Uncharted Territory

January 30, 2009

Assessing self-assessment

Filed under: Economics, Inefficiencies — Tim Joslin @ 8:29 pm

Vast amounts of information provided by UK taxpayers during the self-assessment process could be delivered much more efficiently to the taxman by the financial services industry.

At times my self-image is something like that of Mel Smith’s eponymous character in the late 1980s sitcom Colin’s Sandwich. There has been much cursing chez Joslin over the last few days as, inevitably – following a natural law normally applied to computer programs – my tax form remained, seemingly permanently, in a state of 90% completion.

Eventually my partner asked what all the fuss was about. I pronounced the whole process entirely futile. “Why”, I asked in despair, “don’t the banks just send the data direct to the Inland Revenue?” “Oh, that’s what they do in Estonia”, she replied. I’d previously attributed the lack of fuss around her tax returns in the Baltic state to the sort of innate female efficiency epitomised by Louisa Rix’s Jen, Colin’s girlfriend in the classic BBC sit-com. Or perhaps to a lack of complexity in her financial affairs. But it turns out that Estonian taxpayers only have to report changes in circumstances affecting tax allowances. The taxman already knows about their bank interest, share dividends and so on.

Here’s my advice. If you should ever happen to own some shares or investment funds, do not, on any account, make a profit. It’s simply not worth it. I now realise how stupid it was to sell investments during the last tax year. If I’d waited until the markets crashed late in 2008 I would have saved myself many hours of effort working out my capital gains tax (CGT).

If you share my views and start on a rant about CGT in the pub, then, at around this point, some smart alec will almost certainly whine: “Why don’t you get an accountant?” Because I’m not George Soros, that’s why. The cost would dwarf the amount of tax I have to pay. In fact, a win-win situation could be achieved if it was possible to simply negotiate with the taxman: “Look, I’ve done most of it but I think I owe around another £200; if you let me off having to work it out exactly, will you take £250?” But the main justification for tax DIY is that gathering the data is 99% of the work. All an accountant has to do is add up some numbers and type them into a form. Which you may as well do yourself. Once you have itemised all the interest, dividends and capital gains and losses, it should be childishly simple to enter them online.

Except that the Inland Revenue clearly did not employ a child to design their system. The obvious way to handle CGT would be to provide a spreadsheet where you could enter line after line of item, date bought, cost, date sold, proceeds of sale – and that’s about all you need. Then it would be a simple matter to calculate the tax. But no, they’ve implemented a full page form plus additional pop-up calculators for each entry. It’s almost beside the point that I couldn’t get the form to work, since you could only fill in a maximum of 10 sheets. More than 10 items and you had to do the calculation yourself.

So I started tidying up my own spreadsheet for sending to the taxman, before realising that simply calculating the tax for each transaction and then adding them all up won’t do. Oh no. The online tax form required separate sub-totals that it hadn’t occurred to me to derive. After all my fiddling in Excel, you might suppose that the Inland Revenue would want the ability to check the formulae used in my spreadsheet. Wrong again. It turns out that the Inland Revenue only accepts PDF files. Without access to the formulae used, do they have some high-tech way of validating your calculations? Hardly likely, is it?

And get this. The form asks if you want to pay any outstanding tax through your 2009-10 tax code. It turns out this is simply a mistake. You can’t. You’d think some junior programmer could have made an emergency change. For example, they could have replaced the text: “Do you want to pay through this year’s tax code?” with: “Don’t tick this box, it doesn’t do anything”, which might have been a little less confusing.

The galling thing is that I only incurred a CGT liability because of an unfair, retrospective tax change. I was virtually forced to sell assets to avoid higher tax liabilities in the future. My tax form nightmare was entirely the fault of Alistair Darling. With one stroke of his red pen the Chancellor did away with the decades-old principle of providing relief against inflation when calculating CGT.

Taper relief and indexation have been abolished from the start of the current tax year (2008-9) and replaced with a new flat CGT rate (18%). The unfairness of this change received very little publicity at the time because it was overshadowed by the furore over the removal of the 10% tax band. True, there was a protest over changes to the CGT rules for those selling businesses, and concessions were made. But the voice of private investors (pdf) who were seriously affected by the CGT change was barely heard. The change hugely increased the tax liability for assets held for many years, especially for lower-rate taxpayers. In a double-whammy, some will end up paying 18% tax on a large capital gain rather than 10% on a gain protected from inflation by taper relief and indexation. It would be difficult to devise a more prejudicial tax change – it has the effect of dramatically increasing the tax burden for some taxpayers based on the type of assets they have, not their wealth or income. Furthermore, your house is exempt, but, if you happen to have rented and invested some money instead, you could face a hefty tax bill. Is that fair?

What’s more, Darling only announced the CGT change after the start of the tax year prior to it coming into force. This meant that if, like me, you had disposed of some assets in April 2007 (fearful of possible stock-market falls later in the tax year), it was too late to remain under the CGT threshold when doing the logical thing and taking profits under the old rules on investments that you’d held for many years.

One reason given for abolishing CGT taper relief was to “simplify” the system. But since you need a complete record of your transactions anyway, and the calculations are carried out electronically, not in your head when drunk at a party, it simply doesn’t matter how tricky the arithmetic is.

If we really want to simplify the process, though, here’s my suggestion: implement a system exactly like that which apparently exists in Estonia. Simply instruct the banks, share nominee account providers and other custodians of individuals’ investments to upload a simple list of interest, dividends and capital gains to the Inland Revenue. Employ a few of the IT professionals currently being laid off in the City, and all the taxpayer would have to do would be to add anything that has not been captured automatically and sign the form. Implementing such a system would most likely pay for itself in reduced tax evasion.

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