Capital gains tax should be fairer and simpler

 

Charging CGT at income tax rates is not that controversial — it’s been done before

“Taxes should be simpler and fairer” is the common mantra of better off people and tax commentators.

Even accountants who make their living wrestling into submission some of the more arcane rules of HM Revenue & Customs tell us the UK tax code is the longest in the world and should be simplified. This is usually when opposing yet another attempt to close a loophole they sell to their clients.

So I was shocked to read the numerous objections to the latest report by the Office for Tax Simplification which proposed making capital gains tax (CGT) simpler and fairer. It proposes:

• Chucking out the separate rates of tax for gains and income.
• Slashing the annual £12,300 gains allowance to as low as £2,000.
• Scrapping highly complex reliefs intended to encourage entrepreneurs, but which do not do that.
• Taxing equally the products of our labour whether we are paid in wages, dividends, or share options (adding the word “options” allows tax to be avoided). 

What could be fairer? Or simpler?

No, no, no, said one credulity-stretching comment to the OTS. “Without a lower rate of tax on its eventual sale [I] would not have worked nearly so hard to expand the business.” Really? You work to pay less tax on money you have not even made yet?

Perhaps the key to all the objections is this sentence in the review: “If gains were taxed at income tax rates some taxpayers could face a substantial increase in their overall tax liability,” the OTS said, citing HMRC estimates that aligning rates of CGT and income tax could raise £14bn. Objectors seem to think that simplicity and fairness is fine as long as it doesn’t mean more tax is paid by the well off.

And the people who pay CGT are well off. If you inherit a home and keep it for a few years and then sell it the CGT will be modest, only being calculated on the difference between its value at inheritance and price at sale (CGT death uplift prevents it being valued when the deceased acquired it, though the OTS also recommends scrapping this uplift). But you are better off than most because you have a second home and when it is sold you have the value of it.

In fact, charging CGT at income tax rates is not that controversial. At the end of its report, the OTS notes that for the 20 years to 2007-08, that is how it was charged. Nigel Lawson, the Conservative chancellor, believed there was “little economic difference between income and capital gains” so they should be treated along similar lines.

He echoed the principle of Labour’s James Callaghan, who introduced CGT in 1965 and told Parliament: “Gains confer much the same kind of benefit on the recipient as taxed earnings . . . the present immunity from tax of capital gains has given a powerful incentive to the skilful manipulator.”

The OTS report has many examples of the way skilful manipulators have got to work to minimise the effect of CGT on share and business owners. Two examples in the report (cases 8 and 9) show the advantage for self-employed people to set up a company, pay themselves largely in dividends, store excess money in the business, and then liquidate the company and claim business asset disposal relief to slash the tax on the gain to 10 per cent. Thus director Rose pays £108,817 less tax over five years than self-employed Geoff doing the same job for the same income. Rules that distort behaviour to pay less tax are found throughout the review. But the OTS loses its nerve when it comes to scrapping them.

Stupid Geoff, you might say. No. Stupid tax system that includes rules which the OTS says “distort behaviour, pushing taxpayers towards incorporation”. In the last tax year, this business asset disposal relief gave £58,700 each to 46,000 people at a cost of £2.7bn — even though OTS says it does not “stimulate investment and risk-taking by business owners”.

Rules that distort behaviour to pay less tax are found throughout the review. But the OTS loses its nerve when it comes to scrapping them. It tries to find fairness by tinkering with the dog’s breakfast rather than starting again with the basic tin of Chum, in the form of the principles of Callaghan and Lawson. It should ignore the special pleading of the better off that “it’s not fair”.

Fairness is being fair to all taxpayers, not just the few who pay CGT. A truly fair and simple system would tax a capital gain like income in the year it is received. Just as a bonus at work or a pension withdrawal is added to income and taxed that year, so should a capital gain.

The right level for the annual exemption is not a de minimis £2,500 but zero. Scrap relief for enterprise investment schemes, social investment relief, venture capital trusts shares, investor relief, rollover relief, death uplift, holdover relief and losses relief. Get rid of anything that gives scope for well-paid advisers to help wealthy people game the system.

Tax the 265,000 people lucky enough to have taxable capital gains (which would rise to 1m after the changes) at the same rates as the 32m who pay income tax, with no choice and before they even see it. And prevent the manipulators by applying the change from Budget Day afternoon.

Simpler and fairer. Who could possibly object?

This piece first appeared in the Financial Times 19 November 2020.

GET THAT REFUND

All over the country thousands of people are due refunds for holidays, flights, trips, concerts, or events that they have paid for but have not happened. The law is clear – if you pay for a service and it is not provided then you are entitled to your money back. These rights are given under various legal provisions, but they all say money must be refunded. If you bought something through an agent - a ferry ticket for example - it is the supplier of the goods or service who remains liable not the agent.

Despite these clear rights, enforcing them can be difficult against a firm that says it will not – or cannot – pay you. It may have offered a voucher for a future replacement trip. Ot it might claim that the event has just been postponed and your ticket will be valid at some future date. 

None of those alternatives take away your right to a full refund.

Enforce your rights

Knowing your rights is one thing, enforcing them can be quite another. So here is my guide to the big stick you can use to make a company obey the law. 

Of course, you have written, emailed, phoned, hung on for ours and tried all the things the firm suggests and you still have not got your money back, as the law says you must. 

Time for the nuclear option. 

Step 1: The court

If a firm owes you money you can go to court to recover it. We used to call it the ‘small claims court’ but in England and Wales it is now done centrally through the Courts & Tribunals Service website at moneyclaim.gov.uk. In Scotland it is called the Simple Procedure at Scottish Courts and Tribunals. In Northern Ireland go to justice-ni.gov.uk and search ‘small claims’ or use this direct link. 

Don't worry, you are almost certainly not going to go to court. Begin the court action online. Fill in the claim form with your details, and the details of the firm and the amount claimed. Claim the full amount including non-returnable deposits. Put your reasons. Do not proceed with the claim but take a screenshot of the page.

If you are having difficulty finding details of the firm see 'tracke them down' below.

Step 2: The boss

Forget about customer service, go straight to the person who can make something happen. Email the Chief Executive of the company that owes you the money. You can find that address from www.ceoemail.com. Write a brief, polite but firm email summarising in a few lines what you are claiming and why, reminding them that you are entitlted to your money back and warn them that you expect a refund within seven days or you will go to court. 

Now attach the screenshot of your court claim to the email. That is the masterstroke. It proves that you are not just threatening to 'go to court' but that you know how to do it and are already halfway through the process. 

Emails to the boss will usually be read by a minion. But that does not matter. Every firm has a section to give cases special treatment. You have just reached it.

Shortly after you should get your money. One happy reader who had spent weeks going through the usual channels used this technique and emailed me: “It worked! Easyjet wrote back today and I’ve received the reimbursement to my credit card”.

Turn the screw

If after 14 days this method does not result in a full refund including non-returnable deposits and without deduction of any administrative fees, then go back to your online claim and start the court action. These proceedings are very simple and straighforward and any small fee charged at this stage will be refunded when you win. 

In fact your case will almost certainly never get to court. The last thing any firm wants is a judgement that it has to refund customers. It will be settled out of court and you will be given your refund - in full without fees or charges deducted - and reimbursed for your costs. You may even get a few pounds added on.

The regulator

Don't just take my word for it. The Competition & Markets Authority (CMA) is a government agency whose job it is to promote fair competition between companies and make sure they do not trample on consumer rights.

 At the end of April 2020 it warned firms that 

Where a contract is not performed as agreed, the CMA considers that consumer protection law will generally allow consumers to obtain a refund. In particular, for most consumer contracts the CMA would expect a consumer to be offered a full refund where:

a business has cancelled a contract without providing any of the promised goods or services;

• no service is provided by a business, for example because this is prevented by Government public health measures;
• a consumer cancels, or is prevented from receiving any services, because Government public health measures mean they are not allowed to use the services.

The CMA said that weddings, holiday accommodation, and nurseries and childcare particularly concerned it. A couple of months later it forced Hoseasons and Cottages.com to offer refunds to customers instead of trying to fob them off with vouchers. It has now had similar successes with holiday firm TUI and with wedding organisers. It did not mention flights as they are regulated by the Civil Aviation Authority but these rights to a refund apply equally to flights under the European Regulation EC 261/2004.

Track them down

One problem people find with global companies is that it is very hard to track down a UK address for them. You need that for your court claim - you can only sue a UK entity for money. First, search the website very carefully as it may be there. Second, have a good rummage round that ceoemail.com website - it will probably be there. If not try Companies House. It is almost certain the firm has a UK branch. Try searching on company names but always check you have the right one by looking at the 'people' or 'filing' tabs to see what the company does and who are its directors. The search is free - never google 'companies house' you will get firms that want to charge you for free information. But Google can be helpul to find who owns whom by googling the firm's name and clicking news to see who may own it now. 

Thanks

I am grateful to Helen Dewdney of thecomplainingcow.co.uk for this idea. She has many more in her excellent books How to Complain and 101 Habits of an Effective Complainer.

Paul Lewis 

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NOT SO PREMIUM BONDS

Premium Bonds give a poorer return from the December 2020 draw. So are they still a good place for your savings?

Premium bonds are good if you fulfil three conditions

• You can buy the maximum £50,000 or close to it. 
• You pay higher or additional rate income tax. 
• You have used up your personal savings allowance with interest on other savings outside ISAs.

The further you are from those conditions the worse they are.

How do they work?

Each month the 95 billion £1 bonds earn interest which is 1% from the December 2020 draw. Each month the interest - which from December NS&I says will be £82 million - is put into a prize fund. That total is then shared at random among the bondholders as prizes. From December each bond has a 1 in 34,500 chance of winning a prize in each monthly draw. Prizes are paid tax-free so the return is better for higher rate (40%) or additional rate (45%) taxpayers.

The fund is divided so that 98% of the prizes are for £25 which uses up 85% of the money. From December about 2.8 million £25 prizes will be paid. Just over 25,000 prizes each of £50 and £100 will also be paid. Those three prizes use 90% of the prize money and accounted for 99.8% of the prizes. 

Go for the max

Although the stated interest rate is 1%, when considering the actual interest earned in any realistic timeframe it is only the £25 prizes that should be counted. That means the effective interest rate - the money used for the prizes you might win - is 0.85% from December. 

With the maximum £50,000 bonds you will now expect a £25 prize every month at least - 17 over a year. Of course chance will not produce an even return. But over time that should be the average. That is equivalent to earning 1.06% taxable interest for a basic rate taxpayer, 1.42% for a higher rate taxpayer and 1.55% for a taxpayer with an income over £150,000 who pays 45% income tax. 

Those are not bad rates for an instant access account. Money in Premium Bonds can be taken out without notice at any time, though it may take a few days to get your money back.

You would expect a £50 or £100 prize very 6 and a bit years, a £500 prize every 33 years and £1000 ever 100 years. Above that prizes range from £5000 to £1 million. Although winning a million is a nice thought, forget it. You won’t ever win that prize. Even with the maximum £50,000 bonds you would have only an even chance of winning a million after 82,000 years. That was when when humans were still having sex with Neanderthals and 40,000 years before we started painting in caves. The odds of winning the second prizes of £100,000 are just half those for the million pound prizes. If you bought £50,000 of premium bonds to celebrate your first cave painting you might by now have won one prize of £100,000. 

Even the smaller large prizes are very sparse. If you had bought £50,000 premium bonds to celebrate the death of the Roman Emperor Caligula in 37 AD you would have expected just one £5000 prize by now. You will wait another 1975 years for the next.

Fewer bonds 

With smaller amounts of bonds, prizes of course are much rarer. £100 gives you an even chance of winning a £25 prize every 29 years. The new minimum of £25 would mean a wait of 115 years to have an even chance of one prize and 200,000 years to win a £1000 prize. 

With one bond bought when when Stonehenge was built you might have expected one prize of £25 by now at the current rates, and only have a few hundred years to wait for the second. Earth has barely been around long enough to have an even chance of getting the £1,000,000 prize which happens ever 4 billion years with one bond. 

Good for the much better off

The interest on all savings is tax free up to £1000 for basic rate taxpayers and £500 for higher rate taxpayers. So the tax-free prizes are of most value to those who have other savings which have used up those savings allowances. For higher rate taxpayers that probably means £50,000 in top savings products as well as any cash in ISAs. For basic rate taxpayers it means at least £100,000 in best buy svings accounts. Additional rate taxpayers do not get the personal savings allowance. So premium bonds are very good for them. More than half the bonds are held by people who have at least 30,000 of them and 650,000 individuals own the maximum £50,000.

Randomness

ERNIE (Electronic Random Number Indicator Equipment) who draws the winning bonds each month is not a computer. However hard they try computers cannot produce genuine truly random numbers. So ERNIE uses a process which was invented by a Bletchley Park codebreaker - called transistor thermal noise - to create truly random events which are then counted and combined in turn into bond numbers. Every month the Government Actuary checks the prize list for randomness before the prizes are paid.

Because every bond really does have an equal chance of of winning there is no point in cashing in 'unlucky' bonds and buying new ones. Doing that also means there is a month between selling and buying when the bonds are not in the draw. So it worsens the odds of winning.

Buying
You can buy Premium Bonds online at www.nsandi.com where you can also check for prizes and trace lost bonds. You can also buy them by phone or post. You must be at least 16 years old. Parents, realtives, and friends can buy them for children under 16.

From March 2021 all prizes must be paid direct into a bank account. At the moment about a quarter are paid in the post with a warrant - effectively a cheque on the Government. NS&I says there will be provision made for people without a bank account to receive the money or a mobile phone or email to be informed they have won. Details are awaited.Meanwhile those with bank accounts can register the details at nsandi.com/prize-options. 

 

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FREE TV LICENCES

MORE THAN A MILLION OVER 75s MUST ACT NOW TO KEEP THEIR FREE TV LICENCE

From 1 August 2020 the BBC has decided to restrict free TV licences to people aged 75 or more who also get a means-tested benefit called Pension Credit. 

Before the change around 4.6 million people over the age of 75 got a free TV licence. From 1 August the number getting one could be as low as 500,000. Another 1 million and more could get a free TV licence but only if they take action now. 

• 450,000 people over 75 who also get Pension Credit have registered with TV Licensing. They will continue to get a free TV licence. The green slice of the pie. 
• 472,000 people aged over 75 are on pension credit but have not registered with TV Licensing. They will not get a free TV licence after 1 August if they do not register. The yellow slice of the pie. They need to register with TV Licensing online or call 0800 232 1382 - at the moment that line is pretty rubbish. 
• Up to 650,000 over 75s could get Pension Credit but have not claimed it. If they successfully claim Pension Credit they can contact TV Licensing and their free licence will be restored and backdated. If they do not successfully claim Pension Credit they will have to pay for their TV licence. The amber slice of the pie. 
• All free licences expire on 31 July 2020. Anyone who does not get Pension Credit will have to pay from 1 August 2020. There will be more than three million people over 75 who cannot get a free TV licence whatever they do. The red slice of the pie.

In August TV Licensing will write to everyone who gets a free TV licence except those who have already registered as on Pension Credit. No one need do anything until that letter is received. People who get the letter will have two months to (a) register that they get Pension Credit or (b) claim Pension Credit and let TVL know or (c) pick a payment plan to pay the £157.50.

Some people who must now pay will not have paid for a TV licence since the scheme began in 2000. They will be able to pay by credit or debit card on the phone or online and can pay weekly, fortnightly, or monthly if they choose. 

People without a bank account or credit card will have to pay in cash at a shop with a PayPoint - or get someone to do it for them. DWP says there are 375,000 over 75s who access the state pension or pension credit via the Post Office Card Account. They are less likely to have a bank account. 

Some of those who have to pay will have a very low income. An income as low as £209 a week for a single person or £305 a week for a couple will be just above the normal pension credit limit. They will have to pay in full for the Licence. That will cost up to 1.4% of their income. 

Some couples may have a lower income than that and still be excluded. Couples where one partner is below state pension age can no longer claim Pension Credit for the first time and they may have benefits as a couple as low as £137 a week. The TV licence will be more than a week's income. However, a mixed age couple who already gets pension credit will keep it and will still be eligible to a free TV licence. 

Who can get Pension Credit

Age

Pension Credit can only be claimed by people over state pension age - from October that will be 66. If they live with someone else as a couple then to claim Pension Credit in future both must be over state pension age (there are exceptions - see Couples below). If they get Pension Credit the free TV licence is given if either of them is over age 75.

Income

If you are over 75 and your income is up to £208.65 a week then you can get Pension Credit. If you live as part of a couple then your income is counted jointly and the upper limit is £304.20 a week. Even if you qualify for just 1p a week pension credit you will still get the £157.50 free TV licence.

If you get Carer's Allowance you can add £37.50 to these amounts and still qualify. You can count as a carer even if you do not get carer's allowance if you would be entitled to it. See 'Carers' below.

If you are severely disabled add £66.95 to these amounts. 'Severely disabled' normally means means you get Attendance Allowance. See 'Severely disabled' below. If you are part of a couple the rules for adding these amounts are complex but you should still apply.

Savings

If you have savings or investments of up to £10,000 they do not affect your entitlement to Pension Credit. If they are more than £10,000 then an amount is added to your income. That amount is £1 a week for every extra £500 of savings. So savings of £15,000 mean that £10 a week is added to your income. Of course, savings of £500 will not produce an income of £1 a week. You will be lucky if you get 10p a week. But that is how the rules work. Any income the savings actually produce is ignored. For a couple, savings are added together and the limits apply to their joint savings.

There is no upper limit for savings that disqualifies you from getting Pension Credit. Some people with low incomes and tens of thousands of pounds in savings can still get Pension Credit. But if savings are very high then your entitlement to Pension Credit will be wiped out. 

Just claim!

If your head is hurting with all these complex rules (mine often does!) then just claim pension credit. You can do that easily by calling 0800 99 1234. The call will be free. Have all your details of income and state pension with you and if possible your NI number. They will process your claim if you do qualify and tell you if you do not. 

The average amount of unclaimed Pension Credit for people over 75 is £1820 a year. So it is well worth claiming regardless of getting a free TV licence. Even if your entitlement is just 1p a week you will still get the free TV licence.

Check your entitlement

If you want to check entitlement yourself then you can use one of the online calculators. All are anonymous. 

The best online calculator is from an organisation called Entitled To. It will also work out if you can get any reduction in your council tax and, if you are a tenant, your rent as well. It also suggests other places you might be able to get financial or other help. Homeowners can claim Pension Credit.

Another online calculator is run by the charity Turn2Us. It also has an online search for grants and other cash help you may get. So it is worth using for that.

The extra help will almost certainly include money off your council tax (or rates in Northern Ireland). If your income is below £173.75 a week (£265.20 for a couple) then your council tax should be reduced to zero. If your income is higher than that then your council tax will normally be substantially reduced.

Fiddly Bits

Extra information about some of the complex rules that surround Pension Credit and the free TV licence.

Limit for pension credit 

There is some confusion about income limits for Pension Credit. That is because it is in two parts - guarantee credit and savings credit. Guarantee credit will raise your income to £173.75 a week (£265.20 for a couple). But if your income is higher than £150.47 a week (£239.17 couple) then you are also given an extra bit of pension credit called 'savings credit'. Entitlement to that runs out as your income exceeds £208.67 a week (£304.25 for a couple) though you will not see those two figures in any official publication.

The savings credit is not paid to people who reached state pension age from 6 April 2016. They are men born from 6 April 1951 and women born from 6 April 1953. At the moment they cannot get free TV licences as they are still under age 75. When they can claim from April 2026 and 2028 there will be discrimination between men and women and the scheme may have to change. See also 'Younger People' below.

Couples

A new rule for couples began on 15 May 2019. From that date they can only get Pension Credit if they are BOTH over state pension age. Before that date they could claim Pension Credit if EITHER of them had reached state pension age. So a man of 75 with a partner aged 65 is not now entitled to claim Pension Credit.

However, no-one will have their pension credit taken away. So if you are a mixed age couple (as the DWP calls them) and you already got Pension Credit or Housing Benefit before 15 May 2019 you will still qualify for them.

The DWP does not care if a couple is married, civil partnered, or neither. If they live together as a couple then they count as a couple.

Carers

You qualify for Carer's Allowance if you spend at least 35 hours a week caring for someone else who is severely disabled. That normally means they get 

• Attendance Allowance, or
• One of the two higher rates of Disabled Living Allowance (DLA) or, 
• Either rate of Personal Independence Payment (PIP). 

If you are over state pension age you may not have claimed Carer's Allowance as it will not be paid on top of your state pension. But it is important to claim it as it will entitle you to more Pension Credit. 

Severely Disabled

For people over 75, severely disabled normally means you get 

• Attendance Allowance, or
• Constant Attendance Allowance paid to ex-service personnel

Mixed households

The free TV licence is available to any household where at least one person aged 75 or more lives. So if the licence is in the name of a younger person it should be changed to the person over 75 on pension credit who lives with them. The household itself will not be means-tested. So younger people will benefit from the free licence in those circumstances.

Numbers

DWP statistics for November 2019 show that 922,028 people aged 75 or more get Pension Credit. 

DWP take up figures for 2017/18 - published in February 2020 - show that between 520,000 and 650,000 over 75s who could claim Pension Credit do not do so. The central projection was 590,000. This analysis uses the highest number. Roughly four out of ten people who could claim pension credit do not do so. The average amount unclaimed by them is £35 a week or £1820 a year. 

The BBC now estimates that there were 4.4 million people who got a free licence before the rule change. That is lower than the estimate of 4.6 million produced for it by Frontier Economics in 2018 when it was consulting on changes to the free licence. The DWP, which still paid part of the cost in 2019/20, said there were 4,665,000 free licences in 2018/19 and forecast 4,779,000 in 2019/20 - an increase of 114,000 in a year. The Office for National Statistics predicts that the number of people over the age of 75 will grow by 165,000 a year over the next 25 years. That argues for a growth in the number getting free TV licences by around 139,000 a year over that period. In this blog I use the 4.6m estimated by Frontier Economics as a compromise between the BBC's low figure and the DWP's high figure. The BBC offered no explanation for why its figure is now lower.

Why the BBC changed the rules

Origins

The free TV licence for people over 75 was introduced by Gordon Brown when he was Chancellor of the Exchequer. It was announced in the pre-Budget Report on 9 November 1999 and confirmed in the Budget on 21 March 2000. It began on 1 November 2000, a few months before the June 2001 election which Labour won comfortably. The cost - around £350 million a year then - was paid by the DWP and it has continued to pay the BBC for the cost of the free licences. So the free licences did not cost the BBC anything.

People now aged 95 or over will have had a free licence for 20 years. Those aged 75 to 95 will never have paid for a licence once they reached 75.

Change

As part of the renewal of the BBC Charter in 2015 the Government insisted that the BBC bear the whole cost of the free licences from April 2020. Passing on the cost was phased in over three years from 2018/19. The BBC estimates the full cost at £745 million in 2021/22 rising to £1 billion a year by 2030 as the number of 75 year olds grows and the price of the TV licence increases with inflation. The cost is around 15% of its current £5 billion a year budget and is more than the total cost of all its radio stations and almost as much as all its TV stations apart from BBC One. The BBC says it cannot afford to pay that full cost without major cuts affecting programmes enjoyed by all licence fee payers. The cost of the means-tested free licence scheme is estimated by the BBC at £250 million a year. However, that assumes that all the 1.5m over 75s who get or could get pension credit will do so and will register for a free licence. That seems very unlikely as take-up of pension credit is highly resistant to change and the cost is much more likely to be between £100m and £150 million a year. 

As part of the Charter deal the BBC was allowed to raise the licence fee by inflation from April 2017. It had been frozen since 2010 as part of the previous Charter deal when the BBC had refused to take over the cost of free TV licences. It rose in April 2017 by £1.50 to £147, by £3.50 in April 2018 to £150.50, then in April 2019 it went up by £4 to £154.50 and then in April 2020 by £3 to £157.50. There are almost 26 million licences so the inflation rise brought in around £40 million in 2017/18, £90 million in 2018/19, £100 million in 2019/20 and will bring in around £75m in 2020/21. That is nothing like enough to match the decline in the DWP payment of between £200m and £250m a year over the three years 2018/19 to 2020/21 nor to pay the estimated continuing cost of the free licences for over 75s on pension credit. And of course the increase with inflation also has to fund the BBC's other rising costs including pay and services. 

People outside the UK

The change in the rules applies throughout the UK. People living in the Channel Islands or the Isle of Man - which are not in the UK - also pay for a TV licence and get a free one if they are aged over 75. Their position is still being discussed.

Free TV Licence

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MONEY BACK PLASTIC

If you pay for goods or services by credit or debit card or by a prepaid card you have clear rights to get your money back if anything goes wrong. So it is always safer to pay by plastic and you should always do so if you can. With a credit card you have two separate rights.

Legal right

If you pay by credit card for an item which costs more than £100 and up to £30,000 then the credit card provider has a joint legal liability with the retailer for the goods or services you buy. If the product or service goes wrong you can claim the full cost back from the credit card provider. 

For example, you pay for a holiday or flight and the firm goes bust. Or you buy clothes online and they do not arrive. Or you purchase an electronic device which stops working after a week. Or you pay for an online service which is a fraud. In all those cases you can use your legal right to get your money back from your credit card provider. 

The legal right covers purchases made anywhere in the world – whether you are buying in person abroad, or you pay online or by phone. Note the price limit applies to each item not the total amount of the bill. So two items of £80 each bought at the same time are not covered but one item of £160 is.

It is called your ‘section 75’ (or s.75) right because it comes from that section of the Consumer Credit Act 1974.

Of course, it is usually best to go first to the retailer or supplier to get your money back. But if they refuse or have disappeared or gone bust then the credit card provider must refund the whole cost.

Even if you just pay for part of the purchase on a credit card and the rest in some other way s.75 covers you for the whole purchase price if that falls within the limits. So if you buy a £750 sofa and pay a 10% deposit of £75 on a credit card and then you pay the balance in cash, you can claim a refund of the whole amount from your credit card provider if the sofa doesn’t arrive or is faulty.

There is no time limit on making a s.75 claim but it is always best to make a claim as soon as possible. If the purchase was more than six years ago you may find it more difficult as that is the normal limit on legal claims.

Section 75 rights apply to every credit card – Visa, MasterCard, or American Express (credit cards but not its charge cards).

Contract right

If you pay by debit card, credit card, or prepaid card you have a separate right to get your money back called chargeback. It is part of the contract between Visa, MasterCard, or American Express and the bank or firm that provides the card. Chargeback generally has no upper or lower limits, but MasterCard won’t consider claims for items that cost less than £10. Chargeback is most useful for plastic card purchases not covered by s.75. It does not apply to American Express charge cards but American Express credit cards are covered by it (and, of course, they are covered by s.75).

Chargeback covers the same problems as s.75 – goods that are defective, do not arrive, are fraudulent, or where the firm goes bust.

There are time limits for claiming which are quite complex. Normally you have to claim within 120 days – about four months – of realising something has gone wrong. But there is also an absolute time limit of 540 days which is about 18 months. So claim as soon as you know something has gone wrong.

The chargeback procedure involves your bank going to the bank of the supplier and trying to recover money from them. The supplier’s bank will then ask the supplier to provide the money. If the supplier refuses then its bank has to refund you if you have a valid calim. Some guides and some banks suggest it depends on the firm you paid agreeing to refund their bank. That is not true. If can only refuse to pay if it believes that you do not have a valid claim. If you insist you do then it goes to a dispute procedure with Visa, MasterCard, or American Express. The card network's decision is final. If it upholds your claim then the suppliers bank has to pay. It is part of its contract with the netork and if it refuses then it will - or should - lose the ability to use Visa, MasterCard, or American Express. Although it is not a right under a legal provision, it is an absolute right guaranteed by Visa, MasterCard, or American Express and their contracts with the card providers. If your claim is valid the supplier's bank must pay up.

Many banks and card providers misunderstand chargeback and frontline staff may well say that you cannot recover your money or they must wait for the provider to refund them. If the product has failed or not arrived they are wrong. But if you ultimately lose and the network says your claim is not valid you may have to give the money back.

How to claim

Write to your bank or card provider setting out the details of what has happened and say you are claiming a full refund under s.75 of the Consumer Credit Act or under the chargeback procedure. In your initial letter always say that if you do not get a satisfactory response within eight weeks you will take the claim to the Financial Ombudsman Service. That tends to concentrate the mind. If the claim is refused or not resolved within eight weeks then do take it to the FinancialOmbudsman Service. Normally a claim to the Ombudsman costs the financial firm £550. It is free to you. The Ombudsman upholds most of the claims that reach it. You must go to the Ombudsman within six months after receiving a final refusal from the card provider.

Not covered

Section 75 and chargeback apply when the item you purchased is faulty, goes wrong, doesn’t turn up, or was fraudulent. They do not apply if you change your mind. However, if you buy online or over the phone you have an absolute right to reject the item as long as you tell the supplier within 14 days.

Version 2.0
20 July 2020

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SMART METERS - DO THEY THINK WE'RE DUMB?

UPDATED 3 June 2020

The latest figures indicate the Government is going to miss its revised target to fit 85% of home in Britain with a smart meter by the end of 2024.

This new target was introduced in September 2019 when it became clear that the original target of fitting or at least offering one to every home in Britain by the the end of 2020 was, literally, unachievable. But now the new one looks out of reach too.

By the first quarter of 2020 just over 19 million smart meters had been installed in homes, split about 57:43 between electricity and gas. The number of installations has fallen from its peak of 1.3 million in the last quarter of 2017 to just 984,685 in the first quarter of 2020. A year ago I said that at the current rate of fitting it would be be mid to late 2026 before the target was reached. That remains the case.

To install the remaining 25 million smart meters by the target date would require 1.3 million fitted every quarter. In 2019 the average was just over a million a quarter. The rate is falling - and will have been practically shut down by coronavirus - so even at a million it would take 25 quarters which takes us to the first few months of 2026.

The trade body energy UK warned the Government in November that the target was unreachable and the best it could hope for was just over two thirds of homes fitted by the end of 2024.

Meters fitted
Of the 19.2 million smart meters which had been fitted by the end of March 2020 only 4.3 million were SMETS2, leaving 14.9 million of the early version called SMETS1. Despite their name they are not smart enough to cope when the customer changes supplier and will normally go dumb or, to use the official phrase, 'operate in traditional mode'. The latest figures show that 3.7 million of these SMETS1 meters have gone dumb and BEIS has told me that "the vast majority is likely to be a result" of customers switching supplier.

So in addition to the 25 million traditional meters that need replacing another 15 million SMETS1 meters need upgrading.

Since 15 March 2019 all meters being fitted should be SMETS2. However, we know that some suppliers have still been fitting SMETS1 meters because SMETS2 are in short supply and they still have SMETS1 meters in their stores. The latest report for Quarter 1 2020 says "Energy suppliers are now installing second generation smart meters (SMETS2) as the default choice in most cases." My emphasis. It clearly implies some SMETS1 meters are still being installed.

There are plans to upgrade SMETS1 meters to operate with any supplier. They will still not be SMETS2 meters but the workaround will at least mean they can support switching supplier. This process is known as enrolment into the DCC network (described below) and it was due to begin in July 2019. The target date to upgrade all SMETS1 meters is still the end of 2020. It is not clear to me yet what progress has been made but we do know that 3.7m SMETS1 meters are still operating in dumb mode.

Voluntary
Customers are free to choose whether or not to have a smart meter fitted. But the large companies are more and more trying to make it seem inevitable. Some are even booking appointments without agreement others are cold-calling and sending texts to customers. This hyperactivity was because if they missed the original 31 December 2020 target they could be fined. EDF was fined £350,000 for missing its 'milestone target' for fitting meters. These milestone targets are secret and Ofgem refuses to reveal them despite an FOI request. Ofgem also confirmed that any SMETS1 meters fitted after 15 March 2019 will not count towards those milestone targets.

Most major suppliers now have at least one tariff where agreeing to a smart meter is part of the terms and conditions. Regulator Ofgem says such terms are within its rules as long as "communications are transparent and accurate, including around any smart meter only tariffs they are offering."

Not all homes can have smart meters. Rural areas, tall blocks of flats, buildings with thick walls, and meters in odd locations can all prevent installation. And the target by the end of 2024 is only to fit them to 85% of homes - leaving between four and five million homes without one.

What smart meters do
Smart meters are not in fact very clever. They simply report back to the supplier how much electricity and gas the customer uses each day and, with the customer's permission, every half hour. More frequent reporting may be available in future.

The meter also feeds some information about current use to what is called an 'In Home Display' or IHD. If you have both electricity and gas there will be one IHD which covers both electricity and gas. It will normally be mains-powered and fixed in position but there will be an option for a separate portable battery powered unit. The IHD can show how much fuel is currently being used and can display the cost in £.p. Some of them will have a traffic light system - glowing green when consumption is low through amber to red when it is high. They can also do calculations of past and future use. Some reports suggest that if the IHD is switched off for any reason it is difficult or impossible to get it back online and recording usage accurately.

Costs
The costs of the smart meter programme are certain, though it is inevitable now that they will increase above their current estimates. The latest cost/benefit analysis was published in September 2019. It is still priced in 2011 pounds and to get to a current 2020 cost these figures should be multiplied by 1.17. It estimates that manufacturing and installing 53 million meters, communication devices, and IHDs in 30 million premises will cost £7.5 billion. There is also a new communications infrastructure network called DCC which will cost £2.9bn. That was due to be completed late in 2015 but was in fact not switched on until November 2016 and was still being tested In 2018. It now seems to be working with the 4.3 million SMETS2 meters fitted by the end of March 2020. The cost/benefit analysis puts the total costs of the programme over 22 years at £13.5bn. That is around £15.8 billion in today's pounds.

That cost is more than £500 per household and is paid through higher electricity and gas bills. Those payments have begun. In 2017 all major suppliers and some smaller ones have put up the cost of electricity by 10% to 15% and each of them blames that rise in part on smart meters. That process continued in 2018.

Savings
Estimates of the savings are more speculative.

 * Customers will save money because they will use the information from the IHD to cut their energy consumption. That is the theory and the saving from that is put at £6.2bn over 22 years based on a 3% cut in electricity use and 2.2% in gas use (and just 0.5% for prepayment gas customers). The savings figure assumes that just one in three customers will achieve these savings.

Achieving those savings requires active engagement by customers. But many will not be engaged and will end up paying more. A report by the old Department for Energy and Climate Change on some pilot smart meter installations found that initially 96% used their IHD but about four out of ten disconnected them during the research. None were able to identify any clear savings due to the IHD. The Public Accounts Committee estimated in 2014 that customers would save on average about £26 a year. A survey by a price comparison site in July 2018 (on a small and perhaps not representative sample) found that less than half (49%) of its sample of 678 people with a smart meter had reduced energy usage. And as standing charges grow - in 2019 they accounted for 13.5% of the typical bill - the scope for reducing bills by cutting energy use decreases.

Customers will also gain, if they choose to, by faster switching from one supplier to another. The process can take weeks now but a 24 hour service is promised. They will also benefit from suppliers sending an accurate monthly bill of energy used rather than sending out estimated bills. Though they will then lose the advantage of smoothing their bills over the year. 

In the 2019 Cost benefit analysis there is a new saving allocated to customers. It is £1.4 billion from what it called 'time savings' which it says is a monetary value on "reduced time consumers spend interacting with the energy system". That includes reading the meter, sending the results to the supplier, calling the firm with complaints or questions and, in the case of prepayment customers, travelling to a shop to get their key charged up. It comes to 32 minutes per year for credit meter customers and around three hours per year for prepayment customers. Halve those times for customers who only have electricity.

* Energy suppliers will save an estimated £8.1 billion. The biggest chunk - £2.3bn - will be from ending meter reading and other home visits. Reduced customer enquiries and complaints will save £1.2bn. Another £1bn will be saved by managing pre-payment customers better and there is a big saving of £1.2bn from reducing the cost of customers switching supplier. A further £1.9bn is saved by managing debt better and reducing theft.

* Networks and the generators will save £1.7bn between them from smoothing the peaks and troughs of demand and generating less power.

* Finally, carbon related benefits and air quality improvements will add £2bn to bring total savings to £19.5bn, of which £9.8 billion is saved by the energy industry directly.

These figures from the 2019 cost/benefit analysis are in 2011 pounds. Actual costs in 2020 pounds will be 17% higher. Even in constant terms the total cost of £13.5 billion is £2.5 billion more than the 2016 assessment. The cost is being paid by energy customers through their bills.

Who gains?
Less than a third of the savings will be made directly by consumers, though if you add in the value of the time saved that comes to 39%. Half the savings will be made by the industry. The hope is, of course, that suppliers, generators, and transmitters of electricity and gas will pass some of those savings on. They may. But some of their savings - on debt management and prepayment meters for example - will come at a direct cost to the customers affected though they may be passed on to others.

So while the customers will pay for the £13.5 billion cost of the smart meter programme through their bills, the savings of £6.2 billion will only be gained by those who adjust their behaviour and and the £9.8 billion saved by the industry will only be felt by customers if the industry passes on its own savings to customers in lower prices. It is not at all clear that the £2 billion rather speculative carbon related and air quality savings will ever reach consumers' pockets.

The energy industry has a very poor record in passing on savings. In 2014 they took many months to pass any of the gains from the fall in the wholesale price of gas and none reduced electricity prices even though much of that is generated by burning gas.

Extra costs.
The impact assessment does not take account of two significant extra costs.

First, bills will no longer be estimated as they will be based on actual usage over a month. That is promoted by the Government as good news for consumers. But it will be expensive for gas and electricity suppliers. For many years they have encouraged customers to agree to pay estimated bills monthly by direct debit rather than quarterly based on meter readings. The result is that the firms have kept hundreds of millions of pounds on their books belonging to customers. The value of that is shown by the fact that customers who pay a more accurate quarterly bill can be charged 7% extra or more more than monthly direct debit customers. If they no longer make that saving then prices will inevitably rise. Some customers may prefer to keep estimated bills. They are at least constant and that can help with budgeting.

This money the suppliers routinely hang onto is separate from the £400m that Ofgem found they had wrongly kept when customers switched to another supplier. In February 2014 it ordered firms to refund this money. That event does not bode well for hopes that the industry would voluntarily return to customers the savings it makes from smart meters.

Second, the DCC has incurred expenses planning and eventually implementing the upgrade of SMETS1 meters. The National Audit office estimated in November 2018 that will add another half a billion pounds to the cost.

Time of use
The report also makes no assessment of the costs or savings to be made from what are called Time of Use tariffs. Once the smart meter network is rolled out suppliers will start making customers manage the load, especially in electricity supply. In other words when demand is high the price goes up. When demand is low the price comes down. And with half hour reporting - and it may be more frequent in future - time of use tariffs could be very specific.

For example, energy could be more expensive between 7am and 9am when most people are getting up, putting on the kettle, and making breakfast. Or between 5pm and 8pm when evening meals are being cooked. The result would be that poorer families could not afford to eat dinner at dinner time.

Ultimately the cost of power could rise during the adverts in TV soaps or the interval in football matches when millions put the kettle on make a cup of tea.

Time of use tariffs mean that the customer is being drafted in to manage the national power load. By pricing people out of energy use at peak times the peaks and troughs of usage - so irksome to the engineers managing the grid - are smoothed out.

Time of use tariffs are particularly being touted for charging electric vehicles overnight for those drivers who have a drive or garage at home where they can charge them up. The current specification for home vehicle chargers specifies that suppliers will be able to decide the time of day that the energy is fed to them.

Debt and disconnection
Smart meters will also enable energy suppliers to manage debt and disconnection remotely. Customers can be switched from credit payment to prepayment by the supplier without changing the meter. It also means that if someone has not paid their bill then the supplier will be able to disconnect them remotely. There are currently safeguards about who can be disconnected and when. But once the conditions are met the process of doing so will be much simpler. In fact though there were only 17 disconnections in 2017.

Organisation
The delivery of this programme is in the hands of the six large and dozens of smaller energy suppliers. They each fit the meters for their own customers. Which could mean dozens of different engineers visiting the same street or block of flats to do the same job in neighbouring homes.

The central Data & Communication Company (DCC) is run by Capita. It will be responsible for collecting the data sent back by smart meters and forwarding it to the right energy supplier, the networks and energy services companies. Others may also get access to it. In 2014 the Information Commissioner expressed concerns about the security and use of this data. There is currently no provision to let customers know specifically who has access to it.

The data network will be run by two companies - Arqiva will cover northern England and Scotland using a long-range radio network and Telefonica UK will cover the rest of England and Wales using standard cellular telephone technology with what it calls 'mesh technology' to fill the gaps in the cellular network. Unlike individual customers the devices will be able to roam between suppliers to find the strongest signal. The target is to cover 99.25% of dwellings - which if achieved will leave 225,000 premises unconnected. However, remote dwellings, tall buildings, and multi-occupied premises are problems that have not been solved. Some in the industry have said that 30% of homes cannot be integrated into the DCC grid. The Department for Business, Energy, and Industrial Strategy has not denied that figure.

Meanwhile Smart Energy GB spent £87m over 2018 and 2019 to persuade us all that the smart meter programme is a good thing. What it calls building consumer awareness and understanding of smart meters and encouraging consumer engagement. It included advertising such as the Gas and Leccy characters and a Smarter Britain bus tour with daytime TV housing gurus Kirstie Allsopp and Phil Spencer - who admitted he didn't have a smart meter before he was paid to promote them.

In November 2018 the Advertising Standards Authority told SmartEnergyGB to stop claiming smart meters were free as we were all paying for them - about £400 per household - through higher bills. And in March 2019 it ruled that a claim smart meters saved people money was false and should be withdrawn. They only save money if we change our habits to use less.

Criticisms
On 25 November 2018 the National Audit Office published a report on smart meters and warned

"The facts are that the programme is late, the costs are escalating, and in 2017 the cost of installing smart meters was 50% higher than the Department assumed. 7.1 million extra SMETS1 meters have been rolled out because the Department wanted to speed up the programme. The Department knows that a large proportion of SMETS1 meters currently lose smart functionality after a switch in electricity supplier and there is real doubt about whether SMETS1 will ever provide the same functionality as SMETS2. The full functionality of the system is also dependent on the development of technology that is not yet developed.

The facts summarised above, and many more, are not fatal to the viability and value for money of the programme. However, there are serious issues that need to be addressed if Smart Meters is to progress successfully and deliver value for money."

On 15 October 2018 a revised House of Commons Library briefing set out the difficult task of meeting the 31 December 2020 deadline and has a lot of useful background information.

In July 2018 the British Infrastructure Group of MPs and Peers published their report Not So Smart which said that the saving per household would probably be only £11 a year and that the 2020 deadline was not achievable - it recommended a two year extension. It also raised concerns about whether the savings by the energy suppliers and the networks would be passed on to consumers. It was concerned that customers would not know what was happening to their data.

On 7 March 2015 the Energy and Climate Change Select Committee expressed concerns about delays and unresolved challenges in the smart meter programme. "Without significant and immediate changes to the present policy, the programme runs the risk of falling far short of expectations. At worst it could prove to be a costly failure."

In December 2014 the Ontario auditor general Bonnie Lysyk said that the state's smart meter programme had cost twice its estimate and made few if any savings for customers or suppliers and failed to reduce energy consumption.

3 June 2020
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