Being cautious, releasing the stress
Let’s be quite clear: I’m not the Judge who will decide this case. I cannot tell you what will absolutely happen at the end of the day. Anything I say in this message or the other messages I have posted are my own personal opinion. What is more, these comments apply to everyone else on this forum and indeed our advisors too.
But I do believe in what I write. I do have my money on what I write. What I’m sharing on here is what I am doing. I, like almost all of you, stand by the courage of my convictions.
Here’s what I currently believe will happen:
With my viewpoint in mind, note well that we are not at the end of this. It is my observation that one has the most power in a situation when one has enough money behind themselves to cover not just their bills, but their potential bills.
While I think we will win, there is a possibility that we might not – the unthinkable could happen. If we met in the street and you asked me whether you should be saving cash – I’d say yes. It would be irresponsible of me to answer otherwise.
If you save cash and HMRC somehow manage to win, then you have the cash ready. However if, as I believe we will, we win – then you have a nest-egg. But the bigger bonus is that if you can see a way to having the money, then you should suffer almost no stress from this situation.
You might feel that the amount is impossible and I know that for some people that is true. It might be for as many as 60% of people according to our survey. Don’t despair; there is a factor on your side – time.
The scheme ran from around 2001/02 to Sept 2008. That’s about 6 years. It’s going to be around 4 years till a decision is finally reached. I’m not claiming that you will be able to save the equivalent of 6 years tax in 4 four years – especially when you consider that there was large fee on the income during those years. But it is possible to get so far.
If the worst were to happen then the fact you have begun to make provision will count in your favour.
How?
So, let’s say you decide to save some money – how should you store it?
There are, broadly speaking, four options. Okay, there are really hundreds of options but I’m sticking to secure savings options rather than investments as such.
Option 1 – make a payment on account as HMRC want you to do.
No. Don’t do it. You will never see your money again whether we win or lose. HMRC say it’s “payment on account” but the fact is that they have went to court in the past to keep ‘payments on account’. Making a payment on account is very similar to saying, “yes, you’re right”. If you did decide to go down this route, talk to your provider first.
Option 2 – Certificate of Tax Deposit (CTD)
The advantage of a CTD is that it stops the interest accruing. It does not wind the clock back – previous interest would still be due. However, the downside is that you will only get the HMRC repayment rate if we win. Currently, the repayment rate is 0.5% - it’s not very attractive.
Option 3 – Cash ISA or Savings Account
Providing the account pays the same or more than HMRC’s overdue interest rate (currently 3%) then you will be quid’s in either way. It’s time for an example.
Let’s say you are due £100 in tax today (I know, me too!) in four years time you would be due HMRC:
Amount due today = £100
Interest for year 1 = 3% = £3.00
Interest for year 2 = 3% = £3.00
Interest for year 3 = 3% = £3.00
Interest for year 4 = 3% = £3.00
Total due at end of year 4 = £112
[Note that the interest is simple]
Now let’s say you put the same amount in a Cash ISA with the same interest rate (3%)
Original deposit = £100
Interest for year 1 = 3% = £3.00
Interest for year 2 = 3% = £3.09
Interest for year 3 = 3% = £3.18
Interest for year 4 = 3% = £3.28
Total saved at end of year 4 = £112.55
[Note that the interest is compound]
So at the end of the time you can cover your tax bill and still have 55 pence profit.
The best ISA rate now is 4.75% which in the above example means you’d cover your tax bill and have £8.40 profit.
It doesn’t seem much – but if you apply it to £100,000 then that £8.40 is actually £8,400 “profit” over the four years. This, of course, can go towards paying off part of the bill – effectively giving you an 8.4% “discount”. The longer this continues, the better it gets.
The advantage is the money is still under your control and you are not admitting anything to HMRC. And when we win, you get to keep the money.
When checking accounts remember that there will be tax to pay on interest of non- ISA accounts so you must use the net figure for interest. Also, rates change so always keep an eye on them. If you are tempted by a fixed rate/term deal then check if it is possible to get your money out early.
Option 4 – pay the money into your mortgage
This would be the same as Option 3 but because you’re paying a debt there is no extra tax to pay. Rather you are saving paying interest which means that you’d need a savings account paying a net rate more than your mortgage rate to make saving worthwhile. Some mortgages allow overpayments which then reduce the term of the mortgage and so save on interest.
Whether you chose option 2, 3 or 4 depends on the interest rates available to you and (if you’re using non-ISA accounts and are a higher rate taxpayer) on your marginal rate of tax.
I hope that it can be seen from the above description that it does not make business sense to make a ‘payment on account’, nor in many cases to buy a CTD. If you use ISA’s and savings accounts then you can make your money work harder and have a chuckle as the tax man squirms in his own mess.
One significant caveat on this strategy: HMRC’s actions have placed an almost intolerable amount of pressure on some relationships. If you are following this strategy then it is important to agree with your partner that this money will be set aside for the payment of tax until such time at the matter is settled. We’ve all heard of divorce proceeding where one party is ‘cleaned out’. So get this agreement in writing as part of your strategy now – just in case.
Let me conclude where I began: I think we will win and HMRC will lose. Until the Courts, and then possibly the politicians, have made their final decision the only thing we have to deal with is stress. By making provision for the unlikely that stress should dissipate. You won’t look at those Saturday morning brown envelopes in the same way when you get a healthy bank statement in the same post.
Let’s be quite clear: I’m not the Judge who will decide this case. I cannot tell you what will absolutely happen at the end of the day. Anything I say in this message or the other messages I have posted are my own personal opinion. What is more, these comments apply to everyone else on this forum and indeed our advisors too.
But I do believe in what I write. I do have my money on what I write. What I’m sharing on here is what I am doing. I, like almost all of you, stand by the courage of my convictions.
Here’s what I currently believe will happen:
- this case will go all the way to the Supreme Court
- we will ultimately win and HMRC will lose
- we will not have to go to the European Court
- the case will go on another two to four years (if we do go to Europe then it would be longer)
- HMRC will be badly scarred by what they have done and will receive attention from a Parliamentary enquiry as a result
With my viewpoint in mind, note well that we are not at the end of this. It is my observation that one has the most power in a situation when one has enough money behind themselves to cover not just their bills, but their potential bills.
While I think we will win, there is a possibility that we might not – the unthinkable could happen. If we met in the street and you asked me whether you should be saving cash – I’d say yes. It would be irresponsible of me to answer otherwise.
If you save cash and HMRC somehow manage to win, then you have the cash ready. However if, as I believe we will, we win – then you have a nest-egg. But the bigger bonus is that if you can see a way to having the money, then you should suffer almost no stress from this situation.
You might feel that the amount is impossible and I know that for some people that is true. It might be for as many as 60% of people according to our survey. Don’t despair; there is a factor on your side – time.
The scheme ran from around 2001/02 to Sept 2008. That’s about 6 years. It’s going to be around 4 years till a decision is finally reached. I’m not claiming that you will be able to save the equivalent of 6 years tax in 4 four years – especially when you consider that there was large fee on the income during those years. But it is possible to get so far.
If the worst were to happen then the fact you have begun to make provision will count in your favour.
How?
So, let’s say you decide to save some money – how should you store it?
There are, broadly speaking, four options. Okay, there are really hundreds of options but I’m sticking to secure savings options rather than investments as such.
Option 1 – make a payment on account as HMRC want you to do.
No. Don’t do it. You will never see your money again whether we win or lose. HMRC say it’s “payment on account” but the fact is that they have went to court in the past to keep ‘payments on account’. Making a payment on account is very similar to saying, “yes, you’re right”. If you did decide to go down this route, talk to your provider first.
Option 2 – Certificate of Tax Deposit (CTD)
The advantage of a CTD is that it stops the interest accruing. It does not wind the clock back – previous interest would still be due. However, the downside is that you will only get the HMRC repayment rate if we win. Currently, the repayment rate is 0.5% - it’s not very attractive.
Option 3 – Cash ISA or Savings Account
Providing the account pays the same or more than HMRC’s overdue interest rate (currently 3%) then you will be quid’s in either way. It’s time for an example.
Let’s say you are due £100 in tax today (I know, me too!) in four years time you would be due HMRC:
Amount due today = £100
Interest for year 1 = 3% = £3.00
Interest for year 2 = 3% = £3.00
Interest for year 3 = 3% = £3.00
Interest for year 4 = 3% = £3.00
Total due at end of year 4 = £112
[Note that the interest is simple]
Now let’s say you put the same amount in a Cash ISA with the same interest rate (3%)
Original deposit = £100
Interest for year 1 = 3% = £3.00
Interest for year 2 = 3% = £3.09
Interest for year 3 = 3% = £3.18
Interest for year 4 = 3% = £3.28
Total saved at end of year 4 = £112.55
[Note that the interest is compound]
So at the end of the time you can cover your tax bill and still have 55 pence profit.
The best ISA rate now is 4.75% which in the above example means you’d cover your tax bill and have £8.40 profit.
It doesn’t seem much – but if you apply it to £100,000 then that £8.40 is actually £8,400 “profit” over the four years. This, of course, can go towards paying off part of the bill – effectively giving you an 8.4% “discount”. The longer this continues, the better it gets.
The advantage is the money is still under your control and you are not admitting anything to HMRC. And when we win, you get to keep the money.
When checking accounts remember that there will be tax to pay on interest of non- ISA accounts so you must use the net figure for interest. Also, rates change so always keep an eye on them. If you are tempted by a fixed rate/term deal then check if it is possible to get your money out early.
Option 4 – pay the money into your mortgage
This would be the same as Option 3 but because you’re paying a debt there is no extra tax to pay. Rather you are saving paying interest which means that you’d need a savings account paying a net rate more than your mortgage rate to make saving worthwhile. Some mortgages allow overpayments which then reduce the term of the mortgage and so save on interest.
Whether you chose option 2, 3 or 4 depends on the interest rates available to you and (if you’re using non-ISA accounts and are a higher rate taxpayer) on your marginal rate of tax.
I hope that it can be seen from the above description that it does not make business sense to make a ‘payment on account’, nor in many cases to buy a CTD. If you use ISA’s and savings accounts then you can make your money work harder and have a chuckle as the tax man squirms in his own mess.
One significant caveat on this strategy: HMRC’s actions have placed an almost intolerable amount of pressure on some relationships. If you are following this strategy then it is important to agree with your partner that this money will be set aside for the payment of tax until such time at the matter is settled. We’ve all heard of divorce proceeding where one party is ‘cleaned out’. So get this agreement in writing as part of your strategy now – just in case.
Let me conclude where I began: I think we will win and HMRC will lose. Until the Courts, and then possibly the politicians, have made their final decision the only thing we have to deal with is stress. By making provision for the unlikely that stress should dissipate. You won’t look at those Saturday morning brown envelopes in the same way when you get a healthy bank statement in the same post.
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