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Consuming Issues Friday, 22 November, 2002, 12:53 GMT
Find tax taxing?
Adrian Chiles, Adam Shaw and John Whiting in the Working Lunch studio
Adrian and Adam put your queries to John
John Whiting, tax partner at PricewaterhouseCoopers, answers your questions.

John Kerley - "When all other financial periods, for such things as wages, salaries, budgets, company accounts etc, finish at the end of a week/month/quarter/year, why does the tax year conclude on the apparently bizarre date of the 5th April?

" What is wrong with 31st March, or even 31st December?"

That is a great question - all a matter of history....

In some ways you can blame the Romans. To them March was the year-end and some believe the warning to Caesar to "beware the Ides of March" was misinterpreted by him as a reminder about Self Assessment deadlines. Thus when tax payments evolved, March tended to be the end of the tax year.

In medieval times, rents and taxes were traditionally paid on the quarter days (25 March, 24 June, 29 September, 25 December), with the 25 March date - Lady Day - being the year-end time.

As time went on, the calendar we used here got out of line with the Sun and in the 18th century we finally switched from the Julian to the Gregorian calendar - an early bit of Euro harmonisation as it got us in line with the rest of Europe, just before the French had their revolution and tore up their calendar.

Our change led to a shift of 11 days, leading to riots in the streets from people who felt they had been deprived of 11 days of their lives.

And in amongst all the fuss, the tax year quietly moved from 25 March to.......5 April, because even then they realised you couldn't accelerate tax payments dates.

So for income tax purposes we stick to 5 April as our tax year-end.

Telling this story to a group of foreigners usually convinces Americans that we are, indeed, ineffably quaint and most Europeans that they should never have let us into the EU in the first place.....

Keith Taylor in York has two questions - "Having recently retired, I receive a company pension which is taxed at source. My wife is a non-taxpayer.

"Is it okay for us to put most of our savings into her name to avoid paying tax or is this seen as tax evasion?

"Also, as we're both in our early fifties and will need to carry on paying class three voluntary national insurance contributions (NIC) to qualify for a state pension, do these count as allowances for tax purposes or do you just pay them from your income after tax?"

What you describe in the first part of your question is very definitely what you should be doing - and it's just good tax planning and certainly not evasion!

It's a normal and sensible step to try and make sure as far as possible that some income goes to a non-taxpayer so as to use up their personal allowance.

You can pass assets to your spouse without capital gains tax (CGT) or IHT consequences.

Whether you pay Class three NIC contributions to keep up your contributions record is very much an investment decision - basically, will you get back in increased pension more than you put in!

It would be worth asking the NI office for projections of your pension entitlement as you stand now and think that through with whatever else you have by way of pension provision.

I know that a lot more people than used to be the case are "opting in" to the state pension regime as it is being seen as better (and safer) value.

But if you do pay Class three NICs, they are not deductible for income tax purposes.

Gilbert Taylor, Staffordshire - "Is it correct that a pensioner receiving an occupational pension pays tax at basic rate but at the age of 65 (ie eligible to receive basic old age pension) they are then moved from standard rate tax to 'K' code - therefore paying more tax than they would on a basic rate and being taxed on an old age pension, which is supposed to be tax free?"

I'm afraid that all pensions - apart from some war and disability pensions - are taxable, including the basic state pension.

And if the pensions (together with other income) are high enough, pensioners can be taxed at 40%.

So someone pre-65 who gets a pension would be due to pay tax just like everyone else - basic rate if total income is under £34,515 at present.

Once you reach 65 and start receiving the state pension, that has to be taxed.

The way the Inland Revenue collect the tax is to reduce your tax code, which governs how much tax is taken from your other pension.

That reduction in tax code could tax you as far as a "K" code where you have negative allowances, i.e. you end up paying tax at more than 22% (or 40% if higher rate) on your occupational pension.

I'm afraid that the tax system doesn't really deal reliably with pensioners who get two or more pensions and many of course have to fill in a tax return to get their figures checked.

It is all rather inappropriate, I have to say, but that's the tax system for you!

Rick Haslam, London - "Fifteen years ago, I bought my maisonette under the "right to buy scheme" using my name and the name of the former tenant - my mother (now aged 76).

"If I were to sell the property and use the money to buy another property in my sole name, would I (or we) be subject to CGT?

"The value of the place was £160,OOO in November 2001.

"As I understand it, if my mother gifted her half to me, she would have to stay alive for seven years to avoid paying any tax on the transfer, unless there is a way of settling the problem between the sale of our place and the purchase of the other?"

If I've understood the situation correctly, you and your mother own half the maisonette each.

Thus when it is sold, each of you gets assessed to CGT on half the capital gain made.

As you'll be aware, every person can, in effect, have one property CGT-free as the "main residence" - so if you and your mother both live in the maisonette, there would be no tax to pay.

But if it's still been your mother's main residence and you have another place, you could be in for a CGT bill - though we'd need to look at costs, indexation, taper relief and the like to see how much.

If your mother gave you her half now, that would be a gift of £80,000 - and CGT could arise even though she hasn't got any money for her shares, though if it's her main residence, we're back to the point above.

There wouldn't be any inheritance tax (IHT) on this if she hasn't made any other gifts, as it would be the first part of the £250,000 that escapes IHT.

Steve Thomas - "I am a full time firefighter and a part-time firefighter in my local community (retained).

"I pay tax in both jobs but pay base rate in the part-time job. Is there any way I could reduce the amount of tax I pay in the part-time job?

"I only get one pension, sick pay etc."

What is happening in tax terms is that your personal allowance - your tax-free pay - is going against your full time job.

That also benefits from the 10% tax rate that you get on some income.

So the net effect of that is that your tax rate on these earnings is on average much less than the 22% basic rate.

When it comes to your second job, there's no personal allowance or 10% band left so you pay at 22% on all the income.

If your total income is sufficient you could find the Inland Revenue come knocking for some more tax as you could end up in the 40% tax bracket.

To reduce the amount you pay are there any deductions you can claim? Pension contributions?

John William Quinn, Cambridgeshire - "Why is it that as a disabled person I am able to buy products like a garage door, bed and/or chair (all electronic) and don't have to pay VAT but because I have savings over the limit allowed, I have to pay VAT on the money I pay my carer?

"Why is VAT is payable on some aspects of disabled care and not on others?"

In principle, VAT is charged at the standard rate - 17 ½ % - on everything.

What then happens is that some things are taken out of the VAT net and taxed at a zero rate or are exempt altogether. A few things are taxed at just 5%.

Examples are many foods, children's clothes, newspapers & books - and some disabled aids.

Unfortunately what the disabled find is that only things specifically designed for the disabled get the VAT relief.

Thus buying something that you need or find helpful because you are disabled may still mean you have to pay VAT, as it's something that is just generally used. And services, such as carers' fees, will have VAT on them, as there is no general relief here either.

In theory all this is taken into account with the setting of disabled allowances but it leaves an inevitably bad taste in the mouth of many disabled people - and indeed of many able-bodied who see what is happening.

Ruth Downing, Devon - "I'm considering building an annexe or other self-contained attached house onto my home for my mother.

"What is the VAT position, as my architect has recommended a small builder who¿s not VAT registered?

"Also, can I insure against the whole thing going pear-shaped?"

VAT law starts from the position that there is VAT on everything! But then some things are zero-rated, including new houses.

Repairs and extensions still have VAT on them, however.

So to escape VAT, you need to be building a new house. The VAT law talks about this being:

  • self contained
  • no internal access from another home
  • having proper planning permission

    So I suspect that your annexe would have VAT on it but the self contained but attached house would probably be zero-rateable (but you'll have to make sure that you can get planning permission for it of course).

    As for the small trader who isn't registered - you can use him, probably with you buying all the materials (on which you'd probably pay VAT though there are some "self build" relief schemes to recover VAT) and just paying him for labour, which would make sure he stayed under the VAT registration limit.

    On insurance - do bear in mind that a new house should carry a National House Building Council (NHBC) guarantee - thought these do, I think, come only from NHBC registered builders.

    Ann Taylor, Surrey - "My father died just over four years ago, and left half his house to the children.

    "My mum has a 'lifetime interest' in the house so it cannot be sold.

    "When we come to sell the house (hopefully many years off yet) will we have to pay capital gains (or indeed any other taxes) on the gain in value of the property since my father's death?"

    Much depends on how the arrangements over your mum's lifetime interest have been set up.

    If your father left the property into a trust and that trust formally gives your mum a life interest, then there is a relief that treats the situation in the same way as if your mum owned the house direct.

    So she would have the house (I assume) as her "main residence" which would be outside the CGT net with no CGT due if the house were sold.

    There are also reliefs that could help if the trust was wound up at your mother's death.

    So I suspect the answer is "no CGT" - but the counter punch from the Revenue is that the chances are that the house is treated as being in your mother's estate for Inheritance Tax purposes so that may mean an IHT bill - but one that, all being well, will be many years into the future!

    One viewer is concerned about paying his tax bill - "I¿ve been investing in the property market for over nine years and own eight properties.

    "In the last year, my cashflow¿s been affected because some have been empty and others had upgrading. But my accountant¿s told me I owe around £10,000 in tax, due in January.

    "Can I negotiate with the taxman or pay monthly on an interest free basis - what are my options?"

    Tax on rental incomes is due at 31 January. And of course if you don't pay on time, interest will start to run.

    If you really don't have the money, I would recommend that you approach your tax office now to discuss the situation.

    They have been much more flexible in recent years in arranging what might be termed flexible payment options.

    They have said that they have no interest in forcing people out of business - they would rather the business carried on and got back on its feet (then it can pay more tax!).

    To be honest, I'm not sure what their stance will be on a property business such as yours because they tend to be most sympathetic to manufacturers and traders.

    But it really is worth asking and being honest and open now - you will, I think, get a reasonable response.

    Please don't take the ostrich approach to your tax bill!

    Alan Hargreaves has had great difficulty using the Inland Revenue¿s online filing system and says it¿s wasting his time.

    What do you think of it?

    I sympathise greatly!

    E-filing should be the way forward but sadly you are not alone in facing difficulties in trying to get to this brave new world.

    Many people have struggled - frankly I think the service was launched before it was properly ready.

    I wouldn't in all honesty advised you to try e-filing if you had a capital gain to sort out. It works best for simple tax situations.

    It also requires patience (to await passwords etc) and luck (having a go when the system is fully operational).

    The system is getting there but it will be a while before we can all use it with ease, I fear.

    Graham Richardson, Surrey -" Why do we still give VAT back to tourists when they leave the country?"

    Exports don't have VAT on them - so if a visitor to the UK buys something and returns to home country shortly afterwards, exporting the item, we give the VAT back that they would have paid.

    They may have VAT to pay when they take it into their own country of course, and possibly other duties as well.

    Steve Elms - "What are the tax implications for a couple if they sell a house and buy a new one in a different location in the UK, making a profit of about £100,000?

    "The house they own is their only property and the reason for moving is that they are retired and need a smaller house."

    Each individual - or each married couple - can have one property as their "main residence" for CGT purposes, which would be outside the CGT net.

    So in the circumstances you describe, the couple can enjoy the capital they have released without worrying that the taxman will be along to take a bite.

    The opinions expressed are John's, not the programme's. The answers are not intended to be definitive and should be used for guidance only. Always seek professional advice for your own particular situation.
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