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International Handbook on Clinical Tax Education: Chapter 4 Rationale Tax support for low-income individuals

International Handbook on Clinical Tax Education
Chapter 4 Rationale Tax support for low-income individuals
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table of contents
  1. Title Page
  2. Copyright
  3. Contents
  4. List of figures
  5. List of tables
  6. List of appendices
  7. List of abbreviations
  8. Foreword
  9. 1. Introduction
  10. Part I. The tax clinic
    1. 2. A brief history of tax clinics around the globe
      1. 2.1 Key findings
      2. 2.2 Introduction
      3. 2.3 From humble beginnings
      4. 2.4 From east to west
      5. 2.5 From south to north
      6. 2.6 Conclusion
    2. 3. Project administration: how to set up a tax clinic
      1. 3.1 Key findings
      2. 3.2 Introduction
      3. 3.3 The foundations of a clinic
        1. Institutional and/or organisational support
        2. Costs and wider resources
        3. Supervision
        4. Insurance
        5. Data protection
      4. 3.4 Clinic design
        1. Student and supervisor recruitment
        2. Educational design
        3. Integration into community (client recruitment)
      5. 3.5 Concluding remarks
      6. 3.6 Key reading
    3. 4. Rationale: tax support for low-income individuals
      1. 4.1 Key findings
      2. 4.2 Introduction
      3. 4.3 Historical context
      4. 4.4 The tax charities – what they really do
        1. TaxAid
        2. Tax Help for Older People
        3. Tax clinics
      5. 4.5 The tax charities moving forward
      6. 4.6 Access to the tax charities
      7. 4.7 A rationale for low-income taxpayer support: common tax issues faced by those on a low income
        1. Non-tax issues
        2. Tax complexity
        3. Expansion of self-employment
        4. COVID-19
        5. Late registration and tax returns
        6. Other changes in how people are paid
        7. Incorrect PAYE codes
        8. Pension drawdown
        9. Proliferation of umbrella companies and disguised remuneration schemes
        10. Penalties
        11. Bankruptcy
        12. Digital exemption and assisted digital
        13. Working with HMRC to resolve generic tax issues
      8. 4.8 An international call to action
      9. 4.9 Concluding remarks
    4. 5. Rationale: tax and the poverty interface
      1. 5.1 Key findings
      2. 5.2 Introduction
      3. 5.3 Canvassing the tax and wider social issues addressed by the National Tax Clinic Program
        1. Tax and financial literacy
        2. The unmet need for tax advice in Australia
      4. 5.4 Introducing the UNSW Tax and Business Advisory Clinic
      5. 5.5 Benefit of tax clinics: Australia and internationally
        1. Opportunities for further research
      6. 5.6 Concluding remarks
  11. Part II. Tax clinics and our communities
    1. 6. Engagement in the community
      1. 6.1 Key findings
      2. 6.2 Introduction
      3. 6.3 The external stakeholders in CTE
        1. Supporting your local community
        2. Becoming part of the local community
      4. 6.4 Concluding remarks
    2. 7. Listening to our communities: the Community Tax Law Project as an example of a low-income taxpayer community-focused service provider
      1. 7.1 Key findings
      2. 7.2 Introduction
      3. 7.3 What does a community-focused tax clinic look like?
        1. Mission driven
        2. Community understanding and support
      4. 7.4 What populations are you going to serve?
        1. Demographic scope: how do your clients live, work, pray or play?
        2. Resources and limitations
        3. Learn from failures
      5. 7.4 What do these populations need or want?
      6. 7.5 What specifically does your clinic require to meet these needs and wants?
        1. Community partners: you cannot reach everyone by yourself
        2. Social capital: the who, what and when of building your clinic family
        3. Finances: the lights do not stay on with positive thoughts and well wishes
      7. 7.6 How do I fix the problem at the source? Yelling up the chain: advocacy as part of the clinic’s mission?
        1. Community advocacy
        2. Administrative advocacy
        3. Litigation as a venue for change
        4. Governmental advocacy
      8. 7.7 Conclusion
    3. 8. Public education: the Tax Club UNILAG
      1. 8.1 Key findings
      2. 8.2 The context of the Tax Club UNILAG
      3. 8.3 The creation of Tax Club UNILAG
      4. 8.4 An overview of the club’s activities
      5. 8.5 The importance of tax clubs
      6. 8.6 Some challenges faced by the tax club
      7. 8.7 Support for the use of tax clubs in education
      8. 8.8 Looking to the future
      9. 8.9 Concluding remarks
    4. 9. Public education: engaging with secondary education in schools
      1. 9.1 Key findings
      2. 9.2 Introduction
      3. 9.3 Tax clinics as defenders of taxpayer rights
      4. 9.4 Partnering with secondary education
        1. How the partnership was established
        2. Benefits of the community partnership
      5. 9.5 Conclusion
    5. 10. Taxpayer resolution: improving taxpayer compliance in Indonesia
      1. 10.1 Key findings
      2. 10.2 Introduction
      3. 10.3 Taxation in Indonesia in a nutshell
        1. Registration
        2. Bookkeeping
        3. Payment
        4. Reporting
        5. Audits and penalties
      4. 10.4 Revenue and taxpayer compliance
      5. 10.5 Improving individual taxpayer compliance
        1. The formation of the FoT community
        2. The development of FoT
      6. 10.6 Conclusion
    6. 11. Policy changes: impact on and through the Tax Court
      1. 11.1 Key findings
      2. 11.2 Introduction
      3. 11.3 Government approach
        1. Regulations and other rules
      4. 11.4 Role of tax clinics in shaping the law
        1. Litigation: impact of clinics on the community of low-income taxpayers
        2. Commenting on proposed legislation, regulations, forms and rules
        3. Commenting on systemic problems at the IRS
      5. 11.5 Conclusion
    7. 12. Marginalised voices: tax and the criminal justice system
      1. 12.1 Key findings
      2. 12.2 Introduction
      3. 12.3 Making Tax Digital
      4. 12.4 Digital exclusion
      5. 12.5 Tax issues – people in prison
        1. Digital exclusion – people in prison
        2. People in prison/with previous lived experience of prison as clinic clients
        3. Prison and self-employment
        4. Tax and self-employment
      6. 12.6 Student and university benefits
      7. 12.7 Conclusion
  12. Part III. Tax clinics and our students
    1. 13. Pedagogical theory and clinical tax education
      1. 13.1 Key findings
      2. 13.2 Introduction
      3. 13.3 Fostering the next generation of tax advisers: the importance of pro bono
      4. 13.4 Relevant pedagogical theories
        1. Employability from tax clinics: work-integrated learning (WIL)
        2. Growing student motivation and confidence: self-determination theory (SDT)
      5. 13.5 Concluding remarks
      6. 13.6 Key reading
    2. 14. Enhancing student experience: shadowing, role-plays and reflection
      1. 14.1 Key findings
      2. 14.2 Introduction: pedagogical rationale
      3. 14.3 Initial collaboration
      4. 14.4 Implementation
        1. Student recruitment
        2. EOI, CV and job interview
        3. Participation and presentation
      5. 14.5 From theory to practice
        1. Shadowing
        2. Team-based approach
        3. Role-plays
        4. Reflection and report writing
        5. Career readiness
        6. COVID-19 and the impact on the student experience
      6. 14.6 Conclusion
    3. 15. Introducing tax advocacy to students
      1. 15.1 Key findings
      2. 15.2 Introduction
      3. 15.3 The structure of a clinic course
        1. The seminar component
        2. The client representation component
      4. 15.4 Major design choices within the clinic model
        1. The directive–nondirective continuum
        2. Level of student responsibility for cases
        3. Use of examples and templates
        4. Case supervision
        5. Tension between client service and student educational development
      5. 15.5 Developing a reflective practice
        1. Exercising agency over one’s professional development
        2. Building the habit of reflection
      6. 15.6 Skills and direct advocacy experience
        1. Law firm management
        2. Ethics
        3. Multicultural lawyering
        4. Legal skills
          1. 1. Interviewing
          2. 2. Fact and legal investigation
          3. 3. Client advice and communication
          4. 4. Document drafting
        5. The advocacy mind-set
      7. 15.7 Working with community members
      8. 15.8 Conclusion
    4. 16. Developing employability skills through practice-based learning
      1. 16.1 Key findings
      2. 16.2 Introduction
      3. 16.3 Rationale for the TAC at UEL
        1. To raise awareness and provide free guidance in response to the COVID-19 lockdown
        2. To support employability of our accounting and finance students
      4. 16.4 Relevant literature
        1. Voluntary services: student, faculty and practitioner participation
        2. Pro bono: the participation of experienced practitioners
      5. 16.5 Clinic design
        1. Student volunteers
        2. Practice-led teaching
        3. External impact, collaborations and partnerships
        4. Student experience
        5. The challenges of tax and accounting clinics
      6. 16.6 Data and methodology
      7. 16.7 Results and discussion
        1. Tax and accountancy clinic and employability skills development
        2. The impact of COVID-19 on student TAC experience
        3. The measurement of students’ satisfaction: quality of the TAC training
      8. 16.8 Concluding remarks
    5. 17. Students’ professional identity and a fully online tax clinic
      1. 17.1 Key findings
      2. 17.2 Introduction
      3. 17.3 The Griffith Tax Clinic
        1. Face-to-face
        2. Online
      4. 17.4 Research methodology
        1. Participants
      5. 17.5 Data results
        1. Overall
        2. Nationality
        3. PWE (Professional Work Experience)
        4. Limitations of research and future research
      6. 17.6 Concluding remarks
  13. Part IV. Moving forwards
    1. 18. A research roadmap for tax clinics
      1. 18.1 Key findings
      2. 18.2 Introduction
      3. 18.3 Developing the tax clinic as a research project
      4. 18.4 Mapping the research field
      5. 18.5 Research methods
      6. 18.6 Theoretical perspectives
      7. 18.7 Concluding remarks
    2. 19. Moving forwards: tax clinics and business schools
      1. 19.1 Key findings
      2. 19.2 Introduction: the civic university
      3. 19.3 Widening participation
      4. 19.4 The challenge of professional accreditation
      5. 19.5 Practical experience
      6. 19.6 Some ideas for clinics going forwards
        1. Replacing High Volume Agents (HVAs)
        2. Child Trust Funds
        3. Cryptocurrencies
      7. 19.7 Policy clinics
        1. Desk research for the Office of Tax Simplification
        2. Educating policy makers
        3. Drawing on students’ experiences of the tax system
      8. 22.8 Concluding remarks
    3. 20. Concluding remarks
  14. Index

Chapter 4 Rationale Tax support for low-income individuals

Tina Riches*

4.1 Key findings

The UK has a unique source of support for low-income individuals. The UK tax charities have extensive experience over thirty years of working with vulnerable people on their tax issues. Although some of this experience is reflected on the tax charities’ websites and also the website of the Low Incomes Tax Reform Group, there is otherwise a scarcity of research and reference material in the public domain.1 The experience of the charities’ staff and volunteers is reflected throughout the discussion of this chapter, offering a unique insight into the tax issues that low-income individuals face. Overall, using the UK as a case study, this chapter demonstrates the need for pro bono tax advice – and highlights that tax issues are not exclusively for the wealthy.

4.2 Introduction

This chapter looks at the development of the charities TaxAid and Tax Help for Older People (Tax Help), together known as ‘the tax charities’. They are the only UK charities dedicated to providing free independent tax advice to vulnerable people on low incomes who need help to cope with the UK tax system and yet cannot afford to pay for the help they need.

TaxAid also supports two new university tax clinics, which are beginning to make impressive inroads into supporting people in their local communities with tax issues. While tax charities and universities can work well together to provide free advice to local communities, this chapter also looks at why people need this help, the types of issues people face and the support available, together with some international context.

Similar issues can be reflected in other jurisdictions, an increasing number of which have clinics that provide tax support, although the presence of tax charities is rare – but then charities are a typically British attempt at finding solutions to an array of social problems – making the UK scenario an interesting case study for those considering something similar in other jurisdictions.

4.3 Historical context

Until a few decades ago, there were very few sources of help on personal tax issues:

•   The UK tax authority, formerly the Inland Revenue, now incorporated into HM Revenue and Customs (HMRC)

•   A tax adviser or accountant

•   An employer

•   Family and friends.

Vulnerable people often find it stressful to open mail from HMRC (this condition is often referred to as ‘brown envelope anxiety’2) and even more difficult to approach the tax authority and explain their problem. There is often an underlying fear of HMRC, due to its perceived use of powers and impenetrability. Sometimes the individual is unable to explain their problem, perhaps due to learning difficulties or poverty – no money means no phone. Sometimes individuals need an independent person to represent them.

In the tax charities’ experience, most HMRC staff are trained to deal with the majority of people and cases. HMRC’s Charter (which outlines HMRC’s commitments to behaviours and values) states that it ‘will give you extra support if you need it’ by referring people to its Extra Support Team (EST).3 The EST is effective in resolving relatively straightforward tax issues for those individuals who have been identified as vulnerable. However, the onus is on the individual to ask for that help; and these individuals can find it difficult to identify, understand and explain their special needs to HMRC. This means that those needing specialised help can fall through the cracks.

Tax advisers are usually too expensive for people on low incomes, and they may lack sufficient skills or experience to deal with vulnerable people. Employers, family and friends cannot necessarily provide reliable help – and confidentiality is an issue. Until the early 1990s, there was therefore a dearth of vital tax help for these vulnerable people in the UK (apart from a limited amount of pro bono support given by local tax professionals at Citizens Advice Bureaux). Citizens Advice, as it is now called, is a network of independent charities offering confidential advice and support to citizens on a wide range of consumer rights, pension guidance and legal support.4 They do not tend to provide support for tax difficulties.

David Brodie OBE, an accountant, founded TaxAid in December 1992, seeing the need for free and independent tax advice for those who could not afford to pay for it. David once told me that the need for the service was highlighted by the steady stream of letters to Members of Parliament (MPs) from distraught citizens who could not get their tax issues sorted.

There was evidence that people:

•   Were being made bankrupt unnecessarily due to estimated tax demands

•   Had been overpaying tax for years because they didn’t understand the rules

•   Did not know how to access their rights of appeal, particularly regarding penalties, or

•   Were running small businesses in serious difficulty, often in tax debt.

In December 1998, the Low Incomes Tax Reform Group (LITRG), a committee of the Chartered Institute of Taxation (CIOT), published its first report, which highlighted the common tax issues of many elderly people.5 These issues, often related to pension income and multiple sources of income, were compounded by a gap in the pro bono help available.

In the absence of any significant tax authority action to address the problems highlighted by the report, LITRG, then chaired by John Andrews OBE, initiated Tax Help in April 2001 as a one-year pilot, to provide free accessible and independent tax advice for older, vulnerable and unrepresented people on lower incomes – people who could not afford to pay for advice. Funding initially came from the CIOT and the Nuffield Foundation, helped by volunteers.

There is a clear division of remit between the two charities in their current form. While both deal with those on low incomes, their differing remits are outlined below:

•   Tax Help deals with older people, usually over sixty, whose affairs can be complicated, for example by the receipt of pensions. Historically, it has not dealt with the self-employed (although this is changing as the working age increases) nor some specialist areas such as disguised remuneration.

•   TaxAid deals with any other individuals – people under pension age, together with taxpayers of any age who are in business or need help in some limited specialist areas.

Over the years the two charities have increasingly worked closely together on the operational side; they now fundraise together through their Bridge the Gap campaign,6 which also raises awareness of the work that both charities do. The importance of sustainable funding for tax charities, tax clinics and clinical tax education projects is discussed by Sams in Chapter 7.

Funding increasingly comes from a variety of sources, for example: organisations, and individuals in the tax profession (including donations from the majority of the top ten accountancy firms); income for tax advisory services to the clients of some large pension providers; grants from the tax professional bodies (the CIOT and the Association of Taxation Technicians (ATT)), the Worshipful Company of Tax Advisers (WCOTA – a modern livery company); and trusts and foundations. A varied funding network helps the charities remain independent.

Of course, none of this would be possible without the support of the charities’ patrons, ambassadors, trustees, staff, secondees and volunteers, and the significant input from HMRC itself, in terms of both financial support and working with the charities, not only on individual cases but also in consultation on improvements to the tax system.

4.4 The tax charities – what they really do

The need for UK pro bono tax advice has grown significantly since the charities’ formation, due to changes in how people earn their income and the tax treatment of this income, as will be highlighted presently. However, their fundamental purpose remains the same: to help vulnerable people on low incomes when they get into difficulties with their tax affairs.

They only help taxpayers not already represented by a tax adviser and who cannot afford professional advice. Those taxpayers helped tend to be at the most disadvantaged end of unrepresented taxpayers on low incomes. Volunteers give their time and expertise free of charge to benefit the community; most of them are currently practising or retired tax professionals, including retired HMRC staff.

Given their unique experience in advising those on low incomes, the charities inform HMRC about instances where the tax system is particularly unfair, inefficient or reduces incentives to work. As the tax system (both legislation and operations) becomes more complex, this consultation role expands. The charities retain their invaluable close links with LITRG, which in turn exists to give a voice to unrepresented vulnerable people and campaigns to achieve improvement and change tax policy.7

TaxAid

TaxAid runs a national helpline, and prior to the pandemic provided face-to-face (F2F) services in London, Manchester, Birmingham and Newcastle upon Tyne, in addition to giving advice via email. Many nationwide roles are fulfilled by volunteer tax professionals.

TaxAid also trains high street advice agencies to recognise tax problems, deal with the first step and appropriately refer clients to TaxAid (or Tax Help).

Tax Help for Older People

Tax Help operates across the UK from its office based near Bridport, Dorset, with a team of staff along with a national network of over 400 tax volunteers across the UK. Tax Help runs a national helpline, mainly run by staff based at Bridport. The majority of the calls resolve the issues raised by individuals, while those that require more technical input are referred to volunteers or occasionally to specialist staff at TaxAid.

Tax clinics

In a more recent UK development, TaxAid trained some students and supervisors volunteering at the first UK university tax clinic in Lancaster in late 2019. Following its success, the Scottish Tax Clinic opened at Edinburgh Law School in 2021, becoming extremely busy within a fortnight of opening, demonstrating the need for local tax support for vulnerable people around the country.

The clinics carry out similar work to the tax charities and are provided with initial training and ongoing support by the tax charities. It is hoped that the number of university tax clinics will grow. If these clinics can be developed around the country, this can only be to the benefit of those on low incomes with difficult tax issues. This development brings the UK more into line with the USA, which has a long history of tax clinics,8 and Australia with its government funded National Tax Clinic Program.9 A number of these clinics are discussed throughout this book.

4.5 The tax charities moving forward

As set out in TaxAid’s annual report for the year to 31 March 2018, the trustees’ chairman, Stephen Banyard, reported that:

Over the 25 years, together with our sister charity, Tax Help for Older People, we have helped over 250,000 people. The need for people on low incomes to have access to independent tax advice has if anything grown since TaxAid was founded – there is now a harsher economic environment for people who are vulnerable and on low incomes; and many more now have to use more complex parts of the tax regime, for example because of the growth in self-employed and agency status work.10

The report highlighted the need for the charities to work together, while efficiently expanding their operations. Merely seeking more volunteers, who would all need managing, with associated costs, was not viable. So, the charities began to explore different operating models, particularly where volunteers come with their own supervision and finance. Now under the leadership of CEO Valerie Boggs and ultimate steering of their respective trustees, the tax charities are taking some significant steps forward to increase the number of people who can be helped; steps include:

•   Working closer together and adopting new technology to reduce their cost model and so extend the number of people they can help

•   Volunteering arrangements with some of the large firms under which their staff can volunteer and the firm provides a level of supervision

•   A few secondments of six months to a year of large firms’ people embedded into the charity to support parts of the change programme

•   Development of university tax clinics

•   Reaching out to other organisations that have some shared aims, such as:

◦   Membership organisations whose members may also have contact with low-income vulnerable people

◦   Health and poverty organisations – given that for many of the people who approach the tax charities tax is not their only problem

•   Exploring ways of working with HMRC, other charities and the software industry to better enable those on low incomes to be prepared for HMRC’s Making Tax Digital for income tax self-assessment (MTD4ITSA) programme, coming into force in 2026 (delayed from 2024)

•   Developing and broadening the charities’ funding bases to support a greater number of people, to help maintain the charities’ independence and their ability to provide independent advice and to make the funding base itself more resilient.

These are all actions that increase access to pro bono tax advice and that might be recreated in other jurisdictions.

4.6 Access to the tax charities

Access to the tax charities demonstrates the infrastructure and resources needed to provide pro bono tax advice to local communities (see also Chapter 3 where resources are discussed in more detail). Initial access to the charities by an individual requiring help is usually through the phone lines, where a triage service maximises efficiency; occasionally initial contact is by email. Staff or volunteers answering the phones at the charities will have had training around the types of tax issues callers commonly have, to enable the key issues to be identified swiftly; for example, where a caller contacts the charities about a penalty notice the call handler can usually determine swiftly why the penalty was issued, and so what other work is required.

Staff and volunteers also have training in helping vulnerable people, including spotting mental health issues and having an awareness of other common underlying non-tax issues, so that the help offered can be tailored to the client. Over 20 per cent of the individuals who contact TaxAid have mental health issues.

If the tax issue cannot be sorted in a single phone call, the caller may be asked to seek out other specific information and call back or send the information in. Occasionally, more direct assistance is required and in such cases a meeting may be required, either at one of the charities’ offices (outside the COVID-19 pandemic), at a volunteer’s office around the UK or by a telephone appointment.

The change in HMRC’s service offering has increased the need for access to the tax charities. Until a couple of decades ago, most large towns and cities had a tax authority office where citizens could drop in with tax problems and seek help. Since then, these offices have been progressively closed, with the last major push over the last few years.11 Many people were comfortable in moving to alternative contact methods, such as online access or telephone, providing there was a speedy response, but many vulnerable people on low incomes struggle with these. The office closures prompted HMRC to set up its EST, mentioned earlier. Sometimes the tax charities refer individuals to the EST (the charities have a direct route into EST), recommending to the client how to get the best help from HMRC. However, it remains difficult for individuals to access the EST directly.

As the charities have developed, they have been working on enhancing their profile to increase accessibility. Part of this has been through an increase in the use of social media, which worked well during the COVID-19 pandemic lockdowns, when TaxAid offered help to callers on the availability of the UK’s Self-Employment Income Support Scheme,12 available to self-employed people whose income had been hit by the pandemic.

Other ways that the charities are using to enhance their profiles to help ensure those needing their help find it include:

•   Improving links with Citizens Advice and other high street advice centres – resulting in an increase in referrals to the tax charities’ websites and direct referrals to both TaxAid and Tax Help (visits to Citizen Advice offices have already started, leading to more referrals, especially as they recently removed tax advice from their website and direct their agents to go to the charities’ websites)

•   Liaising with other charities that have contact with vulnerable people, such as those dealing with the non-tax issues mentioned below (links have been made to a couple of large debt charities, leading to some referrals each way)

•   Reaching out (through professional conferences, and so on) to suppliers of tax and related services, such as bookkeepers, who can refer to the charities people with tax issues that the service provider cannot take on due to the person being unable to afford the fees (for example, in December 2021 a group of staff and volunteers attended the Accounting Web Live 2021 exhibition and met a range of service providers).

Creating a network of community stakeholders who can help refer clients is an important element of the work of the tax charities and would be important for anyone creating a project to provide pro bono tax advice to their local community.

4.7 A rationale for low-income taxpayer support: common tax issues faced by those on a low income

The Bridge the Gap campaign website stresses that ‘if tax were simpler, if people better understood their responsibilities, if HMRC always got it right first time, then the tax charities would not be needed’.13 This point is reiterated by Kayis-Kumar et al., who discuss low levels of tax understanding in Chapter 5.

There now follows a discussion of some of the more common tax issues that people on low incomes may face in the UK. Issues are often as much to do with the operation of the tax system as the detail of legislation. This collection of issues should not be taken as definitive as more come and go with the seasons. While these issues are often UK-specific, they provide a useful comparison point for other jurisdictions that might be beginning to explore some of the obstacles that their tax system presents to low-income individuals.

Tax issues are not always the sole obstacle an individual faces. Non-tax issues can also contribute to the underlying reasons why vulnerable people have problems with their tax. These non-tax issues are pervasive and cross jurisdictional borders: they are worth considering wherever you are based in the world.

Non-tax issues

It is important to recognise that, for many of the people who contact the tax charities, tax is just one of their life problems. It is often the last straw added to many life problems, which are often the reason the tax issue arose in the first place. Many of the people who call the charities, in addition to having a low income, may also have one or more of these issues:

•   Poverty – even to the extent of food shortages

•   Debt

•   Health issues – both mental and physical, both short term and long term

•   Low levels of education or language difficulties

•   Learning difficulties, leading to issues with memory, reading, maths and problem solving

•   Homelessness, often coupled with addiction

•   Bereavement

•   Loss of business

•   Broken family, sometimes due to abuse

•   An abusive employment relationship.

The experience at TaxAid is that individuals will often highlight these issues when talking to an adviser, who, with the individual’s agreement, can make a referral to other agencies, such as a mental health charity. Importantly, this wider understanding helps the adviser to tailor the help to the individual, so they can not only help the person sort the current tax issue, but also to try to identify why it arose in the first place and help put measures in place to prevent a reoccurrence.

Tax complexity

While the length of the tax code may not correlate exactly with its complexity, it is seen as a reasonable proxy. When I first entered the tax world around forty years ago, UK tax legislation was set out in a direct taxes handbook, which could be held in one hand, and a slim volume for indirect taxes. Over the following three decades the legislation expanded to four weighty direct tax handbooks.14 Despite the valiant efforts of the UK Government’s Office of Tax Simplification,15 this growth has continued rapidly.

Tax legislation has become longer and more complex for a variety of reasons. One is to counter tax avoidance. In the past, some tax advisers developed their business around selling tax avoidance schemes, which has driven governments in the UK and around the world to introduce copious legislative changes to attempt to block their effect.

Another reason for complexity is that the tax system serves a number of purposes as well as raising money – for example to promote innovation or to advance environmental issues.

An additional impetus to complexity in the UK is that, by law, we are required to have an annual Budget and Finance Act to confirm the continuance of income tax. Income Tax was originally a temporary tax set up in 1799 to help finance the military efforts in the Napoleonic Wars. Although this requirement has been adjusted, over 220 years later the government of the day is still effectively required to have the theatre of an annual Budget, watched by journalists and citizens up and down the UK, and an annual Finance Act.16 This presents an opportunity – and an expectation – for regular changes.

Individuals with tax advisers will generally be kept up to date by their adviser. Employers may deal with most aspects of the tax affairs of individuals in a single and stable employment. The remainder of the population have little help to fall back on and they, including many on low incomes, struggle to understand how our complex tax system works and keep up to date with relevant changes.17

Expansion of self-employment

The tax charities now support thousands of people in self-employment. The Office for National Statistics (ONS) report on self-employment at the start of the COVID-19 pandemic highlights that between the year 2000 and the end of 2019, the number of self-employed people in the UK rose from 3.2 million to more than 5 million, an increase of 56 per cent.18 The ONS report also concludes that on average self-employed people are older than employees, with 10 per cent aged 65 or over, compared to 3 per cent for employees.

The Institute for Fiscal Studies (IFS) has also reported that the average solo self-employed individual (rather than someone in a partnership) had median earnings of 30 per cent less than for employees and this gap has widened.19

The IFS report also concluded that many individuals move to solo self-employment from unemployment (23 per cent) or inactivity (31 per cent), which means that there are often low levels of skills or experience. This ties in with the drive to move people away from being reliant on Universal Credit, the main UK welfare benefit.

The tax charities now see far more self-employed vulnerable people, many of whom are much more vulnerable than in the early days of TaxAid, when self-employment was more a planned business venture. This corresponds with the evidence in the above reports.

This means that many self-employed people face a combination of issues: being older, on a lower income, often with low education levels, potentially having previously been unemployed or economically inactive and, unless they can afford to pay for an adviser, they need to become their own accountant and tax adviser, mastering new skills and understanding tax rules and other statutory obligations. This precarious combination can be too heavy a burden. Many of them do not even consider they are running a business; it is just how they work and earn money from day to day.

COVID-19

The above IFS report also explains how debt worsened in the pandemic. Those in debt without savings struggle to pay their tax bills as tax is often trumped by the need to pay for food and rent. This has probably hit the self-employed the worse. In Spring 2020, the proportion behind with bills was reported as rising from 2 per cent to 13 per cent and those reporting financial difficulties rose from 16 per cent to 25 per cent.

There appears to be a connection between these debt increases and the fact that many self-employed were ineligible for government support through the Self-Employment Income Support Scheme. During the pandemic the tax charities opened a dedicated helpline so that people could easily check if relief was available to them. The tax charities have therefore been responsive to broader, external pressures, such as those created by the COVID-19 pandemic.

Late registration and tax returns

Lack of knowledge around the tax obligations connected to self-employment is all too common. There seems to be a disconnect between some UK government departments, in that one dealing with Universal Credit can encourage someone to become self-employed, yet the individual is often completely unaware of the need to meet the tax obligations checked by another department.

One requirement for most people in self-employment, as well as many other taxpayers, is to register for and complete a self-assessment tax return. This requirement to register is not obvious to a number of those who contact the tax charities. This can mean that once they find out about this, they have already missed the deadline for registration (5 October after the tax year end of 5 April in the UK) and sometimes the tax return deadline of 31 October for paper returns and 31 January for digital returns. HMRC has been considering accelerating the registration deadline, which could have the effect of increasing the number of penalties, rather than improving compliance.

Other changes in how people are paid

Similarly, the tax charities support a large and growing number of people in multiple precarious employments, agency work and gig economy workers. Many roles have zero hours contracts, so the workers often need to hold down more than one job, or even a combination of employment and self-employment, to make sufficient income. A combination of roles can give rise to more complex tax positions, especially where the income from each role fluctuates, which is common for those in zero hours contracts.20

Incorrect PAYE codes

One common issue encountered by gig economy workers is where the individual has not had the right amount of personal allowance, where this has not been allocated appropriately to their income.

A right to earn the first £12,570 (in 2022/23) of pay free of income tax is easy to implement where someone has a sole source of income, whether employed or self-employed, or if the income from one source exceeds the allowance, so this can be set against only that main income. However, in other cases, the code needs to be split across different sources.

HMRC’s PAYE (pay as you earn) system now attempts to do this but is based upon estimates of income. Where these fluctuate, a person may not have utilised all their allowance, hence overpaying tax. The charities see individuals who have been overpaying tax for years because they did not understand the rules.

A worse yet not uncommon situation is where multiple personal allowances are used by more than one employer of the individual. At TaxAid, one client had eleven gig economy jobs with more than one full personal allowance allocated across the jobs, giving rise to a significant underpayment. In theory HMRC’s system picks these up when doing end of year reconciliations, but where someone has moved residence or other changes have occurred, the system may not link the employments. Such unwitting underpayments, once exposed, can have a devastating impact on individuals.

Pension drawdown

Other individuals have been caught out when they are persuaded to withdraw their pensions from safe wrappers and ‘reinvest’ it in another ‘fund’, which transpires to be a scam. Not only do they usually lose the funds, but they trigger an unexpected tax charge on the withdrawal – a tragic combination, particularly for vulnerable pensioners with little savings for retirement.

Proliferation of umbrella companies and disguised remuneration schemes

LITRG research has concluded that there are about 500 umbrella companies in the UK employing around 600,000 employees, which is around 50 per cent of those working through agencies.21 Some umbrella companies run reputable businesses, relieving their employees, who are required by the end user to operate through a company, from much of the administrative burden.

However, some umbrella companies specialise in running disguised remuneration tax avoidance schemes that employees unwittingly join, often receiving some pay without tax and National Insurance Contributions (NICs) being deducted by the employer who might describe this pay as a loan. This usually results in appalling consequences for the individual employees, who may have two unwelcome surprises:

•   HMRC pursuing them for unpaid tax in the form of a loan charge, an unusual and complex piece of legislation that applies a retroactive tax charge. See the LITRG website for more detail.22

•   Being pursued by the ‘lender’ for repayment of the loan. Although there are legal counter arguments against such loan recalls, the practice continues.23

HMRC has issued warnings about such employment structures, but people on low incomes continue to trip into them – some cases taking months or years to resolve, with more still coming to the surface. The loan charge legislation has failed to discourage unscrupulous promoters from entering these schemes. Discussions with government on these issues continue.

Penalties

HMRC’s extensive powers are designed to encourage a high level of compliance, including penalties for:

•   Late notification

•   Late return

•   Late payment

•   Incorrect return.

Penalties can soon mount up if the taxpayer delays in getting in touch with HMRC. For example, where an individual with taxable income of, say, £20,000, a level that covers little more than basic accommodation and food in London, submits a return a few months late, their tax and NICs bill of just over £2,400 would also have accumulated penalties of about £1,200 added on.

Most individuals making profits realise they may have to pay some tax, although many selling goods on online platforms do not. Yet more do not know how to calculate the income and/or pay the tax. It is then very easy to end up with penalties. Once a noncompliant person has been identified, HMRC’s compliance activity and practices on debt collection rapidly engage. This can appear extremely harsh for those on low incomes who often have no savings. The tax charities can step in and try to get the penalties waived or reduced where the failure was a genuine mistake.

Bankruptcy

In extreme cases where noncompliance continues, HMRC can threaten bankruptcy. These cases frequently arise because the individual cannot afford to settle the tax (often estimated by HMRC) and penalties, and does not know where to go for help. The tax charities do not advise on the bankruptcy itself but are able to help get the person’s tax affairs in order (and often, the debt itself is much reduced in the process). They then refer the case to a debt adviser.

For some individuals, bankruptcy may be the best option. The tax charities see people with few assets, who live in rented accommodation and do not work in an area where bankruptcy is likely to affect their employability. They have little to lose from bankruptcy and often much to gain from wiping out the liability. The key to avoiding these problems is obtaining assistance early on in the process, but this requires people to know where to turn.

Digital exemption and assisted digital

HMRC, as with many government departments and businesses, is moving towards a predominantly digital-only interaction with taxpayers. This will have impacts on many taxpayers (and particularly marginalised taxpayers), something that is explored in detail by Deborah Wood in Chapter 12.

Through its MTD4ITSA initiative, HMRC intends to require many individuals (including the self-employed with a turnover over £10,000) to report their income quarterly online from 2026 (Budget 2023 deferred this from 2024), although the increase in the initial MTD4ITSA turnover threshold to £50,000 will exclude some of these people from the first tranche of taxpayers. Initially this is due to include the self-employed with a turnover in excess of £50,000 (was £10,000). This may work satisfactorily for individuals with adequate digital skills. However, Lloyds Bank’s 2021 research indicates that the proportion of the population with no or only a partial set of digital skills, and therefore unable to interact online, has increased from 19 per cent in 2019 to 20 per cent of the population in 2021.24 More worrying is that 12 per cent of the self-employed, which is over half a million people, have inadequate digital skills to interact online.

In addition, many of the self-employed will need to develop skills in accurately using online bookkeeping software. Much work will therefore need to be done before and after 2026 to ensure those who cannot yet use digital channels without help and are not exempted by HMRC have access to and complete suitable training. In 2017 I gave evidence to the House of Lords Economic Affairs Committee for its report on Making Tax Digital.25 There, I stressed that even fee-paying clients needed much hand holding during the first couple of years of a move to a new digital system, especially through the first complete cycle. This will surely be the case for vulnerable people: while the tax charities are keen to help, they do not have the resources at present to help everyone.

Working with HMRC to resolve generic tax issues

The tax charities work constructively and closely with HMRC. Representatives from the tax charities frequently attend various HMRC fora so that issues can be highlighted, and solutions sought, where possible. The tax charities also have a close working relationship with LITRG, contributing to LITRG experience of cases to inform LITRG’s extensive reports and guidance, and also its work with HMRC. Occasionally the charities spearhead or become involved in campaigns – a prominent and successful one was getting the same bereavement rights for both men and women.26

4.8 An international call to action

The UK tax system can be seen by many on low incomes as ever-changing, complex and sometimes harsh. Yet complexity is not confined to the UK. Some of these issues resonate around the world.

Potential reasons why the UK tax system (and those outside the UK) have such a detrimental impact on vulnerable taxpayers include:

•   Low levels of education in this area, despite citizens being expected to have an understanding. The UK school curricula are already bursting at the seams. Adding basic tax education to this seems unlikely in the foreseeable future but would better prepare people for adulthood and the digital world ahead.

•   Active state encouragement to move into self-employment without providing the necessary support.

•   A general lack of knowledge about the free accessible advice that the UK tax charities and the university clinics can provide, particularly before problems escalate.

In the meantime, the UK tax charities are doing all they can to provide a safety net for those on low incomes, including continuing to encourage and support the development of a network of tax clinics. Taking a wider perspective, it is important from a humanitarian point of view that appropriate safety nets are set up and developed in other countries.

4.9 Concluding remarks

By drawing on the extensive experience of the tax charities, this chapter has explored some of the common tax issues faced by low-income taxpayers. There is a strong need for pro bono tax advice to help support those who would otherwise be unable to afford professional advice.

Additional ways forward include:

1.   Better guidance that is more accessible to more people

2.   Education for all about basic tax obligations and debt and how to seek help

3.   Ensuring new tax policy equality assessments in impact assessments are improved to consider the impact on those on low incomes

4.   Acceptance by government that some umbrella companies still force people on low incomes into disguised remuneration schemes; going forward, this would mean pursuing the promoters rather than the victims

5.   Removing some of the ‘sludge’ in the tax system;27 a simpler system, with fewer reliefs and exceptions, albeit potentially slightly less fair but with a better safety net of state benefits for those on low income, could be a better way forward

6.   Universal free advice, readily available, to those who cannot afford to pay for tax advice and who are unable to sort their tax affairs with HMRC

7.   Improvements in HMRC services to those on low income, including EST access and improvement

8.   Adequate funding for the tax charities, not just for services provision but to enable them to advertise those services and raise their profile

9.   Funding and support to develop more university tax clinics around the UK and around the world.

Many of these are difficult to achieve in the short term, particularly in the current economic circumstances. I would therefore urge the government and the tax industry to support tax charities and other low-income tax projects to perform their vital role; and encourage other jurisdictions to explore the support they offer to low-income taxpayers.

  1. *   Tina Riches, former National Tax Partner, Smith & Williamson – with thanks to my colleagues from the tax charities, Valerie Boggs, CEO, Stephen Banyard, Trustee Chair, TaxAid, Penny Hamilton, Trustee Chair, Tax Help and Gail Mackie, former Advice Manager, who each contributed to this chapter, although any errors or inconsistencies are down to me.

  2. 1   TaxAid website: <https://taxaid.org.uk/> accessed 20 December 2021; TaxHelp website: <https://taxvol.org.uk/> accessed 20 December 2021; LITRG website: <www.litrg.org.uk/> accessed 20 December 2021.

  3. 2   Articles on brown envelope anxiety: Suzanne Bearne, ‘I Lived in Fear of Brown Envelopes’: Being Chased by the Taxman’ (The Guardian, 26 May 2017), <www.theguardian.com/small-business-network/2017/may/26/fear-brown-envelopes-being-chased-taxman> accessed 1 August 2022; ‘Brown Envelope Anxiety’ (Management Accountant, 5 August 2021), <https://tinyurl.com/BrownEAnx> accessed 1 August 2022.

  4. 3   HMRC, ‘The HMRC Charter’ (November 2021), <www.gov.uk/government/publications/hmrc-charter/the-hmrc-charter> accessed 24 June 2022; for more information on the Extra Support Team, see <www.gov.uk/get-help-hmrc-extra-support> accessed 20 December 2021.

  5. 4   Information about Citizens Advice: <https://citizensadvice.org.uk/about-us/contact-us/contact-us/contact-us/> accessed 1 August 2022.

  6. 5   Low Incomes Tax Reform Group, ‘Older People on Low Incomes: The Case for a Friendlier Tax System’ (December 1998), <www.litrg.org.uk/sites/default/files/1_67_Dec98report.pdf> accessed 20 December 2021.

  7. 6   Bridge the Gap <www.bridge-the-gap.org/> accessed 20 December 2021.

  8. 7   For a greater discussion of impact on policy, see Chapter 11.

  9. 8   Keith Fogg, ‘Taxation with Representation: The Creation and Development of Low-Income Taxpayer Clinics’, Tax Law 67, no. 3 (2013): 3–65.

  10. 9   Australian National Tax Clinic Program: <www.ato.gov.au/General/Gen/National-Tax-Clinic-program/#:~:text=The%20National%20Tax%20Clinic%20program,for%2Dprofit%20organisations%20and%20charities> accessed 23 June 2022. See also Chapter 2 for a discussion on the history of tax clinics.

  11. 10   TaxAid UK, ‘Annual Report and Financial Statements for the Year Ended 31 March 2018’ (2018), <https://taxaid.org.uk/wp-content/uploads/2018/11/TaxAid-accounts-2017-2018-Dry-signatures.pdf> accessed 20 December 2021.

  12. 11   Penny Sukhraj, ‘HMRC Office Closures and Regional Centres’ (30 September 2020), <http://data.parliament.uk/DepositedPapers/Files/DEP2020-0609/HMRC_Office_closures_and_regional_centre_opening_dates.pdf> accessed 20 June 2023.

  13. 12   HMRC, ‘Check If You Can Claim a Grant through the Self-Employment Income Support Scheme’, <www.gov.uk/guidance/claim-a-grant-through-the-coronavirus-covid-19-self-employment-income-support-scheme> accessed 20 December 2021.

  14. 13   Bridge the Gap: <www.bridge-the-gap.org.uk/Campaign.html> accessed 20 December 2021.

  15. 14   Tina Riches: ‘When I first started in tax over 20 years ago the yellow book basically fitted in one hand, and a slimline orange book could fit in your pocket. Now we’ve got four volumes of the yellow book and a hefty orange book – and the pages are thinner’, quoted in Tim Swain, ‘George Osborne’s Tax Book Example’ (Full Facts, 20 May 2010), <https://fullfact.org/news/george-osbornes-tax-book-example/> accessed 20 December 2021.

  16. 15   Office for Tax Simplification, ‘Length of Tax Legislation as a Measure of Complexity’ (2012), <https://assets.publishing.service.gov.uk/government/uploads/system/uploads/attachment_data/file/603470/OTS_length_of_legislation_paper_published_Apr12.pdf> accessed 24 June 2022. Note that the Office of Tax Simplification was decommissioned in September 2022: <https://commonslibrary.parliament.uk/research-briefings/cbp-9624/> accessed 1 October 2022; <www.gov.uk/government/news/government-announces-closure-of-office-of-tax-simplification> accessed 1 October 2022.

  17. 16   UK Parliament, ‘Income Tax Abolished and Reintroduced’, <www.parliament.uk/about/living-heritage/transformingsociety/private-lives/taxation/overview/incometaxbolished/> accessed 27 June 2022.

  18. 17   Deloitte, ‘The Tax Education Gap – Is It Time to Talk Tax?’ <www2.deloitte.com/uk/en/pages/tax/articles/tax-education-gap.html> accessed 27 June 2022. See also Kayis-Kumar et al., Chapter 5.

  19. 18   Office for National Statistics, ‘Coronavirus and Self-Employment in the UK’ (April 2020), <www.ons.gov.uk/employmentandlabourmarket/peopleinwork/employmentandemployeetypes/articles/coronavirusandselfemploymentintheuk/2020-04-24> accessed 20 December 2021.

  20. 19   Giulia Giupponi and Xiaowei Xu, ‘What Does the Rise of Self-Employment Tell Us about the UK Labour Market?’ (Institute for Fiscal Studies, 19 November 2020), <https://ifs.org.uk/publications/15182> accessed 20 December 2021.

  21. 20   Judith Freedman, ‘Tax Administration Shaping Tax Reform: Does Employment Status Matter for Tax? (2021) Tax Journal, available at <www.taxjournal.com/articles/-tax-administration-shaping-tax-reform-does-employment-status-matter-for-tax-> accessed 2 August 2022.

  22. 21   LITRG, ‘Labour Market Intermediaries’ (2021), <www.litrg.org.uk/sites/default/files/files/LITRG-Labour-Market-Intermediaries-Report-2021.pdf> accessed 20 December 2021.

  23. 22   LITRG, ‘Help on the Loan Charge’, <www.litrg.org.uk/latest-news/news/210817-help-for-those-with-unfinished-loan-charge-business> accessed 20 December 2021.

  24. 23   LITRG, ‘Contractor Loan/Loan Recall Issue – FAQs’ (May 2021), <www.litrg.org.uk/latest-news/news/210525-contractor-loan-loan-recall-issue-faqs> accessed 20 December 2021.

  25. 24   Lloyds Bank, ‘Essential Digital Skills Data Tables’, <www.lloydsbank.com/banking-with-us/whats-happening/consumer-digital-index/essential-digital-skills.html> accessed 20 December 2021. For a further discussion of digital exclusion, see Chapter 12.

  26. 25   Select Committee on Economic Affairs, Corrected Oral Evidence: Finance Bill Sub-Committee (2017, HL, Q19–34), available at <http://data.parliament.uk/writtenevidence/committeeevidence.svc/evidencedocument/finance-bill-subcommittee/draft-finance-bill-2017/oral/47196.html#:~:text=a%20lot%20of-,hand%20holding,-during%20the%20first> accessed 2 August 2022; Economic Affairs Committee, Draft Finance Bill 2017: Making Tax Digital for Business (HL, 2016–17, 137), available at <https://publications.parliament.uk/pa/ld201617/ldselect/ldeconaf/137/137.pdf> accessed 20 December 2021.

  27. 26   House of Commons Library, ‘Widow’s Bereavement Allowance’ (2009), <https://researchbriefings.files.parliament.uk/documents/SN01478/SN01478.pdf> accessed 31 December 2021, 1.

  28. 27   Richard Thaler, ‘On Sludge’, <www.youtube.com/watch?v=Ky68sLibi6g> accessed 2 August 2022; see also Cass Sunstein, Sludge: Bureaucractic Burdens and Why We Should Eliminate Them (MIT Press, 2021).

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