A better deal for the low-income taxpayer

The latest report by the Low Incomes Tax Reform Group (LITRG), ‘A better deal for the low-income taxpayer’, shines a light on aspects of the tax system that can set nasty traps for those who are unfamiliar with tax and cannot afford to pay for professional representation.

The current pandemic has thrown up some particularly egregious examples of the difficulties people encounter because of the various complex methods by which earnings are taxed: through PAYE, by deduction at source under the construction industry scheme (CIS), or through filing of tax returns under self-assessment. I highlight some of these difficulties in this article.

The tax charities – TaxHelp for Older People and TaxAid – have seen increased demand for their services during the pandemic and have risen to the challenge of helping people navigate the latest tax and benefits rules. However, more than ever, the charities need the support of the tax profession – why not add them to your Christmas gift list? (Details at the end of this article).

Subcontractors miss out on support

Help is available through the tax system in the shape of COVID-related grants and loans, but some people struggle to access it.

LITRG’s report shows how some unrepresented construction workers whose tax is deducted under the CIS have for years mistakenly reported those earnings on the employment pages of their self-assessment tax returns, yet at no time were their returns challenged or amended by HMRC.

When those workers attempted to claim a Self-Employment Income Support Scheme (SEISS) grant, they were refused because their tax returns show no self-employed income. In addition, there was no PAYE real-time information data matching their tax return entries.

If their returns had been checked by HMRC’s compliance functions and corrected, all might have been well; but they were not, and the individuals themselves, lacking professional advice, understandably concluded that because they were paid by their contractor who deducted tax on their behalf, they were in receipt of income from employment. Their mistake has cost them dearly.

Problems for agency workers

It is fairly common these days that a worker is employed by an agency or an umbrella company to supply labour or services to an end user who, under a more traditional arrangement, would have been the worker’s employer. Here again is a fertile source of error, because few workers understand the intricacies of the arrangements they are required to work under.

The LITRG report highlights the situation where a worker is put on furlough because they were on a live assignment which came to an end because of coronavirus and were paid under the Coronavirus Job Retention Scheme (CJRS) until the assignment would have ended normally. However, it is uncertain whether those whose assignments were coming to an end but might have been extended were it not for COVID, or those who were looking for an assignment and might have found one but for COVID, are similarly entitled. Official guidance is silent on the matter.

Life is also complex for low-paid workers who are required to provide their services through their own company but struggle to understand the legal vehicle they must work through, and consequently have difficulty in furloughing themselves as directors of their own company and securing the necessary grants.

Contractor loans and other schemes

The LITRG report highlights the plight of workers who are unwittingly, and usually unwillingly, caught up in tax avoidance schemes used by the engagers of their labour who themselves rely on expensive advice to implement those schemes. In such cases, if HMRC detects that use of such schemes has resulted in insufficient tax being paid on the workers’ earnings, it may pursue the workers themselves rather than the actual users of the schemes, particularly if the latter are offshore, or in liquidation. (Think: loan charge.)

Pension tax confusion

Pensioners are just as likely as working-age people to get into trouble through not understanding their tax affairs. The LITRG report draws attention to the fact that the state retirement pension is the only form of pension income that is not subject to PAYE, and how this misleads people into thinking it is tax-free.

My own experiences with the charity Tax Help for Older People have taught me just how difficult it is to explain to a state pensioner why the PAYE system has allocated them a K-code, and how it works (in fact it was difficult enough for me to grasp the concept at first!).

The tax charities and how to support them

Mention of Tax Help for Older People leads me to draw attention to their work and that of TaxAid. These are the two tax advice charities which harness the skills of professional advisers (staff and volunteers) to help those who are otherwise unrepresented and have nowhere else to turn to for advice. They include the people who are now suffering the consequences of COVID through loss of work, loss of their business, home or loved ones, or through mental or physical illness.

The charities’ caseload includes many who are caught out in the ways described above and other system complexities set out in the LITRG report. The charities’ advisers help them sort out their tax and enable them to get on with their lives.

The charities have added new services during the pandemic and helped over 6,000 people apply for the government support they were struggling to access. We can all support this vital work – and give tax justice to vulnerable people.

Bridge the Gap coordinates fundraising for the two charities. Please donate at bridge-the-gap.org.uk/donate.aspx.

Robin Williamson

Written by Robin Williamson

Robin Williamson MBE CTA (Fellow) is an author and commentator on tax, welfare and public policy. He was technical director of the CIOT’s Low Incomes Tax Reform Group from 2003 to 2018 and a part-time senior policy adviser at the Office of Tax Simplification from 2018 to 2019. In May 2020 he won the lifetime achievement award at the Tolley Taxation Awards. He was recently appointed UK country reporter to the Observatory on the Protection of Taxpayer Rights at the IBFD.

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