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Key points
- Many pensioners are effectively disenfranchised by HMRC's insistence on delivering information via the Internet.
- HMRC's complaints procedure should operate more smoothly and effectively.
- Retired people should receive a comprehensive report of benefits received and the tax paid, if any, before the start of each tax year.
- Tax policy should be risk assessed for its effect on pensioners before being introduced
CURRENTLY ONE IN six of the population in the UK is aged 65 or over. Over the next 30 years it is estimated that this proportion will rise to one in four.
The problems of pensioners on low incomes are particularly acute, and nowhere more than in the realm of taxation. Despite reports published by the Low Incomes Tax Reform Group in 1998 and 1999, it appears that the service offered to pensioners has deteriorated rather than improved over the past few years.
Despite the hype about 'silver surfers', many pensioners are not computer literate, which immediately cuts them out of many HMRC information sources. All taxpayers have found that communication with the department by letter or telephone is extremely difficult, and face to face meetings are largely a relic of the past (except in investigations).
It is therefore timely that the LITRG published a new report in May 2007, 'Older people on low incomes — The case for tax reform'.
Older people
Chapter 1 introduces the Low Incomes Tax Reform Group to the reader, and refers back to the 1998 and 1999 reports. Although these reports were well received at the time, the problems highlighted in the previous reports therefore remain. The current report highlights some of the recurring issues facing pensioners where the LITRG believes that there is an urgent need for reform. It is believed that the suggested changes would not, in the medium term, add to the costs of Government.
Chapter 2 poses the question 'Why do older people require special consideration?' The latest statistics show that there are around 1.8 million pensioners who are living in poverty in the UK.
Despite this fact, it is possible for a woman pensioner to start to pay tax in 2007-08 on an income of little over £100 a week. That person will be entitled to state pension credit, but will be required to submit a self-assessment tax form to HMRC.
Increasing age hastens a reluctance to fight personal battles against bureaucracy, particularly as two separate Government departments (HMRC and DWP) are likely to be involved. Workplace support has been removed and health problems may have intervened. Easy access to the occupational pension payroll department has gone, and the pension administrator only deals with that part of the individual's affairs. In many instances, during retirement may be the first time that the person comes into direct contact with HMRC.
Communication
Chapter 3 is entitled 'How HMRC communicates with its older low-income customers'. The LITRG believes that the taxpayer or tax credit claimant has a right to receive information from HMRC in an accessible format.
Charities such as Tax Help for Older People, TaxAid and the Citizens' Advice Bureau perform a vital function on behalf of low-income pensioners. However, the LITRG recommends that consultations should take place with low income customers (and those who represent them) to establish meaningful service standards for people who rely totally upon HMRC for information and service.
It is submitted that there has been a decline in face to face advice, home visits and written contact. Coding notices are a particular problem and the LITRG recommends that HMRC should issue a statement to each pensioner before the start of a tax year, setting out the total allowances due and income estimates that have been used, and how it is proposed to allocate allowances at the different tax bands to the various sources of income.
The difficulties of telephone contact with HMRC for pensioners are obvious, and it is unrealistic to expect that section of the population to be computer literate. It is recommended that information useful to pensioners should always be available in hard copy form, as well as on the Internet.
Previous criticism of HMRC leaflets and helpsheets resulted in the withdrawal of a number of leaflets, and those that remain and are relevant to pensioners are unsatisfactory. It is recommended that new leaflets and helpsheets are produced around the life events that cause pensioners particular difficulty.
It is recommended that a specific helpsheet is produced for those with disabilities, and a specific part of the HMRC website is designed to cover disability-related issues.
Complaints
The LITRG has consistently been critical of the HMRC complaints and disputes procedures, because the scales are tipped against the unrepresented taxpayer generally. As regards pensioners, the LITRG recommends a choice between a central complaints contact point or speaking to the person who last dealt with the pensioner.
The report recommends that a simpler, shorter, more visible complaints procedure (including by e-mail) is established, and which provides an immediate acknowledgment by a named individual who deals with the whole complaint, even if more than one part of HMRC is involved.
Similarly, appeals procedures are daunting for pensioners, and the LITRG recommends that the Tribunals Service provides a good case management service from the initiation of the appeal right through to the hearing.
In addition, consideration should be given to incorporating, in the early preparatory stages of an appeal, the opportunity for an unrepresented appellant to receive independent professional advice on the merits of his or her appeal.
Life events
Chapter 4, headed 'Life events for the pensioner' explains in more detail the issues where the LITRG recommended new HMRC leaflets in chapter 3.
Becoming a pensioner
LITRG recommendations for new pensioners include the following:
- HMRC should take responsibility for ensuring that the correct state earnings related pension (SRP) is included in the PAYE coding for the transitional year when the individual becomes a pensioner and subsequent years by better handling of the automated data transfers from the DWP.
- When HMRC use an estimated SRP figure in a coding notice, this fact should be identified.
n HMRC should take all steps necessary during the initial year of retirement to produce the correct deduction of tax at source by the end of that year.
Bereavement
A Cabinet Office report on bereavement in March 2005 set out to remove cross-government bureaucracy in the event of bereavement. Shortly afterwards, HMRC withdrew leaflet IR45, its only leaflet on bereavement. The LITRG recommends that the suggestions of the 2005 report should be carried through.
Specific proposals suggest that the content of the DWP leaflet D49 is expanded to include more key tax issues where bereaved pensioners are likely to lose out or make mistakes. Consultations with the voluntary sector should take place, and enhanced guidance should be available from both the HMRC and DWP orderlines.
Another suggestion is that the exchange of information between the DWP and HMRC in the event of bereavement is streamlined in order to avoid duplication and added burdens. Furthermore, a complete overhaul of the HMRC bereavement enquiry process (form P161W) should take place so the current 'hit or miss' approach is revised. A single point of HMRC contact on bereavement issues, i.e. a bereavement helpline, should also be introduced.
Going into care
Issues arising when a pensioner can no longer 'cope' are complex. Some individuals remain within the community, while employing someone to care for them. Other pensioners go into residential care, often within the private sector.
Where pensioners remain in their own homes and make payments to a carer, the LITRG recommends that HMRC work with the Department of Health, DWP and voluntary sector organisation supporting direct payments to make sure that older people are given clear and consistent advice about their responsibilities for operating PAYE when they make the decision as to whether direct payments to a carer are appropriate for them.
Releasing capital
When a pensioner goes into care, it may be necessary to release capital and, say, purchase an annuity. Sometimes, home reversion plans are entered into. The LITRG recommends that this important area should be the subject of a working party between HMRC, the DWP and the voluntary sector in order to examine the relevant interactions between taxation and means-tested benefits. An important by-product would be a publication identifying all the issues to be considered by the pensioners and their families.
Anti-avoidance legislation, such as the pre-owned assets regime, is not aimed specifically at pensioners. Similarly the restricted definition of a disabled trust is not relevant. However, in both instances, these tax provisions may impact on pensioners, even if inadvertently.
The LITRG recommends that every new tax policy designed to combat tax avoidance by individuals should be carefully examined for its possible effect on those in care (care-proofing).
Getting the tax right
Chapter 5 is entitled 'Getting the tax right'. The complexities and bureaucracy of the UK tax system mean that pensioners often delay dealing with their tax responsibilities. Major problems include:
- falling into self assessment;
- coping with the pension credit;
- tax deducted from bank and building society interest;
- gift aid;
- official error.
Self assessment
The difficulties of dealing with the self-assessment return are well known, and not confined to the lower paid and pensioners. The LITRG recommends that the DWP should send an annual statement to all state retirement pension recipients, perhaps at the same time as they make the final payment for the tax year. The statement should clearly identify all the different benefits paid out by the DWP and their taxability. This would help to prevent pensioners from including non-taxable income in any information they submit to HMRC.
It is also recommended that the DWP should operate PAYE on selected state retirement pensions when required to do so by the pensioner (the DWP does operate PAYE on selected other state benefits). If this suggestion is not adopted, then HMRC should operate a simple direct payment scheme similar to basic PAYE, rather than bringing the pensioner into self assessment. The DWP should be directly notified of the tax assessed to enable it to take it into account in order to calculate the pension credit.
In instances where the pensioner is taken out of self assessment, the LITRG recommends that its procedures inform the pensioner of what is to follow, whether in a PAYE or a form R40 repayment situation.
In connection with the shorter self-assessment deadlines for those not filing online, it is recommended that before HMRC introduce the new time limits, the department should examine all its support services for low-income pensioners, including home visits and other face-to-face services to assist with return completion. Consideration should also be given to taking more older people out of self-assessment.
Pensioners who are e-literate and remain within self assessment should be supported by funding the voluntary sector to empower them to provide such support.
Pension credit
Claiming pension credit is also complicated. In some instances there is interaction between pension credit and working tax credit. This is another area where things can go wrong, and many have found that it almost impossible to check pension credit calculations. The LITRG recommends that The Pension Service should ensure that all pension credit assessments are based on net state retirement pension income, so that tax liabilities that have not been collected by PAYE are taken into account. The Pension Service should address the implications for pension credit claim line scripts, and for staff training more generally.
It is also recommended that regulations should be changed to remove the circular interaction between pension credit and tax credits for those pensioners who undertake low-paid work.
Bank and building society interest
Investment products pose a particular problem for pensioners. Some are tax free, some pay interest gross, and some pay interest net of 20% tax. The facility to request banks and building societies to pay interest gross by completing form R85 exists, but the overall end of year tax calculation can be complex. There is also the 'tax trap' for better off pensioners where there is a reduction of the age-related personal allowance producing a high marginal tax rate.
Some pensioners will have involuntarily overpaid tax, without the knowledge that they can claim tax repayment by completing form R40 (which incidentally is only available by download from the Internet).
In other instances completion of the form R85 has caused difficulties, either because the pensioner is not aware that an application may be made to pay interest gross, or where increased taxable income brings the pensioner back into tax liability.
The LITRG recommends that HMRC should monitor the effectiveness of the banks and building societies in publicising the pensioner tax back project of 2004-05 and administering the form R85 processes accurately and effectively.
If this recommendation is not accepted, then it is recommended that HMRC be required to match bank and building society interest details with taxpayer records. HMRC should do this on an annual basis so that tax overpaid can be quickly identified and promptly repaid without the taxpayers having to ask for it.
Gift aid
Gift aid is an efficient and generous resource for charities, and pensioners on low incomes are among the most generous of donors to charities. However, a fundamental part of the gift aid arrangements is that the donor must be a taxpayer and must have paid an equivalent amount of tax to the tax deemed to have been deducted from the gift aid payment.
Many pensioners are not aware of this tax trap and the LITRG recommends that a formal consultation takes place to consider the simplification of the gift aid scheme and establishing a mechanism whereby a non-taxpayer can give to charity under gift aid.
In the meantime, charities should be required to warn donors at frequent intervals, that they should inform charities if they cease to pay tax, for example on retirement. Where a donor who does not pay tax makes a gift to charity on which the charity claims and receives gift aid, the liability to repay the tax should be that of the charity and not the donor, whatever the particular circumstances.
Official error
Apart from the fact that Extra-statutory Concession A19 can only be accessed on the Internet via the HMRC website, it is considered that HMRC have set the task of 'reasonableness' in connection with a taxpayer's affairs impossibly high.
The LITRG recommends that HMRC review the operation of the concession, having regard to the circumstances and capacity of the individual taxpayer, and what it would be reasonable to expect of that individual, rather than setting an objective standard of reasonableness which most taxpayers have no hope of reaching.
Conclusion
My detailed study of the LITRG report makes it clear that many of the recommendations made would also benefit other lower-income taxpayers, and, in a number of instances, taxpayers generally. I therefore unreservedly commend this report.
Tribute also needs to be paid to the valuable work done by the LITRG, Tax Help For Older People and other charities, such as TaxAid and the Citizens' Advice Bureau, on behalf of low-income pensioners. Acting for lower-income taxpayers does not represent an important fee earning function for tax practitioners, but it is to be hoped that many firms will be prepared to complete a certain amount of pro bono work on behalf of these important members of society.
John Newth is an independent tax journalist, and won the LexisNexis Tax Writer of the Year Award in 2005.
The LITRG report can be downloaded from the LITRG website or a hard copy obtained from Hazel Mazelin-Forbes at 12 Upper Belgrave Street, London SW1X 8BB, tel: 020 7235 9381, at a cost of £5.
