ fewer than ten people and would only apply where someone works for a company and controls or directs a major part of its operations or manages a significant proportion of its workforce, the organisation will be required to deduct PAYE tax and NI and pay employers NI on any fees it pays for those services.

The good news is in practice these rules are only expected to apply to a handful of freelancers and contractors and should not be confused with the IR35 legislation which is far more wide reaching.

Does working from home affect CGT?

Working from home as a freelancer or contractor is an increasingly popular way of working but could working from home and claiming a deduction from your income tax bill for the costs i.e. the heating and lighting cause you a problem with CGT if you sell your home at a profit.

If part of your home is used exclusively for business then you will lose part of your CGT exemption the key is for part of it to be non exclusive.

To do this make sure that other members of your family use the room for non business purposes i.e. allow them to use the computer for personal email, and keeping up with personal paperwork so that no part can be said to be exclusively for work.

Also if you are caught by CGT do not forget that you will have your annual CGT exemption meaning that no tax would be payable

Got a penalty?

If you have received a penalty from Companies House for late or non submission of a return or accounts you will have asked yourself is this an allowable expense for corporation tax.

The short answer is No. Fines and penalties of any sort are not allowable for a corporate tax deduction (but are put through the company accounts) there is a small possible exception if the fines or penalties are being paid on behalf of an employee.

For an expense to qualify for a tax deduction it has to have been ” incurred wholly and exclusively for the purpose of the trade” , wholly meaning the costs and exclusively meaning the purchase was used in the business only.

The deductability of fines and penalties has been tested in the courts and in one case a judge stated that because a fine is intended as punishment, it would be unjust if other tax payers had to foot part of the bill.

Are you an online trader?

Its has been well documented that HMRC are on a dash for cash and are currently gathering as much information as possible from online auction sites about online traders as part of its e-market place campaign.

HMRC Risk and Intelligence service which is based in Cardiff has been issuing notices under S18a(2) TMA 1970 to online auction sites to request information about the members registers kept.

The auction sites are obliged, with no right of appeal, to provide the information as non compliance will result in an initial penalty of £300 plus up to £60 per day for continuing failure.

The information requested is going to be used purely to check on memebers to see that they are declaring and registered for tax correctly. Thus if you are an online trader who has not declared income from online trading activities,  you will need to make a disclosure to HMRC by 14th June 2012. The full disclosure and payment of outstanding tax then has to be made to HMRC by 14th September 2012.

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