UK: TAXATION WITHOUT EXEMPTION. - The Inland Revenue is cracking down on both the salaried and self-employed. With the change in work patterns, the taxman is looking closely at severance payments too.

by Neasa MacErlean.
Last Updated: 31 Aug 2010

The Inland Revenue is cracking down on both the salaried and self-employed. With the change in work patterns, the taxman is looking closely at severance payments too.

If you're trying to get the best of the taxman these days, it helps to be rich and ingenious.

Alan Sugar of Amstrad falls into both categories. His decision to buy the building which houses London's Hard Rock Cafe and put it into his personal pension plan has been one of the most audacious moves taken by a taxpayer to reduce his tax liability in the '90s. The move will save him hundreds of thousands of pounds in tax relief. But before you try to emulate his bright idea by putting your house into your personal pension fund, bear in mind that you are probably playing in a different league and are therefore unlikely to qualify for the same sort of tax benefit.

Tax relief in these circumstances is given only if the new owners can prove the investment is a strictly commercial one and that they have no intention whatsoever of living in the newly acquired property.

The only way in which Sugar's move should be taken as an example is as a reminder that investing in a pension (however unexciting it may seem) is the best way for most of us to get tax relief. Higher rate taxpayers can save thousands of pounds a year by making the maximum contributions permitted. While most people postpone making Additional Voluntary Contributions (top-ups to their company pension scheme contributions) until they are in their late 40s, even thirtysomethings would do well to think of making this sort of investment: on the whole people simply do not realise how much tax they could save and how much their pension fund would be enhanced if they started paying sooner rather than later.

Pensions apart, the Inland Revenue has become increasingly tight over the last few years on tax relief for both employees and the self-employed.

But even a few years ago they were beginning to crack down: when a blonde barrister tried to argue that she should get tax relief on the black clothes she had to wear in court, claiming that they did not suit her colouring and were bought therefore 'wholly, necessarily and exclusively' for work, she lost the case.

More recently the courts decided that salaried journalists should be taxed on any newspapers they bought for which they were subsequently reimbursed.

In their wisdom, their Lordships decided that journalists do not have to read the competition to write their own articles - yet more proof, if it were needed, that you cannot always expect sensible decisions from the judges sitting in the House of Lords.

There is the odd glimmer of reason. In last November's budget, for example, tax relief was extended to vocational courses or tuition sessions lasting more than four weeks in a year, thus providing executives who go on MBA courses tax relief for the first time.

Employees who buy their own company car also qualify for some tax relief in the shape of capital allowances, or, if the car is bought on hire purchase, some of the interest payments may be tax-deductible.

Meanwhile some employees will be able to save themselves a few pounds a year by claiming the tax relief which is due on certain professional qualifications. The Inland Revenue has a list of qualifications it accepts in this category but, almost needless to say, the list is a conservative one.

Other odds and ends of tax relief include an annual £18 allowance for nurses needing to buy stockings and shoes. The allowance has not been increased since the 1970s, however, and at current prices, this means that nurses can buy one whole shoe a year.

These small parcels of tax relief do not affect many people, however - something which sadly cannot be said of the tax relief available on severance payments of up to £30,000 in a year. With 800,000 people being made redundant each year, tax relief on these payments amounts to a considerable loss in revenue for the Exchequer, with the result that this exemption is unlikely to last in its current form. The Inland Revenue is already finding ways of denying such relief to individuals on the grounds that the payments they received were not really to do with losing their employment.

The self-employed too could be about to see an erosion in their tax relief rights. Traditionally they have found it much easier to set expenses against tax than their salaried counterparts which is one reason why people working on short-term contracts have often fought to be recognised as self-employed.

But with a massive surge in self-employment - from about 2 million in the early '70s to 4.5 million now - we can expect the revenue-hungry taxman to start clamping down in the near future.

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