HC 271 Money Advice Service

Written evidence submitted by TaxAid  

Summary

At the end of September 2011, TaxAid provided a brief for Mark Hoban, Financial Secretary to the Treasury, and his officials at HMT about the Money Advice Service along the following lines. The poor tax advice element of the service has not yet been addressed.

"Based on detailed evaluation of the output of the Money Advice Service TaxAid has major concerns that vulnerable people are being misinformed on financial issues that have a related tax element. The hugely ambitious content of the tax protocol, combined with poor adviser training, inaccurate and inconsistent tax information, with no in-house tax specialism to manage in-year tax changes means that there is currently no route to resolving this issue. As an example, 60% of the material developed for tax training by the MAS was found by TaxAid to be "inaccurate or misleading".

The Thoresen Review identified over 19 million people who were particularly vulnerable in terms of their money affairs. Key features of these groups are unstable and part-time working and multiple small sources of income. These individuals are uniquely at risk in terms of tax misinformation. Lower income taxpayers have complicated personal histories, resulting in a mix of (taxable and/or non-taxable) benefit income and work that makes generic "advice" risky. Massively complex rules – and risks - for those with more than a single source of income are compounded by:

a. Unintended consequences of government policy e.g. interplay of benefits and tax. Going forward replacement of Incapacity Benefit with Employment Support Allowance, and the NEST pension scheme will impact on large numbers of low-paid workers resulting in underpayment and overpayment of tax, and "trivial commutation" complications

b. There are endemic problems with the system with PAYE reconciliation of multiple small sources of income, pensions and savings. Stabilisation of HMRC’s new NPS system is not expected before March 2013 at the earliest – backlog of 6.7million cases at time of the NAO July 2011 report

c. Despite poor understanding of the complex rules and a lack of clear guidelines, more vulnerable people are driven into inappropriately becoming self-employed

d. HMRC is not resourced to cope with the need for greater support for those who are poorly advised by external agencies, with high penalties even for innocent mistakes of taxpayers

e. People on low income are unrepresented, cannot afford to pay for proper professional advice, so are liable to rely on MAS advisers as experts on crucial financial planning issues.

Some examples of where MAS risks falling into the trap of misadvising:

· Thousands of cases of front-line advisers mistaking a determination for a true debt

· Understanding the theory of tax codes alone is not sufficient. MAS advisers may identify PAYE issues correctly – but still the clients under or overpay tax.

· Incomplete transfer of information between HMRC and DWP can mean tax bills for very vulnerable people. Coming off Job Seekers Allowance risks underpayment of tax.

· Part-time work and pensions: pensioners are at risk of being on the wrong tax code. Form P161 Pension coding form is notoriously difficult to complete and process accurately & generic advice does not match specific circumstances.

A victim of misinformation: a former soldier rang TaxAid in tears. He had been discharged a multiple amputee in November 2008 after serving in Afghanistan. He had received a tax demand for £670 from HMRC as his local adviser had not realised that tax would be due on his Incapacity Benefit.

98% of front-line advisers assessed in MAS were unaware of the impact of taxable benefits."

Our overall concerns are the quality of training & consequent risk related to MAS advice – in part resulting from their hugely ambitious scope (CGT, IHT and other tax planning). Inappropriate and/or complex tax planning calls are forwarded to TaxAid’s crisis helpline – which has not been resourced to handle MAS inadequacy.  

1.Status and credentials. TaxAid is a unique charity whose main objective is to provide professional, free advice on tax matters to people on low incomes with queries about PAYE, self-assessment or with more complex difficulties over Revenue enquiries and tax debt. We have more than 15 years of experience in educating the voluntary advice sector on the impact of the tax system for unrepresented taxpayers (i.e. those without a paid professional accountant or tax adviser).

Over the past 2 years TaxAid has evaluated the competence of MAS advisers, their training and the information available on the MAS website. TaxAid is therefore competent to comment on the "tax advice" element of MAS provision.

2.Gaps in provision: TaxAid is set up to resolve tax crises for low income taxpayers, rather than preventative information provision, tax planning or generic information provision. Nor is a "preventative" service provided by front-line voluntary sector (generalist) organizations as they also provide a "crisis" problem resolving service. There is therefore an unmet need, and the concept of an effective Money Advice Service as a valuable resource in front-line provision, delivering cost-saving for HMRC in terms of preventative advice, would be valued. What is needed is to "professionalize" the service – as far as tax is concerned the evidence has been that the "advice" is inaccurate, incomplete or misleading in a great proportion of cases.

3.The impact of limited expertise of front-line MAS advisers. Generic "tax advice" is a misnomer and inevitably risky in its provision since it is the interplay of tax and the individual’s life circumstances and financial situation that requires "computing" to assess the tax impact. For example, the tax impact of a lump sum trivial commutation of pension might depend on timing, other work and benefit income in the year, and other family circumstances. For example, a parent considers taking the option to cash in a small pension pot under ‘trivial commutation’ rules, to fund her daughter staying in education.  Because the lump sum is treated as taxable income of one year, the time when it is taken could impact the family’s tax credits and other financial support available to the student.

Advice that does not consider overall characteristics risks serving both the client and HMRC poorly. The need is to include tax to "get the financial advice right":

An example of the interplay between tax & benefits. Complications related to under and overpayment of tax arise if people have health problems – bringing a mix of benefit income and work. Even benefits advisers are known to make mistakes in this area. Permitted work and taxable benefits – with incomplete transfer of information between HMRC and DWP can mean tax bills for very vulnerable people. Confusion will be magnified by the replacement of Incapacity Benefit by Employment Support Allowance. Coming off Job Seekers Allowance has its own risks of underpayment of tax.

There are endemic problems with the system which does not adapt to the circumstances of the vulnerable and low paid, e.g. PAYE reconciliations and the low paid self-employed who may move rapidly from employment to self employment and back.

98% of the advisers assessed by TaxAid who provided advice under the Money Guidance pilot incorrectly stated that there is no tax impact related to a taxable benefit.

4. Exceeding the competence of MAS advisers. The definition of "advice" as used by the Money Advice Service redefines the usual understanding of the word : MAS claim that their definition is in the "provision of information and referral to other organisations for resolution". The common understanding is "advice" as in "what someone should do" in providing the key to enable "resolution". There is therefore likely to be too high a reliance on the "advice" provided by MAS.  For example, someone owing tax would be "advised" to dispute it at Court (according to MAS website) - that could be ill-advised (see case below)!  

4.1 For example, TaxAid reviewed MAS website in 2011, the commentary on MAS website relating to Court Action on debt said: "…if you accept (or the court decides ....". This is not so for tax debt.  There are special county court rules and the amount of the tax debt cannot be challenged in court. The comment "if you accept" gave a misleading impression and could mean unnecessary and unexpected adverse county court judgments.  Debtors will think they can go to court to challenge, for example, an estimated debt, which is not possible under the special court rules for tax debt. They will then face judgment where they are required to pay estimated tax and could lose the opportunity to use Special Relief to challenge it. Having an adverse county court judgment can have a severe impact on individuals and small businesses - particularly where the only realisable asset is property [1] .

5. Scope too ambitious: the scope of the MAS tax protocol is unbalanced (as compared to other advice provision) and too ambitious for non-professional advisers (even if adequately trained). The MAS has set itself an unattainable hurdle as far as tax advice is concerned. Yet to ignore tax is to get the "sums wrong" – or to misinform clients who may then lose the right of appeal in respect of the poor advice.

6. Overall comment: MAS emphasis is on 'information' without highlighting pitfalls, and 'how it should work' rather than 'what actually happens'. This means that some taxpayer obligations (such as checking tax codes and liability for underpayments) are not always highlighted, while taxpayers on low income and vulnerable taxpayers will still find themselves disadvantaged due to lack of specific guidance – and so not on an equal footing with HMRC. Effectively equipping people to deal with problems includes highlighting expected problems and providing strategies to deal with them.

6.1 None of the key ‘life-stage’ issues and current problems that are likely to drive people to seek advice are covered: such as redundancy, responsibility for underpayments of PAYE, problems of multiple part-time unstable employments, increases in tax following bereavement, tax debt risk when on pensions and also working, issues with taxable benefits, dealing with tax debts, determinations, risks of self-employment and need for budgeting, tax debt and mental health, tax credit overpayment risks on separation / moving in / maternity leave etc .

6.2 These weaknesses are compounded by:

· The type of information provided. Much of the tax information consists of links to HMRC or Direct Gov websites. Information on these sites is good, but it is not ‘problem solving’. Most members of the public are no more aware of the potential pitfalls having looked at these sites. The usual reaction is that they are overwhelmed by the quantity of information and unable to access the relevant facts or a solution. Links tend to be generic rather than specific.

· The needs of different groups of taxpayers – particularly those on low income or the vulnerable – are not well catered for. There are specific difficulties facing these groups which do not impact the ‘generality of taxpayer’. For example, the PAYE system for the most part copes well with ‘middle income’ earners in stable work. It does not readily adapt to low income earners with multiple, part-time, unstable, work. These are among the most financially disadvantaged people in the community.

· Information can be ‘text book’ accurate but have significant gaps which make it misleading. Overall, taxpayers are not made aware of their responsibility for tax and the possibility that they could face a bill, even if the system works as designed. Tax risks in redundancy, divorce and separation, multiple jobs, early retirement and new business are not highlighted.

6.3 This was particularly illustrated when we recently advised a former business link adviser who had ‘taken his own advice’ and gone into business. The result was a disaster of very significant proportions, involving tax debts; undeclared income; failure by employer to apply PAYE which, by default, he had become liable for; unemployment; unsubmitted tax returns and trouble with Companies House. He rued the day he had given start-up advice to others.

7. Specific examples: two examples are examined in more detail to illustrate the point:

Incomplete information on the implications of lump sum redundancy payments. Risk of underpaying tax is not considered.

Quotation from the Money Advice Service’s ‘Redundancy Handbook’ at http://www.moneyadviceservice.org.uk/yourmoney/lifestages/redundancy.aspx

7.1 p.18 ‘redundancy rights’ – "If you receive more than £30,000, you will have to pay tax at your highest rate on the excess. For example, a higher rate taxpayer has to pay 40% tax in 2011-12 on any amount over £30,000. But if you do not receive your redundancy until after you have left your employer, from 2011-12 onwards, your employer will have deducted tax at your highest rate (20%, 40% or 50%) without any tax-free personal allowance. This means that if your income is lower now, you may have paid too much tax."

7.2 Comments: This information gives the impression that the employee will be taxed at the correct rate of tax; or could be due a refund. This is significantly incomplete. There has been an acute problem in the past with underpaying tax on redundancy and the introduction of the ‘0T’ code in 2011/12 does not entirely deal with this risk.

7.3 Missing information: It is not clear that the "0T" code deduction is a provisional payment of tax against the likely total liability for the year. Most employees will find that they have been overpaid or even underpaid tax on redundancy where payments are in excess of the £30,000 limit. Advice should be to always check the position at the end of the tax year.

7.4 These underpayments and overpayments happen even if the employer uses the correct codes, and one cannot guarantee that the employer will use the correct codes.

7.5 In addition, it is the employee’s responsibility to check the tax code used and to check with HMRC if they are unsure. (Cf Your Charter, Your Obligations, ‘talk to us if there is anything that you are not sure about or if you are having difficulty meeting your obligations’ http://www.hmrc.gov.uk/charter/#12 ).

8. Resistance to improvement. It is unfortunate that the timing of the evidence (by 1st June 2012) is incompatible with the MAS "re-launch" to take place on July 1st or thereabouts. However, MAS are still insistent that it is not necessary to have tax expertise in-house and are to rely on a non-tax "financial adviser" to input tax into the material again in 2012. This, despite our previous assessment of the inaccuracies in their training [2] (of their own advisers) and their website as far as the tax impact of financial advice is concerned, would seem ill advised.    

9. Recommendations

The resulting poor service is susceptible to improvement: TaxAid trains "tax awareness" to generalist advisers in "Citizens Advice Bureaux to "recognise, explain and appropriately refer", which is all that can be expected of non-professional front-line staff.

· Appropriate tax awareness training for MAS advisers, including timely updates, from the perspective of the front-line recognising whether their client was "within scope"  i.e. of a tax impact from his other life events;

· Dedicated support to technical tax advice for their front-line advisers. In-house tax professional expertise available to front-line advisers and their clients would be one option. However, it would be difficult (and likely to be more expensive) than engaging the services of the tax professionals in the charities who can help i.e. Tax Help for Older People (for over 60s retirement issues), and TaxAid for training and specialist advice on all tax issues [3] .

· A website that meets its stated objectives as a service.

10. Benefits of delivering a fit for purpose service:

· As HMRC cuts back services in Enquiry Centres, MAS has the potential – with specialist support – to open up a valuable resource to provide a preventative service reaching its target audience of 2 million taxpayers

· Avoiding costs to HMRC in reducing unnecessary contact and unproductive time for HMRC in "unpicking" queries generated by poor information

· Reduces risk to MAS of misinformation, embarrassment and legal action. MAS claimed (May 2012) that they "cannot afford" a professional tax adviser to review their material. TaxAid asserts that it cannot afford not to.

· There is a cost to bringing MAS advisers up to a level of competence that the public might expect, but the problem could be addressed at lower cost than is the current situation of people having no preventative tax education service. The costs then accrue to HMRC and to the taxpayer who fails in meeting the necessary tax obligations.

A note on financial education in schools. It is vitally important that young people should have a basic understanding of their rights and obligations under the tax system as they move in higher education and work. This is not currently available, but until the MAS commits into a higher standard of quality of advice they should not be encouraged to be the provider.

Rosina Pullman, Director TaxAid,

June 2012


[1] These particular examples may well have been corrected as TaxAid provided assistance in 2011 to mentor MAS, effectively re-writing their training material and website (where it related to tax) . These examples are used as illustration of the complexity – and the need – to consider the tax element of financial and debt advice. Their site is due to be re - launched in July 2012, but they tell us no tax adviser is needed to revi ew, despite an error level at 60% [sic] of content in 2011.

[2] In 20 10/ 11, TaxAid assessed their training material (in respect of tax impact) and found that c. 30% was incorrect, 30% was misleading and in any case e-learning modules started from an incorrect premise (i.e. in their scenario which assumed that there is no difference in tax treatment between UK residents and someone possibly non-resident as a migrant worker. We understand that the e-learning material related to tax was therefore scrapped.

[2]

[3] The 3 0 years or so of accumulated knowledge such charities offer is immense in ter ms of specialist tax advice , so working together would present an opportunity to realize less fractured services for a modest financial investment. Professional training in tax awareness improves the odds of front-line advisers getting the tax impact right first time .

[3]

Prepared 15th June 2012