Personal Finance: Taxing initiative

THE cynics have been out in force decrying the new system of taxation outlined in the Finance Bill published last week.

They say in disparaging tones that the Revenue is slimming down its own workforce and transferring the burden to the taxpaying public; it is saving itself from routine work in order to deploy resources in being really nasty to more people than ever; and tight deadlines will lead to many taxpayers being whacked with automatic fines. But the philosophy behind the twin changes must make sense.

Firstly, instead of the ball starting in the Revenue's court and taxpayers being presented with a demand that they must dispute, the initiative is with the taxpayer.

You would not expect the Revenue to allow all the forms to go through without at least a few random checks to see what's going on.

But for those who make a reasonable, honest attempt at completing the job, there should be no further problems.

The other plank of the change is that taxpayers should be taxed on the current year's earnings and should pay no more and no less than is due for that year.

At the moment, there is a crazy system of paying tax based on the previous year's earnings. Many pensioners have found to their dismay that they have had to pay tax on interest from National Savings Income Bonds that they had not earned, as the interest rates fell. This should now be a thing of the past.

The way it will work in practice is that taxpayers will normally make two interim payments of half the tax due in the previous year at the end of January and July, with a balancing payment or credit in the following January to make the correct payment for the tax year.

If taxpayers can show that they expect to earn less than in the previous year, they will be able to pay a lower amount, and those with small tax bills - under pounds 500 is the proposal - will not have to make payments on account.

The Revenue hopes that people will be willing to complete the tax forms right down to doing the arithmetic. But if you do not want to go all the way, you have to get the return in four months early, in September, so the Revenue can do the sums for you.

A lot hangs on the design and language of the forms. If they are well presented and clear, more people will be courageous and have a go.

The Revenue would be wise to install telephone, fax, and face-to-face counselling to help people over any stage-fright when they sit down with the forms.

In spite of the Revenue having greater powers to force people to keep records and to undertake investigations without giving a reason, I think we should give the Revenue the benefit of the doubt. But perhaps I'm a little naive.

THE regulators got steamed up about the way that high-income bonds were robbing the capital to pay the income and the way that the word 'guaranteed' was being used to describe them.

Firms now have to make it plain exactly what is guaranteed. But the word has a magic touch, however it is used.

Take Save & Prosper's guaranteed bond, which pays 8.5 per cent (an earlier version paid 10 per cent). It still manages to mangle the English language by claiming that it is 'guaranteed', when the guarantee is so conditional that it is really no comfort at all.

Amanda Webster, S&P's marketing manager, says: 'The bond guarantees investors a fixed high income plus guaranteed return of capital, provided the market grows by a pre-determined amount.'

It is that word 'provided' that poisons the pill. If the market does not grow by at least an average of 7 per cent a year, you don't get all your money back.

If there is no growth at all then just 57.5 per cent of the capital is retained. It's no good S&P claiming that for basic-rate taxpayers this amounts to a return of 100 per cent with the income thrown in, because that is not how investors think about their capital.

With a straightforward account of how they work, there is a place for investments that provide a pumped-up income with a bit of risk to the capital. The complaint is over the attempt to dress the tomcats up as pussy cats guaranteed to purr.