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Fixed Rate Bonds - confused by HMRC advice
Comments
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I think they use it to send out simple assessments to those who don't do their own tax returns (and sometimes even to those who do).
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I don't think it's primarily aimed at reconciliation as such, but this document has some explanatory background alongside future plans:
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I wonder how many non-SA'ing folks will end up with multi-year bonds with interest credited in monthly/annually (hence attempted to be taxed annually)… is it really wrong for them to allow themselves to be taxed annually if they actually don't mind and don't want complicated affairs? Is the choice of such a product an obligation to go through lengths to correct the situation - or are they actually okay to HMRC's default of annual taxation?
First thing I did was CTRL + F and search for word "accessi" and nothing returned, so I'm not sure they plan to tackle the grey area in future (e.g. put the onus on banks to amend BBSI to comply with interest accessibility).
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First thing I did was CTRL + F and search for word "accessi" and nothing returned, so I'm not sure they plan to tackle the grey area in future (e.g. put the onus on banks to amend BBSI to comply with interest accessibility).
No, I wasn't suggesting that there are any known plans to address the multi-year taxation 'anomaly' - I'd suggest that this causes rather more angst around here than it does in the wider population (and with HMRC), so am unconvinced that it's seen as a priority!
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I do recall that someone on another thread suggested that if you know about the accessibility rule and do your tax return on the basis that inaccessible interest is taxable in the year it is credited rather than on maturity then you could be committing tax evasion. That sounds harsh to me.
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The vast majority of UK adults will not have a problem with this because they will not hold a sufficient amount of savings outside of an ISA. Of those who do have significant savings, I'd say relatively few would be fixing for more than a year without access to their money.
Of those who are left, very few will be aware of the vagaries of interest arising for tax in different years than it is credited, and yet more will assume without checking that HMRC's calculations are correct (leading to the plausible deniability argument). In yet more cases it will make no difference overall because many of those savers with larger amounts of savings will be consistently using the PSA for other savings and remain within the same tax band either way, so in effect they are just paying the same amount of total tax earlier than they really need to.
That leaves what I'd think would be a vanishingly small number who knowingly pay less tax than they ought to. I would argue that it is not "okay" to do that, but I'm sympathetic to those who found out part way through and decided to turn a blind eye. But it would be stretching credulity for someone to open further such products with the intention not to pay tax when it arises when there are plenty of products available that do not create this situation.
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Close to a decade ago, there was someone who claimed to be an accountant who opined here that he advised his clients that either way was justifiable, but they should be consistent. Needless to say this was a controversial view, and HMRC regularly expressed a contrary view in their infamous forum that's now been closed down.
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I wonder how many fall into that "vanishingly small" bucket where there is a difference in overall tax liability between the choices of accepting annual taxation vs pursuing compliance with "interest arising for tax when accessible".
When tax was deducted at source, I think HR / AR taxpayers still used BBSI figures in their SAs, and so still paid the extra tax annually despite the interest not being accessible until maturity - trying to get compliant then would have been a nightmare with 20% already deducted at source, its impact on compounding, etc etc.
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The interesting thing is that even if some HR/AR taxpayers filled out their tax returns incorrectly, many more BR taxpayers (all those not on SA) would have paid their basic rate tax annually, which would have been incorrect. Some might have been pushed into the HR band had they paid it all at maturity. For most, including the HR/AR taxpayers, it just meant paying earlier than necessary. It was the PSA that magnified the problem, but even then the proportion affected must be small.
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I imagine the spirit of accessibility might be purely from a cash flow perspective, i.e. having to pay tax on income now when that income itself is yet to become accessible in cash, but for tax deducted at source I suppose it could be argued that at the time of crediting it, the interest was deemed accessible "enough" for BR tax to be deducted (with the rest credited in for compounding), keeping BR taxpayers compliant with the rule. It's the HR/AR taxpayers who had to fund the extra tax from other money and potentially non-compliant.
Personally, I see no difference to now in terms of accepting annual taxation - after all, interest is time based and spreading out taxable interest over multiple years feels more right than wrong.
Those specifically counting on being taxed on everything at maturity (e.g. coincide with income drop / retirement / overseas move / etc) will likely disagree and cherish the "interest arising for tax when accessible" rule.
In an ideal scenario, interest would be "assessed" for tax annually no matter what, but payment would be deferred to when the interest is accessible - complicated but fair from all perspectives. Otherwise it's just a lumpy capital gain sort of growth much like zero-coupon bonds, but subject to income tax instead of CGT.
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