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KEY POINTS
- Self assessment was always far from simple
- Little demand for low-cost tax preparation services
- Remember Hector the Inspector?
- Overlap profits and fiscal accounting
- Training clients to avoid the last minute rush
Hands up who remembers which Chancellor spoke these words and introduced the biggest reform of the UK tax system since the introduction of PAYE in 1944?
It was Norman Lamont MP in his Budget Speech on 16 March 1993. He went on to outline a system that was intended to be make the process of filing tax returns and payments of tax simpler and fairer.
In essence, the changes abolished the preceding year basis of assessment for the self-employed and introduced the idea of one annual tax statement, one tax bill and the option of self assessment.
It is quite surreal for me to be writing an article with such a historical flavour. I normally prefer to focus on the impact that imminent and recent changes to the tax system will have on practitioners and their clients.
So, why am I writing this piece comparing what the new system was supposed to do with how it has really turned out?
I recently came across a copy of the Essential Guide to Self Assessment — one of the first books to explain the new tax rules and processes for practitioners.
It was originally published in 1994 by Gee & Co and the authors were all from Clark Whitehill, namely Mike Jones, David Furst (now deputy president of the ICAEW) and me.
I also found an old cassette tape and video that were part of the Inland Revenue's promotional material to introduce the new tax system. More on that later.
Although the book was written almost 14 years ago the new tax system only came into force in 1996-97. The first self assessment tax returns were then issued in April 2007.
Thus it was exactly ten years ago on 31 January 1998 that we first struggled to file those final few(?) self assessment tax returns to avoid the new £100 late filing penalty.
Why the changeover?
It was back in August 1991 when the first consultative document was published, 'A simpler system for taxing the self-employed'. This was followed in November 1992 by another document, 'A simpler system for assessing personal tax'.
The second one went much further and anticipated changes that would have an impact on a wider range of taxpayers including those subject to PAYE.
It seemed as though the Inland Revenue, after considering responses to the 1991 document, recognised the willingness of interested parties to consider changes which were rather more extensive than initially had been thought possible.
Early expectations
The initials 'SA' were originally used as an abbreviation for 'simplified assessing', but when it became apparent that little about the new system would be simple, the official position became that SA stood for 'self assessment'.
Even then we had to understand that this meant 'self assessment of one's taxable income'. The tax liability was never self assessed as such. It has always been computed by the Inland Revenue, now HMRC.
Their assessment is demanded by the computer, regardless of any different calculation that the taxpayer or adviser has made.
Some professionals anticipated that, because the new system was expected to require many more taxpayers to file annual tax returns, there would be a heavy demand for low-cost tax return completion services.
There were several forays into the field, some hoping to become the British version of the American giant 'H&R Block'.
In practice, the demand for such services did not evolve as had been anticipated. In hindsight it was easy to see why.
In the US, every citizen has to file an annual tax return and most receive a tax repayment each year, due to the way that their payments on account are computed. The tax return preparers get paid out of the tax refunds they secure for their clients.
Quite simply this could not be replicated in the UK, as its system remained quite different. As a result there are no well known tax return preparation services operating across the UK, although it is interesting to note that one or two banks are looking again at entering the market.
I am on record as questioning the logic of such a move. I do not sense there have been any changes that would make such a service more cost effective and profitable now than it was ten years ago.
Indeed it is now supposedly easier than ever for taxpayers to file their own tax returns — after all, HMRC keep telling us that 'tax doesn't need to be taxing'. I am surprised no-one has reported HMRC to the advertising standards authority.
Completing your tax return will always 'be taxing' for most people and our tax system is so flaming complicated — still — that of course 'tax is taxing'.
My dictionary defines 'taxing' as 'demanding, onerous and wearing'. Competing a tax return will always be demanding. Most taxpayers will also find it onerous and wearing.
The PR material
It was back in the mid 1990s when the Inland Revenue's marketing people first came into their own. They produced an audio tape and an eight-minute video introduction to self assessment for the self-employed.
It starred the actor Michael Elphick. The real star of the new tax system however, was a bowler-hatted cartoon character who officially had no name.
I still remember speaking at the ICAEW annual conference in 1997 and explaining to the audience that the cartoon taxman was to have been called 'Hector the Inspector'.
However just before the campaign was launched, someone at the Revenue had checked the dictionary definition and noted that 'to hector' meant 'to bully or torment'. As these were not qualities with which the Revenue would want to be associated, the name was officially dropped.
Sharing the platform at the conference was a senior Revenue official, Sam Mitha. He spoke after me and immediately disputed my version of events. I was astonished until he 'explained', 'evidently Mr Lee is mistaken as I can assure you that Inspectors of Taxes do not have access to dictionaries'.
We have since laughed about this especially as everyone other than the Revenue always referred to the character as Hector.
After Hector we had Mrs Doyle, the tea lady from Father Ted, and for the last few years, Adam Hart Davies who, as I noted earlier, is constantly required to tell us, misleadingly, that 'tax doesn't need to be taxing'.
Anti-avoidance
The move to 'self assessment' was facilitated by the introduction of the current year basis of assessment and a transitional year, i.e. 1996-97.
The profits of two accounting periods were then averaged to facilitate the move from the preceding year basis to current year basis.
This was seen to be a potentially major opportunity for tax planning as it halved the effective rate of tax payable on profits that fell into the transitional period.
Naturally anti-avoidance legislation was enacted principally to discourage the 'shifting' of business profits or the refinancing of partnership borrowings to benefit from the 'averaging process' or, what was called, 'transitional overlap relief'.
I have long wondered if the Revenue ever sought to apply this legislation and challenged taxpayers who appeared to have benefited unduly from the transition.
My suspicion at the time was that it would be very difficult and that it would have to rely on the honesty and professionalism of advisers to discourage clients from triggering the legislation.
This is an approach we have seen repeated more recently; by which I mean that only the well advised are even aware of the relevant legislation and the Revenue's ability to challenge obvious planning techniques. The most glaring recent example is the law relating to 'pre-owned assets'.
Fiscal accounting
The other big consequence of the move from preceding to current year basis and the introduction of 'overlap profits', was the prospect of what we called, at the time, a 'tax bombshell'.
This would arise on cessation of a business that had benefited from rising profits and an accounting date early in the tax year (most commonly 30 April).
As is now well understood, the value of overlap profits falls over time and can result in cashflow problems when tax becomes payable on the final period's profits.
The impact of the new rules was a primary driver for the move towards 'fiscal accounting', whereby the accounting date is aligned with the tax year. To facilitate this the Revenue agreed to treat 31 March accounting dates as co-terminous with the tax year.
There are still two schools of thought on fiscal accounting. There are those who help keep things simple for their clients by encouraging fiscal accounting and those who focus on the cashflow benefits of an accounting date early in the tax year.
I can see the arguments in favour of each of these from a business perspective, although I sense that fiscal accounting has become far more prevalent over the last ten years. Certainly it dramatically simplifies things for partnerships where partners are joining and leaving each year.
I wonder how many taxpayers (including professional firms) have retained, or adopted, a non-fiscal year end and do not maintain adequate tax reserves? I suspect that a number of unexploded tax bombshells remain just waiting for the business owners to retire or sell up.
Filing deadline
Ten years ago many of us swore that we would not allow the nightmare of January 1998 to be repeated.
Since then I know many practitioners who have successfully trained their clients so that January is no longer a problem month. They have implemented processes and procedures to avoid the worst scenarios.
I share many of their ideas in my talk on 'How to make more money from your tax work'. Many more practitioners however, especially those in firms with more than just a few partners, still suffer in January each year as their dilatory clients effectively force them to work overtime to avoid the late filing penalty.
I hope that practitioners will be able to use the new early filing deadline for paper based returns later this year as a catalyst either to avoid an eleventh January of hell, or that they will arrange matters to ensure that they will be well rewarded for the hassle when clients leave things to the last minute.
And finally
We would all agree, I am sure, that the 'new' system is a great improvement on the pre-self assessment days. We no longer have multiple estimated assessments, appeals and applications to postpone the tax charged on the estimated assessments.
We did away with a raft of pointless paperwork but the accompanying reductions in junior staff numbers, that some expected, did not follow.
The Revenue's ten year Change programme, originally expected to run through to 2002, has continued apace and its staff numbers are being decimated as a result of ill-thought through political posturing.
In this connection, if you agree that the cuts will be harmful to the efficiency of the tax system, do sign Taxation's Stop the Staff Cuts petition.
Ten years on I am sure that Mr Lamont and the senior officials at what is now HMRC would argue that the introduction of self assessment achieved the 'simpler' and 'fairer' aims which were stated at the time and repeated throughout Booklets SAT1 and SAT2.
However, whether the move achieved the levels of simplification and fairness anticipated at the outset is a moot point.
Mark Lee FCA CTA(Fellow) is the founder of TaxAdviceNetwork.co.uk and a past chairman of the ICAEW's Tax Faculty. He can be contacted by email: Mark@BookMarkLee.co.uk, or tel: 0845 003 8780.
