I'll huff and I'll puff - empty threats from the taxman?

The press seem to be reporting ever more stories of how the taxman is going to crackdown, challenge or investigate this and that. The implication is that all who do such things are at risk of a heavy handed enquiry - and that what they are doing is wrong.

Here's an example from yesterday's Sunday Times:

HM Revenue & Customs (HMRC) is thought to have begun a fresh wave of investigations into so-called “image rights” payments by Premier League clubs to their playing staff.

Such arrangements, which are entirely legal and are commonplace, allow players to channel part of their pay into private companies set up for their benefit.

I've highlighted a key point. As in many such cases when you read carefully it becomes clear that the tax avoidance activity in question is 'entirely legal'. I drew an analogy between this approach to tax avoidance and the rule regarding MPs expenses on the blog last week (and indeed last year!)

It seems clear that the objective of these announced crackdowns can only be to catch out the amateurs - those who have copied the avoidance technique but without taking informed professional advice. As a result they have probably missed the subtle nuances that are required to achieve the desired tax outcome. And this means that the amateurs are at risk of getting 'caught' but that the experts continue to 'get away with it' - until the law is changed.

On the one hand this situation is great for tax advisers who are well placed to help 'amateurs' to secure the same tax benefits as the 'professionals'. On the other hand are the press reports simply scaremongering?

Recent and prospective cuts in staff numbers mean that HMRC do not have the resources to investigate many of the tax avoiders in question. And as long as the tax planning involved is legal the time and effort involved in such challenges could generate a better return if focused on chasing illegal evasion.

Would it not be a better use of time, effort and money if the law were changed to counter the tax avoidance in question? It may not be easy to achieve the desired outcome but it's not impossible either. Is it?

Taxman visits to home businesses - the truth

No one will be interested in this blog post. It contains the truth about the taxman's new powers of entry to enter your home. Don't bother to read on if you simply want reinforcement of the scaremongering that has been widely reported over the last few days.

The Times for example reported "HMRC given powers to raid home businesses" and that

"Anyone running a business from home could soon have an unannounced visitor — in the form of the taxman"

The Telegraph piece was headlined: "HMRC allowed to raid homes without warning"

Both papers and many others quoted just ONE firm of accountants (a decent firm to be fair) that had issued a press release giving a worse case scenario about how the taxman could use their new powers after 1 April. It includes the following statement, which is factually correct as far as it goes:

“The many thousands of business people and sole traders who claim expenses for 'use of home as an office' should recognise that from next month, HMRC has the right to enter their home to inspect business records. This power includes visits to any business premises, including any part of a residential home used as an office,”

Background
The new powers were introduced by Finance Acts 2007 and 2008. Over the last couple of years HMRC has held extensive consultations with professional bodies who have been very concerned about the extent of the new powers. HMRC has also made the official line very clear. Unannounced visits to private homes will be very few and far between. And I believe that.

When I was Chairman of the ICAEW Tax Faculty I met with many of the top officials from HMRC. I still see some of them at official functions. They are honourable people and I generally believe them when they explain how they intend the law to be applied. They require extensive powers to constrain the efforts of the worst tax evaders. They don't intend that their new powers will be used on a day to day basis.

Insufficient safeguards
Having said that I have also written previously on this blog about the widespread concern across the profession that taxpayers have insufficient safeguards to protect them from abusive use of HMRC's new powers. So you might expect me to agree with the suggestion that small businesses operating from private homes are suddenly at risk of imminent and frequent visits from the taxman - after all this is the scenario painted by the recent press reports.

My position is clear. I share the concern that others have expressed that the new powers could be misused - just like children enjoy playing with their new toys and learn to use them in unexpected ways. But that won't happen immediately. Of that I'm sure.

In practice
Richard Tyler writing in the Telegraph paints a fairer picture. He notes that:

"The new powers mean that income and corporation tax inspectors will have the same powers of entry and the longstanding powers enjoyed by Customs officials investigating upaid VAT"

There we have it. How often have home based businesses had such unannounced visits in the past? Rarely, if ever.

What this means is that if you are a compliant taxpayer you have nothing to fear. Contrary to the press reports, there is next to no prospect of the taxman starting to make unannounced visits to check up on people running their business from home.

If however you've been defaulting on your taxes you could expect a visit. If you've ignored requests from HMRC to produce your books and records for investigation you could expect a visit. And if you've been involved in tax evasion or even possibly 'abusive' tax avoidance schemes you could expect a visit.

But even then I don't expect such unannounced visits to take place in the near future. Indeed there is a very clear statement in HMRC's own instruction manuals for it's staff:

"a visit would only be justified in exceptional circumstances, perhaps to support a challenge to the amount of domestic expenses claimed as a business deduction."

And note even then such a visit would rarely be "unanounced".

HMRC's public comment
This features at the end of some of the recent press reports:

"HMRC does sometimes need to access premises connected with businesses to see such things as goods and assets where it is reasonable to do so, to ensure the right tax is being paid. Although HMRC is extending these powers, it is also extending safeguards. In particular, unannounced visits can only be made with the approval of specially authorised officers."

Bottom line
What this all means is that someone senior has to sanction an unannounced visit by the taxman. In practice it will be far easier for them to make appointments. Even then they will only insist on coming to your home if there is no other way to secure the information they require. In most cases you will be able to go to the taxman's office. Better yet is to meet with him on neutral ground - eg: your accountant or tax adviser's office.

New 90% tax charge on bankers bonuses

This is not as far fetched as it might seem. Indeed it's what may soon become the law in the USA.

Last week the House of Representatives voted by a massive majority - 328 to 93 - in favour of a plan that would force employees who earn more than $250,000 a year to pay $9 in tax of every $10 they receive in additional "rewards".

The Bill creates a 90% tax charge on any bonus received by those affected on or after 1 Jan 2009, even if it is in relation to a previous year. It must still pass a Senate vote and be signed by President Obama, (although he announced yesterday that he would veto the Bill). If it were to pass however this would not be first time that US legislators have introduced punitive taxes on behavior that lawmakers find objectionable.

Might the Chancellor's Budget on 22 April contain a similar provision affecting the recipients of bonuses by banks now 'owned' by the taxpayer? If so it would need to deny 90% tax relief for any tax sheltering attempted by the recipients (eg: by way of contributions to their pension schemes).

I suspect that even if such a proposal was announced it would only be another headline grabber. Haven't most of the bonuses in question already been paid? It's almost inconceivable that any penal tax rate would be backdated to the current tax year so would only affect bonuses paid after Budget day.

Will anyone 'pursue relentlessly' MPs who bend their expenses rules?

Tony McNulty MP is being criticised for claiming the 'Additional Costs Allowance' in circumstances that seem to involve 'bending the rules'.

Only a short note on this as I addressed the key points in two previous blog posts:

11/2/08 - Is it one rule for MPs and another rule for the rest of us? I drew an analogy between the way that MPs defend criticism of their expense claims by noting that they only do what is allowed by their (own) rules. If they don't break the law why should they be criticised? Hmmm.

16/3/09 - How far can you bend the rules? I noted that the draft HMRC Charter refers to an expectation that "You can expect HMRC to... Pursue relentlessly those that break or bend the rules". I noted that this was ambiguous as there is no clear agreement as to when 'bending' the rules becomes unacceptable; also that it is breaking the law rather than breaking HMRC rules that should be focus of such activity.

Surely it cannot be reasonable to apply distinct standards to MPs and their rules as compared with taxpayers and the tax rules that apply to all of us?

Sir Fred Goodwin's tax worries - right or wrong?

As pressure mounts on Sir Fred Goodwin to give up or give back some of the monies he is due to receive from RBS, the question arises as to what would be the tax consequences?

We are all taxable on the monies paid to us by our employers and pension providers. Assume you then choose to give some of that money back to your employer or to anyone anyone, what are the tax consequences?

Gift Aid is the only facility of which I am aware that provides tax relief for money that you voluntarily give away. So, unless Sir Fred Goodwin was to give 'back' some of his earnings and pensions to a registered charity (using the Gift Aid system) he would not secure any tax relief. And despite RBS current situation it is certainly NOT a registered charity.

This is an important consideration. Let me be clear that I am NOT defending the sums Sir Fred has received and is due to receive. I did note that that when first challenged he made clear that he would not "voluntarily accept a reduction in a pension entitlement" that had accrued over many years including prior to his joining RBS.

I took this to mean that if a legitimate legal challenge were made that he would accede to this. Not that he would have a choice then of course. It is also clear from more recent reports that he is aware that unless he is legally deprived of some of the monies involved his tax bill would remain unchanged.

Assume, for simplicity's sake that if you earned £10m you would have to pay £4.1m tax. You would only be able to give 'back' £5.9m without being out of pocket. The pressure on Sir Fred is to give back the gross amount (£10m in this example) in which case he would then be £4.1m out of pocket.

I have since seen it suggested that a concern over the tax bill is the reason why Sir Fred is unwilling to repay the lump sum that he received from his pension fund. He is quoted as saying that he would pay back the lump sum so long as he can get an assurance that the tax man won't come after him. He is concerned that tax would - in theory - still be due on the £2.7m payment, even if the money has been handed back. Whatever we might think about the sums payable to Sir Fred I must admit to some sympathy with this view. What about you?

Non Doms set to leave the UK - so what's new?

A number of papers (eg: Sunday Times) have picked up on reports that KPMG research reveals that that 1 in 4 non-doms are planning to leave the UK because they don't like the new tax regime for non-doms that was introduced last year.

The fact that 76% of the 80 non doms who responded to the survey are NOT planning to leave the UK imminently suggests to me that the new rules are better targetted than many have previously suggested. That's not to say the rules are well thought through or easy to operate. Some tweaking is required to make them workable without the continued need for HMRC discretion.

And it also seems clear from KPMG's report that the primary motivation for many non-doms returning home is that they have lost their jobs or that the business opportunity that brought them here has disappeared. The new tax regime is not the key reason.

One has to wonder however what question KPMG asked of these non-doms. After all, BY DEFINITION all non-doms are intending to leave the UK at some stage - otherwise they would have become UK domiciled. And this is recognised in KPMG's press release which notes that: "Non-UK domiciled individuals are people whose homeland is abroad."

What is your experience?

How far can you bend the rules?

HMRC's proposed Charter starts by listing what "You can expect" of HMRC. Of the 6 items listed only one is causing particular controversy. "You can expect HMRC to...

Pursue relentlessly those that break or bend the rules"

Background
I imagine that this line has been included at the direct request of the PM who is known to harbour strong feelings about the level of 'contrived' tax avoidance schemes that 'deprive' the Treasury of tax that ought reasonably to be paid.

Indeed back in 2004 I was invited to 11 Downing Street (in my capacity as the then Chairman of the ICAEW Tax Faculty) to be told as much when the 'Disclosure of Tax Avoidance Schemes' regime was first announced. One official told me that the regime was required to satisfy Mr Brown's personal antipathy for the 'abusive' tax avoidance activities promoted by (so far as he was concerned) the largest accountancy firms. Apparently his first thoughts had been to levy a fine on the firms that had been promoting and profiting from (what was then) the almost ubiquitous 'Gilts Scheme'.

Concerns
Back to the Charter (which has also featured in previous posts on this blog). I am aware of concerns about the line I have highlighted above. And I understand these. 'Bending' and 'Breaking' the rules are two quite separate concepts. The latter is illegal. The former is presumably intended to refer to what HMRC and Government describe as 'abusive' or 'contrived' tax avoidance schemes. The problem here is that 'bending' the rules could also cover a much wider range of tax planning activities.

Playing with fire
The wording in the draft Charter is presumably intended to act as a warning that 'he who plays with fire should expect to get burned'. The targets being those who set bonfires not those who play with matches. And yet I suspect that most people attempt to bend the rules. No one wants to pay any more tax than they are required to do so by law. And the fact that it's NOT illegal is a key selling point of many a tax scheme.

To take just one example - the Money sections of the national press are often full of tips and advice to reduce your tax bills. Yesterday for example I was reading about how to realise capital losses and yet, effectively, retain the shares by using your SIPP to buy them back. This is similar to the old 'bed and breakfasting' idea of selling and repurchasing shares that used to be a common tool of tax planning. It was outlawed a few years back but variations remain legal as long as it's not you who buys back your own old shares. It's bending the rules though so would be pursued 'relentlessly'?

Employees vs everyone else
Employees (and this would include MPs and HMRC officials) can do very little to reduce the tax payable on their salaries. If they actively undertake tax planning in this regard it's likely to be a 'scheme' of some sort.

I wonder if some MPs think that the same considerations apply to companies, the self employed, partnerships and private investors? Of course they don't. The fact is that they can all undertake tax planning activities and some of these will 'bend' the rules. When such bending becomes unacceptable is a matter of opinion. It's not a simple matter of fact.

Two other related thoughts:
1 - It's also relevant to note that HMRCs resources are being reduced to the position where they are wholly unable to adopt a consistent approach to pursue those taxpayers thought to be bending the rules. So the statement in the Charter is an empty threat;

2 - Note that the sentence refers to bending 'the rules'. Is this deliberate or should it say 'the law'. The former are set by HMRC and the latter is approved (usually with only perfunctory consideration) by Parliament. But there is still a crucial difference.

My view
I've been here before. I can see both sides of the argument. The statement is controversial because it's ambiguous. It's also not going to be applied consistently due to resource constraints.

Should HMRC have the right to 'relentlessly pursue' and close down 'abusive' schemes - yes, but we need greater clarity as to what is and what is not considered 'abusive'. It's not easy to draw a clear dividing line but it's not impossible either.

I'm hoping that the consultation around the draft Charter will result in greater clarity as to how far taxpayers (and their advisers) can bend the rules without risking the wrath of the Revenue.

What do you think?

HMRC Charter - asking young people what they think

It took a year to develop and everyone recognises that the output is simply a first draft. I'm referring to the 'new' HMRC Charter for which the consultation period ends on 12 May.

HMRC have created a specific 'Charter Consultation' area of their website and last week they launched 'Charterpelago' which is 'a new consultation game' aimed specifically at a 'younger audience'. Created by Delib this is the 'e-consultation' announced when the draft charter was issued last month.

In the context of their involvement with the 'youth engagement tool' Delib's own blog asks: "is there anyone who isn’t affected by the work of HMRC?" - er, yes. YOUNG PEOPLE!

Nevertheless, young people are told on the Charterpelago site that:

"Charterpelago has been created to allow you to tell HMRC what rules you think it should include in its customer charter - the rules HMRC and its customers (that's pretty much everyone) should follow when dealing with each other."

I'm unclear at which age group the Charterpelago is aimed. It looks like a kids game and it involves clicking and draging sentences from the draft charter onto a virtual PDA. This is after choosing the look of your PDA. Finally the 'young people' choose in which order they would like to see the statements.

Let me be clear. I'm all for teaching younger people more about their responsibilities to pay tax and the various roles that HMRC fulfills. But this e-consultation is a joke. And I'm not blaming Delib. I'm not sure I even blame HMRC - it was probably Government advisers that came up with the idea.

Why do I brand this concept a joke?

1 - The consultation element is limited to asking young people to choose which statements they would keep or discard and then to decide the sequence of these in the charter; There is no facility to suggest variations - perhaps because it's clear that young people are not in a position to comment more constructively, but that's not consistent with the idea of the e-consultation.

2 - There is no context for this consultation. Young people don't pay tax. Their experiences of HMRC are entirely determined by their family circumstances and what they see or hear on TV. Their parents may pay tax. Their family may receive tax credits. Parents may have been penalised for late paid tax or for overclaiming tax credits. They may have explained their situation to their children or they may simply have expressed their views of the 'taxman'. And I'm not aware of any positive role models on TV. The only other references that young people may have noted are all the adverts (on tv, on radio and in the press) with the misleading and irritating strap line: "Tax doesn't have to be taxing".

3 - There is no explanation as to what HMRC is, what it does, why it refers to customers, the fact that it deals with tax credits as well as tax payments, what a charter is, etc etc

4 - It's hard to see how responses to this e-consultation can possibly provide any valuable input to the real consultation process. Indeed I fear that 'votes' for which of the statements should remain in the final charter will be reported as part of the overall responses without making clear the context in which such 'votes' were provided.

5 - Any responses to this supposed e-consultation will no doubt be reported out of context and to trumpet the success of asking young people for their input.

A cynic might suggest that this was all about the next General Election when Labour will need all the help it can get and wants to make clear to first time voters that it's interested in their views. Of course most of them will not have taken part in this e-consultation. But they will pick up on the media reports that their views were sought and that they will be heard. And that this will influence their vote.

What do you think? [My apologies to those who know me. Reading this back I fear I may across as an angry old man - and you'll know that's pretty far away from my normal enthusiastic and positive persona]

Beware of upsetting an Inspector of Taxes

Mr Clarke, an accountant, seems to have suffered an enquiry into his own tax affairs as a direct result of winning an appeal before the Commissioners on behalf of a client. Has this ever happened to any of the readers of this blog?

The summary at the start of the full text of the decision in P C Clarke v Revenue & Customs [2009] UKSPC SPC00735 is quite illuminating and easy to follow.

In brief, Mr Clarke argued that a notice under s19 TMA to produce certain documents and information was inappropriate. He contended that the request for documentation was as a result of his success on behalf of one of his clients in an action before the Commissioners and that the enquiry was opened “vexatiously and vindictively”.

The Commisoner noted that he had no authority over the decision to open the enquiry under s9A TMA 1970. He was solely able to consider the legitimacy of the s19 request which followed on from the opening of an enquiry into Mr Clarke's 2005/06 tax return. As the s19 request was in order the appeal failed.

HMRC's evidence seems to suggest that there was an unfortunate coincidence and that the selection of Mr Clarke's return for a full enquiry in October 2007 was wholly unrelated to his success before the Commissioners in June 2007. (His return had been filed in January 2007).

Reading the Commissioner's decision I can appreciate how he reached his decision. But equally I can fully understand why Mr Clarke felt aggrieved. What about you?

Is it better not to know?

Do you know too much? And what do you do if your answer is 'yes'?

Assume you have a client who has a tax problem and a friend of theirs suggests what seems to be a common sense solution. The client explains the situation and tells you of the proposed solution. Indeed it's not unknown for the 'friend' to be a commercial 'audit' partner.

If your tax knowledge is limited you may simply go ahead with the proposal wholly unaware of the adverse tax consequences. On the other hand, if you have sufficient understanding of relevant tax issues you may have to discourage your client from pursuing the friend's idea. That may be fine if you are able to identify an alternative course of action that achieves the same result. But if you can't?

Most professionally qualified accountants and tax advisers are obliged to comply with the IFAC code of ethics. This includes obligations to evidence integrity, objectivity and professional behaviour. The main accounting and tax bodies have gone further in their jointly published Guide to Professional Conduct for those working in tax. This includes the following:

“Members will from time to time find themselves having to advise on matters which require specialist knowledge. In such circumstances they should be careful not to go beyond their own level of competence and, if necessary, should seek help from a specialist in the field”.

So if you KNOW that your knowledge is deficient, you are professionally obliged to involve a specialist.

But if you DON'T know that when you give advice then in all liklihood the client's tax return will be incorrect. HMRC may notice this before the enquiry window closes and start an enquiry. Alternatively they may not pick up the error until a later date and seek to make a discovery - which will be hard to resist as it's unlikely that sufficient disclosure was made on the relevant return. Or HMRC may never become aware of the transations in question.

If HMRC do either open an enquiry or make a 'discovery' then additional tax will become payable together with interest and probably penalties.

But if you did know the law you would be obliged to advise the client of the tax to be paid. And there would be no question of (unintentionally) waiting for HMRC to spot the mistake.

The same scenario arises when a well meaning adviser provides constructive but naive advice. In reality it may not achieve the hoped for tax reduction, or worse it may create an increased tax liability. But in the meantime the client is happy, thinks the adviser is wonderful and tells all their friends. The adviser is also happy as they have generated additional fees (in good faith).
And the client may get lucky, if HMRC never become aware of the issues.

However if an adviser has a fuller understanding of the tax law they may quickly conclude that there is nothing the client can do to reduce the tax due on the transaction. So the client thinks the adviser is unhelpful, the adviser has lower fees and the client pays more tax. Everyone is worse off.

Hence my opening question - Sometimes, is it better NOT to know?

Grandstanding, Rhetoric or Real action

One of the mainstream papers sought my view on the press story about Gordon Brown's recent US trip and the announcement he made about tax havens. Here's what I wrote, in case it doesn't get printed.

If past experience is any guide to the future then Gordon Brown's aspiration to 'press for moves to isolate and close regulatory havens' will be nothing more than empty rhetoric or Grandstanding (as your leader put it).

The OECD officially branded a number of British territories as harmful tax havens in June 2000. But Gordon did nothing about it then. The subsequent European Savings Tax Directive came into force in 2005. Some blame Gordon for amendments which reulted in the Directive only having a limited impact. It will only have real teeth when the amended Directive (agreed in principle last December) becomes operational and effective at some stage in the future.

I note that Gordon did not refer to 'tax havens' as such. This may represent a desire for precision over pantomime. Instead of playing games he seems to have chosen his words carefully and confined them to something that may be achievable rather than aspirational. Historically one would have expected him to promise another 'crackdown' on tax havens and of swift changes in the law which then get held up, watered down or abandoned long after public interest has moved on. Again there are plenty of precedents for this approach.

One wonders whether Gordon has been forced to adopt a more realistic stance to distance himself further from Harriet Harman's recent promise to change the law to suit public opinion.