Monday, March 16, 2009

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"
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'.

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?


  1. "What do you think?"

    I think that Lord Clyde hit the nail firmly on the head back in 1929:

    "No man in the country is under the smallest obligation, moral or other, so to arrange his legal relations to his business or property as to enable the Inland Revenue to put the largest possible shovel in his stores. The Inland Revenue is not slow, and quite rightly, to take every advantage which is open to it under the Taxing Statutes for the purposes of depleting the taxpayer's pocket. And the taxpayer is in like manner entitled to be astute to prevent, so far as he honestly can, the depletion of his means by the Inland Revenue"

    HMRC does and should have the right to pursue and attempt to close such schemes, but only if the taxpayer can enjoy the right to use such schemes and defend his/her position if challenged.


    Howard Bullock
    Clear Financial Advice

  2. Well you talk about "bending" the rules in order to produce "a scheme" and such methods are bound to result in unhealthy HMRC interest in the client concerned and frankly quite right too. No need to engage in such "smoke and mirrors" or loophole engineering when there are plenty of statutory reliefs available to accomplish complete tax protection. No worries either if such arrangements are reported, whether they need to be or not, under Tax Avoidance Regulations.
    HMRC is up to its old tricks of scaremongering and playing on the public's perception that they have more power than they actually have. If you deliberately evade tax you are in trouble but Tax Avoidance using legitmate means is not illegal as Howard Bullock has pointed out. HMRC may not like it but if you use their legislation to achieve greater tax efficiency then its up to them to change the legislation and if they cannot for whatever reason then it is NOT acceptable for them or the PM to attempt to scare the hell out of innocent people who are doing nothing more than the law allows.

    Rex Ashcroft
    Wealth Protection Internation Ltd

  3. " 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."

    Sorry, Mark, but this is nonsense. Rules and laws are the same. HMRC make neither or, at least, should not do so unless expressly tasked with that function by Parliament in which case the rules/laws are, in strictness, still made by Parliament.

  4. I fully expect the "relentlessly pursue" clause to be amended as a result of the consultation. Calm down!

  5. Two comments, first in reply to Andrew Brooks.
    The difference between the rules and the law is that the Revenue has its interpretation of what it thinks the law says, and then pronounces these to be the rules.
    However, we all know that the interpretations can be open to criticism; after all, we would not have Case Law otherwise.
    My second point concerns the "relentless pursuit". I had a new client come to me about some very old tax liabilities (going back 10 years) and outstanding Returns for the last 4 years. He wanted to bring things up to date and we worked hard to deal with the recent declarations and identify the tax debt with the Revenue.
    At that point, we were discussing with the Collector arrangements to pay, but the Collector decided that the only way forward was to make my client Bankrupt! Ultimately, the Revenue received nothing as my client had no assets whereas he was a willing payer, albeit over a period of time.
    How does this acheive "Relentless Pursuit"?
    As a taxpayer, I was appalled that the Revenue did not accept the payment of the debt and would rather merely get rid of the problem by, effectively, cancelling the debt.

    Ken Voller
    Tax Business