Monday, December 20, 2010

8 fallacies that undermine the UKuncut tax protests

Those who know me and those who read this blog will know I'm no fan of aggressive tax avoidance. I'm also critical of those in the media whose attempts to comment on tax issues reveal a woeful lack of knowledge and understanding of our tax system.

The protests outside big companies' stores around the country derive from this invitation set out on UKuncut's website:

"At the same time as making massive cuts to public services, this government is letting rich individuals and corporations avoid billions of pounds of tax. Join UK Uncut’s Big Society Revenue & Customs (BSRC) and become part of an army of citizen volunteers determined to make wealthy tax avoiders pay."

I do understand the need to simplify complex issues so that these can be understood by the man in the street. Equally I deplore the way that some people use the need for simplification to manipulate their readers and viewers. It seems to me that this is part of the background to the recent tax protests.

Part of me really wants to admire what UKuncut has achieved in recent weeks. Leaving aside the anarchists who have joined in, I'm in awe of the level of genuine support UKuncut have secured for their protests. In this regard I heartily reccommend a recent article by Alan Finlayson writing on The philosophical significance of UK-Uncut.

BUT I'm also saddened by the confusion caused by conflating different issues. And also by what some might see as cynical manipulation of public anger. In this regard I have identified 8 fallacies that seem to me to undermine the tax protests.

1 - Who is to blame for the UK's complex tax system?

It's long been complicated but it was Labour who layered our tax system with complexity upon complexity over a 13 year period in office. It was Gordon Brown who resisted calls for effective consultation - and instead rushed new tax rules into law with loads of anomalies and gaps. The Coalition Government have promised a new approach and the evidence todate is that they will do as they have promised.

2 - Who let the Big Companies reduce their tax bills?

The unpaid taxes that UKuncut complain about relate to the 13 years that Labour were in power. You can't blame the Coalition Government for tax avoided before they were elected.

3 - The Coaltion Government are taking action to reduce aggressive corporate tax avoidance

The Coalition Government has announced numerous anti-avoidance tax rules to further reduce the opportunities for aggressive tax avoidance. They aren't ignoring the issue.

4 - Who is the bad guy here?

Either UKuncut is protesting about the Coaltion Government's cuts or about tax avoidance being allowed to continue. Either way the complaint is against the Government rather than against the workers and customers of the stores being attacked by the protests.

5 - There is a degree of naivity at stake here - especially by protesters who don't pay tax

Only a minority of the protesting students have ever paid tax on their earnings. Most employees who pay tax through the PAYE system are understandably frustrated at how much of their pay goes in tax. They want to pay less. If they could, they would. The tax rules for employees make this more difficult than for the self employed and for business owners. But it's still a natural reaction. Those who've not paid tax to date seem not to have conisdered what their reaction will be to the payment of tax.

6 - And there are clear double standards too

Almost every self employed person and small business operator in the UK expects their accountant or tax adviser to help them pay less tax than they otherwise would do so. I wrote a piece recently: Doesn't everyone try to avoid or evade taxes? Common requests are "What can I do to pay less tax?" "What can you do to reduce my tax bill?" and so on. As long as such tax avoidance is within the rules they break no laws. Why should big businesses be held to a different standard?

7 - What about tax avoidance by footballers and football clubs?

Not only do top players receive outrageously high salaries but their contracts invariably entitle them to payments for 'image rights'. Substantial amounts of tax are avoided (legally - most of the time) but no one seems to care, except HMRC who regularly petition Governments (old and new) to change the rules to limit the capacity for such tax avoidance. However it seems no one wants to protest outside football clubs though to make these "wealthy tax avoiders pay".

8 - No one pays tax unless it is due

If an individual or a company arranges their affairs so that less tax is payable than would otherwise be the case, that is all they will pay. Paying more than this isn't an option. If there was a way in which you could change things and be liable to pay extra tax in future years, it's likely to take some time to make the necessary changes to your business structure etc. Simply stated, no one should be expected to make excessive payments to the taxman. And even if they did, HMRC's computers would simply show such sums as overpayments and then refund them at a later date!

Wednesday, December 15, 2010

The Pre-Budget Report that we missed....and what it means

Many people were surprised by the publication last week of a wealth of Treasury and HMRC documentation which included draft clauses for the Finance Bill 2011.

We should remember though that this is all in line with the promised 'new approach to tax policy making'. Much of the Bill was published in draft, back in July when the Government launched an informal consultation on 32 separate technical tax measures. These had all been inherited from the previous government.

We have now been given the promised eight weeks for comments on the draft Finance Bill legislation.

This is all to be applauded and, as I have said before, if the Government continues to keep its promises re the 'new approach' there will be fewer shock surprises and less poorly drafted tax legislation.

Some people are concerned that we have a new Finance Bill but that this was not preceded by a 'Pre-Budget Report'. This also explains the absence of the traditional 'Budget' summaries produced by accountants and the supplements normally published by financial journalists. This is no great loss as such summaries and supplements have decreased in value in recent years.

For those who want to continue the tradition, Budget summaries and supplements will no doubt return after the Budget next March. In the meantime we have more notice than ever before of all key income tax and NIC figures for 2011/12. These were announced on 2 December.
The question though is whether the 'new approach' means that accountants are as uptospeed as ever with all the new tax laws and when they come into effect. I'm wondering if this might increase the demand to defer to tax specialists who, by definition, have to keep on top of such things.

What do you think?

Related posts on this blog:

Wednesday, December 8, 2010

There are two types of tax consultation...

It was pointed out to me recently that there are only two types of tax consultation...

One - "We're doing it regardless"
That is, where HMRC, the Treasury or the Chancellor have every intention of introducing new legislation. In recent years (indeed for at least 13 years!) there were plenty of examples of where the consultation process was almost a farce. Certainly it typically wasted a lot of time given the legislation that was subsequently published with undue haste before responses to the consultation could have been properly considered. Almost as if the outcome was a forgone conclusion....

Two - "We don't really want to do this"
This is where there is no real desire for change but there is a political rationale for exploring how best to introduce a change. The tax law equivalent of kicking a ball into the long grass.
It has been put to me that the Coalition Government's proposed study into the possibility of drafting a GAAR falls into this category.

Such a view of course will be familiar to fans of Yes Minister. And it may be telling that the person who shared this view is an ex civil servant.

It would be nice to think that the new approach to tax policy making we were promised in June will involve a third type of tax consultation. The genuine one. Undertaken with no pre-determined preferred outcome. Or maybe that's just naive. What do you think?

Tuesday, December 7, 2010

Get Aware And Realistic. There are NO proposals for a GAAR (yet)

This week has seen reports of 'Government proposals' for a GAAR - General Anti Avoidance Rule. I have seen headlines reporting, for example, that: 'Experts slam avoidance rule'. And 'experts' all but queuing up to comment on these 'proposals'.

Just one problem.

There are no proposals. There are no new rules. Indeed, if we read between the lines of the latest announcement, we might perceive a different picture altogether.

A General Anti-Avoidance Rule (GAAR) was identified as a possible way forward in the June Budget document: 'Tax Policy Making - A New Approach'.

Now, David Gauke, the Exchequer Secretary to the Treasury, has announced the appointment of Graham Aaronson QC, one of Britain's most respected tax barristers, to lead a study into a General Anti Avoidance Rule (GAAR).

A 'study' to
"establish whether a General Anti Avoidance Rule (GAAR) could be framed that would be effective in the UK tax system and, if so, how the provisions of the GAAR might be framed"
I'm pleased that this 'study' is being undertaken in the open and with no inbuilt Treasury or Revenue bias. I do think that's a good thing.

The Lib Dem's manifesto committed them to the introduction of a GAAR. (Mind you it also contained a pledge to vote against an increase in student fees). The promise of a study followed by a consultation seems to be further evidence of the 'new approach' to tax policy making that the Coalition Government promised in June. Indeed, the terms of reference for the Aaronson study contain the following assurance:
"Ministers will consider the outcome of this work as part of the Budget decision-making process, and would not introduce a GAAR without further, formal public consultation".
The study is required to report by 31 October 2011. Given the 'new approach' it is possible, but I would have thought unlikely, that a consultation could then take place and the outcome be determined in time for an GAAR to be included in the 2012 Budget. So we're probably looking at 2013 - if at all.

Unlike the headline writers and many commentators I tend to think that this development REDUCES the likelihood that a GAAR will be introduced. After all, given the known views of most accountancy and legal commentators, it's hard to see how such a study and subsequent consultation could conclude that a GAAR would provide the desired certainty etc. I've also heard that HMRC are not keen.

Time will tell.

Related items on this blog:
8/10/10 - What view would Tax Counsel take of a General Anti Avoidance Rule?
19/7/10 - Would a GAAR mean less work for accountants?
16/10/09 - Too many marginal tax products are sold to too many unsuspecting people

Monday, November 29, 2010

Does the taxman value the tax agent or not?

Back in September HMRC announced that they would stop sending copies of certain forms to tax agents (accountants and tax advisers). We were told that:
"HMRC is sorry if these changes are unwelcome but has tried to look for savings in areas where there will be minimal impact on customers."
The professional bodies complained through the usual channels. ICAS, for example, stated that:
"some of these cost-cutting measures are misguided, and is particularly concerned that they have been introduced with immediate effect and without prior consultation."
They also suggested that all communications from HMRC should be marked on the outside of the envelope with wording such as ‘If you have a tax agent, please pass this to them immediately’, but it is not yet clear whether this will be done.

A related discussion on the ICAEW Tax Faculty news website revealed the anger and frustration at HMRC's unilateral action here. It's expected to lead to extra work for tax agents, extra hassle and confusion for their clients and EXTRA WORK for HMRC dealing with requests for copy paperwork that was previously sent out automatically. A counter-productive and apparently ill-thought out move it would seem.

But this change was not an isolated one. Recently Taxation magazine ran a related article entitled: Eroding the Adviser. In it, Alex Byrne lamented HMRC’s recent practice of copying clients into letters to the agent. Such an approach undermines the adviser and causes problems of which HMRC again seem unaware.

Regular readers of this blog and my articles in the professional press will know I offer balanced and independent views. I am not an ardent Revenue basher. Indeed, I frequently find myself defending their actions and trying to explain why media criticism is misguided. I know too that often the professional bodies will be engaged in quiet diplomacy. They perceive this is more likely to secure positive changes than public tub-thumping. I suspect that's what is happening at the moment.

In the meantime, what's your view? Do you think HMRC is showing that they value the role of the tax agent, or not?

Wednesday, November 17, 2010

Will benefits reform help entreprenuers and remove 'onerous regulations and taxes'?

Tangental to news stories about tax are those about reforming the benefits system (after all, tax credits are simply 'benefits' in disguise).

I already had a concern about Ian Duncan Smith's long awaited proposals to reform the benefits system. I'm a supporter in principle but wonder if it will address a much overlooked but important issue. The benefits system at present discriminates against honest entrepreneurs.

I was reminded of this when I heard that the PM has urged:
"more people to make a job rather than take a job."

And that Vince Cable has backed the PM's call during Global Entrepreneurship Week UK, pledging to tackle:

"onerous regulations and taxes"

Vince then made the all too common assumption that all entrepreneurs start new companies when they start new businesses. In fact this is rarely a good move from a tax planning perspective unless the entrepreneur is confident they will make substantial profits from the outset.

The point being that many people who start a businesss, whether they are contractors, service providers or web based, will do so as self employed people. They may or may not have entrepreneurial ambitions.

There are few 'onerous regulations or taxes' that can act as a disincentive here. But the benefits system can do so.

When someone goes to register for, what is currently called, job seekers' allowance they are asked how many hours a week they are available for work. That's not unreasonable as the benefit is evidently for 'job seekers'. By definition therefore it is not available to anyone who takes the opportunity to start a business. In most cases they will do so, at least initially, as a sole trader or in partnership with someone else. This means they're not available for a job so are denied the 'benefit'. Or they could lie and not tell the benefits agency that they are looking for business as a sole trader. The system should not incentivise lying.

I imagine this is all quite common and that the job seekers' allowance is paid to people who do some causal work and those who promote their services as a contractor, service provider or whatever. The problem is though that they are then disincentivised from declaring this income. To do so would deny them future benefits - although self employed/causal income is hardly comparable with employed earnings. Much the same is true for tax credits although at least there the system doesn't discriminate against those who start new businesses of their own.

I suggest that the new universal credit needs to recognise that not all unemployed people will be looking for a job. If the Government is serious about encouraging "more people to make a job rather than take a job" the benefits system must support this aim.


Sunday, November 14, 2010

Tax tease: The Chinese vase sold for £53million

The story of the lady and her son from Pinner who this week
"sold their dusty old Chinese vase for a world record £53 million"
is all over the media. There has also been some speculation as to how much tax will be payable. The Telegraph suggests a figure of £12million which seems to be a reference to Capital Gains Tax (CGT). The rationale presumably being that the sale was subject to CGT with tax being paid on the profit made. The taxable profit would be the difference between the value of the vase when it was inherited and the price at which it was sold - with deductions allowed for the all the costs of sale (eg: auction house commission etc).

Let's explore that for a moment.

The lady who inherited the vase (as distinct from her son who found it in his deceased uncle's loft) might be expected to report her profit as a capital gain on her tax return for the current tax year that ends on 5 April 2011. This tax return will need to be filed by 31 January 2012 and the CGT will be payable by that date too. If HMRC keep track of her it will only be some time later that she would receive an enquiry if she fails to report the profit she has made.

But there is another possibility - Inheritance tax (IHT) is almost certainly payable.

The Mail
reports that the vase was originally thought to be worth £800 when the lady's brother died just a few months ago (He is reported to have died 'this summer'). And yet the reserve price at auction was £1 million. It is quite feasible that probate has yet to be granted. Even if it has, the executors (which may include his sister) were obliged to report the value of all his assets owned at the date of death.

The law requires that assets be valued for IHT purposes on the basis of 'the price which property might be reasonably expected to fetch if sold in the open market at that time' using the concept of willing buyer, willing seller. As the reserve price at auction just a few months after death was £1 million this is the minimum amount I would have thought could be reported. Arguably though the figure should be the full £53 million - but this is not clear cut, despite the assumption made in some papers.

Given that IHT would be payable at 40% whereas CGT is only due at 28% the difference of over £5million of tax makes it more likely that HMRC will want to pursue a liability to IHT. If that happens there will be no CGT to pay as the sister will be deemed to have inherited the vase at it's probate value of £53million so will not have made a capital gain when she sold it at auction.

As I've long believed, Tax is taxing!

Tuesday, November 9, 2010

Many people may have paid the wrong tax - why is that?

This is another post by reference to last night's Panorama - "Tax: Are you one of the six million?"

This rather confused TV programme suggested that as many as 1 in 3 people could have paid the wrong tax. Given the wide definitions used for 'wrong' this will come as no surprise to accountants and tax advisers.

Various contributors to the report suggested what needs to be done:
  1. "There has to be a better way of paying tax"
  2. "Too many staff cuts, too fast"
  3. "Sack those at the top of HMRC"
Without going into great detail let's be clear:
  1. The tax system is complex due, in part, to needless complications introduced by Gordon Brown who ignored advice from tax experts.
  2. Many of those complications result in people paying too little or too much (ie: the 'wrong') tax.
  3. The PAYE system worked fine when people typically only had one job or one pension.
  4. A necessary annual reconciliation of PAYE records hasn't been possible for years. Having recognised this, HMRC commissioned a new computer system that would allow them to consolidate the tax records of all PAYE taxpayers - previously spread across a number of old systems.
  5. The Coalition Government seems to genuinely want to find ways to simplify the tax system. This Chancellor will not be looking for ways to grandstand twice a year as did Mr Brown when he introduced and then defended poorly thought through tax changes. Many of these led to the complexities we have today.
  6. The people at the top of HMRC may not be perfect but until recently their hands were tied by the previous Government and the staff cuts that were imposed on them in recent years. Dave Hartnett, for example, has never struck me as complacent or as being satisfied with the poor standards exhibited by some of his staff. On the contrary.
  7. HMRC's staff cuts are not self imposed. They are a direct result of imposed severe staffing reductions imposed by the last Labour Government. To the extent that future staffing cuts occur the Coalition Government will be to blame.
  8. The PAYE system will only rarely get anyone's tax right through in year tax deductions from salaries or pensions. This will generally only happen where someone has only one source of earned income each year, no benefits in kind and no investment or other income.
What struck me most though was the way that contributors to the programme, including Labour MP John Mann from the Treasury Select Committee, were so quick to blame HMRC for a failing tax system and for the staff cuts. Mr Mann in particular should know better.

I totally accept that HMRC screw up sometimes. But the basic PAYE system is not their fault. Nor are the staff cuts. The new computer system should avoid a recurrence of the PAYE debacle we saw this year - that was caused in part by the move onto the new system.

That the tax system needs to be simplified is in no doubt and I welcome the Government's reviews that are a small step in the right direction. As to how did we get here? I place the blame on Gordon Brown and, by definition, the Labour Party - and have done for many years. Indeed "An increasing degree of frustration with developments in tax legislation" was one of the key factors that led to me giving up tax advice myself after a 25 year career as a tax adviser.

Panorama on Tax - Make your mind up guys!

Last night's Panorama on tax was a mishmash that attempted to cover too many disparate topics. And in so doing missed it's key focus.

The title: "Tax: Are you one of the six million" was a clumsy and insulting allusion given that this is not a number referenced previously in the media or HMRC re the PAYE debacle that was topical a couple of months back. As I explained at the time: The PAYE tax system is now working as it should...

Panorama started by referencing the PAYE issues and suggested:
- Bad HMRC - they are incompetent and are sacking too many staff too quickly [NB: on instructions issued by Gordon Brown]
- Bad HMRC - all those PAYE errors and the vast number of people who have not paid exactly the right amount of tax through the PAYE system
- Bad HMRC - refusing to apologise initially for the broken PAYE system and all the notices of under and overpayments
- Bad HMRC for issuing demands for underpaid tax and worrying innocent taxpayers
- Bad HMRC - for not answering the phone quickly when 18,000 people a day were calling them
- Bad HMRC - as "there has to be a better way of paying tax"

But what's this?
- Good HMRC - for sorting out and resolving all the cases raised during the programme and agreeing no tax outstanding in each case; and for apologising to each of the taxpayers concerned.

So - what was the conclusion? Should all the underpaid tax be collected despite the upset and worry caused when HMRC pursue unexpected tax debts? Or should it be written off? Most of the programme implied the former but Jeremy Vine's final comments implied a contrary view. He noted HMRC were insisting that there will not be widespread write-offs. He then quoted an insider who told the BBC that:
"With so many underpayment cases in the system, it is inevitable that many of them simply will not be processed"
Given the main thrust of the programme you'd think that would be a good outcome. But no. Whatever HMRC do it's wrong in Panorama's view. Jeremy Vine's closing comments were clearly critical as regards HMRC writing off such underpayments:
"With the country facing massive budget cuts, that's millions of pounds of lost revenue that could be put to good use"
I'll post separate comments re other elements of the programme.

What did you think of it? (Available on BBC iplayer until 15 November)

It's "Pay As You Like" - if you're wealthy, says Panorama

This is the view of a so-called HMRC 'whistleblower' who investigates taxpayers with a net worth of over £20m. It was broadcast as part of last night's Panorama programme that started as a piece about the millions of PAYE demands in the press recently. It moved off target every now and then.

The 'whistleblower' claimed:
"We used to have dedicated teams that would tackle the top 40,000 taxpayers but as a result of rationalisation and a drive for efficiency they've now shed that down to 5,000 - so now we're only looking at the top 5,000."

"I would say we've lost the war... It's become Pay As You Like"
The programme then showed a message from HMRC which said there has been:
"no reduction in resources focused on the tax affairs of wealthy people"
and that HMRC will have £900m more for targeting [tax] evasion and fraud.

Who do you believe?
(Panorama's "Tax: Are you one of the 6 million?" is available on BBC iplayer until 15 November)

Thursday, October 28, 2010

Tax planning to be wary of

The Spotlights page on HMRC's website remains as it was before the change of Government. It's purpose is to clarify what activities HMRC "are likely to see as [unacceptable] tax avoidance."

The page identifies the types of arrangements and schemes which HMRC say they are likely to challenge. I've mentioned some of these before. The page also sets out 17 indicators of tax planning that HMRC suggest you should be wary of.

I've divided HMRC's list into 2 parts and added some additional comments of my own below.

Even HMRC accept that none of these features, of itself, is a problem. However the more of these features that are present, the more likely it is that HMRC would see the arrangements as [unacceptable] tax avoidance. And, I would add, the greater the likelihood that the promised tax savings are more risky and less certain. This is not simply because of the prospect of the taxpayer being subject to a challenge by HMRC. It is also because the more of these features that exist, the more likely it is that HMRC's challenge will be successful. This is especially the case when the promoters have had no previous connection with the taxpayer - ie: the taxpayer has been encouraged to use a marketed scheme rather than simply undertaking commercially driven tax planning.

So watch out where a marketed scheme is involved and any of the following apply:
  1. There are guaranteed returns with apparently no risk.
  2. It sounds too good to be true.
  3. There are secrecy or confidentiality agreements.
  4. Upfront fees are payable or the arrangement is on a no win/ no fee basis.
  5. The scheme is said to be vetted by a top lawyer or accountant but no details of their opinion are provided. [In the past I saw schemes where the opinion was from a different Barrister to the one addressed in the instructions - suggesting that the promoters had to keep looking to find someone who would provide the desired opinion]
  6. It involves money going in a circle back to where it started.
  7. Low risk loans to be paid off by future earnings are involved.
  8. The scheme promoter lends the funding needed.
And be cautious about structured arrangements where 2 or more of the following apply:
  1. Artificial or contrived arrangements are involved.
  2. It seems very complex given what you want to do.
  3. Tax benefits are disproportionate to the commercial activity.
  4. Taxation of income is delayed or tax deductions accelerated.
  5. The scheme is said to be approved by HMRC (it does not follow that this is true).[HMRC make the point that when they issue a Scheme Reference Number this does not mean either that HMRC 'approves' the scheme or that HMRC accept that the scheme achieves its intended tax advantage].
  6. Offshore companies or trusts are involved for no sound commercial reason.
  7. A tax haven or banking secrecy country is involved without any sound commercial reason.
  8. Tax exempt entities, such as pension funds, are involved inappropriately.
  9. It contains exit arrangements designed to sidestep tax consequences.
For the record I have previously noted that HMRC's spotlights page contains an example of how: HMRC confuse tax avoidance and tax evasion again

Wednesday, October 27, 2010

Guardian suggests no more tax relief for interest

Was surprised to read this at the end of a piece in the Guardian online yesterday. The journalist, Nils Pratley, began his piece by referencing Vince Cable's recent speech which proposed a review aimed at curbing short-termism in the City. Towards the end of his piece Nic then says:
"if the coalition really wanted to reverse the trend towards short-term thinking, it would change the rules on the tax-deductibility of interest since the current rules encourage companies to load up with debt to reduce their tax bills"
Nic goes on to explain the impact that a change in the rules would have on leveraged buyouts and takeovers.

At first I was confused. After all, the fact that interest is tax deductible simply reduces the cost of servicing debt. The full amount of the interest payable still has to be funded out of cashflow. If the business is not generating sufficient cash to cover the interest cost the tax relief is irrelevant. It simply reduces the corporation tax payable at a later date - and if the business is loss making there is no tax payable anyway.

On reflection I assume that some takeovers and leveraged buyouts are funded by special debt instruments. The interest accrues as normal and can (indeed 'must') therefore be deducted from annual profits. But perhaps payment of the interest is deferred until the new projects, that are being financed, generate sufficient cash. And as this is so risky for the lenders the interest rate is high and so the tax deduction is particularly valuable. In such cases I can accept the rationale for Nic's argument.

There are also situations where the borrowings are drawn from a group company which will not pay tax on the interest earned (eg: if located in a tax haven). So the group as a whole simply reduces it's UK tax bill by reference to the intra-group interest payable to the offshore group company. So far as I can recall the 'loan relationship' rules do not prevent this type of mismatch.

Such fancy arrangements are not common however in the SME marketplace. Indeed I'm sure that the vast majority of SME businesses only build up debt if they absolutely have to do so. The fact that tax relief is available for the interest is not the motivation as the interest has to be paid in full to a third party regardless. Taking on more debt increases the costs of doing business. SMEs do not do this unless they have no other option. It's not "short-termism", it's business.

Fortunately there is no realistic prospect of tax relief being removed in respect of the interest payable by SMEs (or larger businesses).

Tuesday, October 26, 2010

The IoD needs to be careful what it wishes for re IR35

According to AccountancyAge the Institute of Directors:
"has labelled IR35 as a "serious problem" in its submission to the Office of Tax Simplification."
The article references the usual observations about IR35 but omits one key point. That being the risks to Companies (including those run by members of IoD) of engaging self employed contractors. If the Company does this directly the Company runs the risk of HMRC arguing that the terms under which the contractor is providing their service is akin to that of an employee. In such cases the Employer Company would be liable to employers' NICs and for the tax deemed to have been deducted from the sums paid to the contractor.

It is no wonder then that many Companies require contractors to provide their services through the medium of a personal services company. This removes all risk from the (employing) Company. Many Companies are also known to have made staff redundant and then re-engaged them through their individual personal services companies so as to reduce employment costs. In many such cases I understand this facility is also used to reduce pay rates to less than the National Minimum wage.

The rules we know as IR35, and which date back to the turn of the century, only come into play when contractors provide their services to (employing) Companies on terms that would otherwise render them as employees. But IR35 does not affect the (employing) Company. It simply(?) reduces the facility for the contractor to benefit from the arrangement.

I would have thought the majority of members of IoD are Directors of employing Companies rather than owner managers of IR35 companies. And I accept that the IoD may well support a simplification of the IR35 rules. However I doubt they want to create a situation that obliges their members to employ all contractors. This would oblige the employing Companies to pay employers' NICs on what were previously consultancy fees paid to personal service companies.

As and when the IR35 rules are simplified I would expect the obligations on employers to increase - especially those those who encourage employees to provide their services through personal service companies.

As I said on this blog back in July: If IR35 is to be abolished - Beware son of IR35

Monday, October 25, 2010

Do you have to organise your affairs to pay the maximum tax?

My attention was drawn to a Q&A in the House of Lords on 19 October. It was clearly an attempt to challenge the legitimacy of pronouncements by Government ministers that confuse tax avoidance and tax evasion.
Lord Ashcroft: To Ask Her Majesty's Government whether they expect citizens to organise their tax affairs in order to maximise tax payable.[HL2125]

The Commercial Secretary to the Treasury (Lord Sassoon): The Government expect citizens to pay tax that is due by law. The Government will take action against tax avoidance schemes that claim to produce results completely at odds with the intentions of Parliament. That is why the Government support the Code of Conduct on Taxation for banks and is asking them to adopt it by the end of November 2010.
On this blog I have taken an objective stance when sharing my views on the issue of legal but artificial tax avoidance schemes. I'm no fan and I'm skeptical of many of the claims made about the prospect of success of such schemes. But I equally understand the rationale for Lord Ashcroft's question (leaving aside his personal position etc). It comes down to the extent to which citizens can take action to reduce their tax bills as long as when doing so they remain within the law.

I don't imagine Lord Ashcroft expected a fully reasoned reply to his question. At it's simplest the answer has to be 'no'. Of course there is no legal or moral obligation to organise one's affairs in order to maximise the tax payable. And that then begs the question as to how far can one go to reduce the tax payable as long as one remains within the law?

I've explored previously the difference between tax evasion, legal but "morally questionable" tax avoidance and uncontentious tax planning. And I asked just last month: Doesn't everyone try to avoid or evade taxes? The problem is that different people will draw the line between what is acceptable or unacceptable in different places.

I know that many advisers struggle with this. The challenge is whether they can honestly and objectively advise their clients as to the risks and downsides as well as the prospective benefits of tax avoidance activities.

Friday, October 15, 2010

Prudential case confirms no Privilege (LPP) for accountants

Accountancy Age have published my comments on the Prudential judgement that was handed down by the Court of Appeal this week. Here's what I said:

I’ve long thought it unfair that lawyers and accountants are subject to different rules when advising clients on tax matters. The distinction relates to the facility afforded by the rules of Legal Professional Privilege (LPP).

LPP is a common law right that has developed over the past 400 years. It is intended to ensure that anyone can seek advice in confidence about their legal rights and obligations and in particular advice about litigation or potential litigation. Where LPP applies the lawyer is not required to report or pass on the information shared with them with any third parties (eg: the police or HMRC). LPP also permits the client to refuse to disclose documents or answer questions, and to require the adviser and others so to refuse as well.

The problem is that this rule only applies to legal advice provided by a qualified lawyer. Not when provided by accountants or tax advisers.

The Prudential case, heard by the High Court last year, decided that LPP should not be extended to other professionals who provide advice on tax matters, in particular accountants. The Court rejected Prudential’s appeal even after accepting that accountants are the main providers of advice of a taxation nature. The Court had little discretion here due to a 1985 Court of Appeal decision on a similar issue (allbeit involving patent agents). So the Prudential appealed.

The ICAEW, quietly supported by the CIOT, intervened and set out arguments for the Court to consider in reaching its decision. Unsurprisingly though, in my view, the Court of Appeal has determined that LPP only applies to lawyers. I admire the ICAEW’s attempts to persuade the Court that the rule should be extended. Legal advice no doubt confirmed that such an attempt was worthwhile. And the members would have been delighted by a successful outcome.

I’m no lawyer so may be accused of naivety in such matters. But my gut feeling throughout was that there was no prospect of success. I take no pleasure in finding out I was right. I could see no circumstances in which the Court would, effectively, extend the range of advisers who could help tax cheats escape prosecution. For that would be the outcome if the rule of LPP were extended.

Clearly it’s wrong that different rules apply to lawyers and accountants when advising on the same issues. It’s also wrong that tax cheats can secure advice from anyone with the protection of LPP. But of course our legal system requires the assumption of innocence rather than guilt – until proven. And that’s why the Courts consider LPP to be “a fundamental condition on which the administration of justice as a whole rests."

It’s not easy to see how the unfairness can easily be resolved. However, let’s assume, for a moment, that the rules are changed and that accountants (chartered or otherwise) can claim the protection of LPP as regards their advice. There is another key difference between lawyers and accountants. The former are trained in legal analysis and interpretation. The latter are not.

Of course plenty (but not all) accountants have an in depth understanding of tax law. But that’s only one aspect of the legal system. It hardly qualifies accountants to emulate lawyers in the interpretation of wider legal principles such as LPP and to properly understand when it does or does not apply. The ICAEW’s failure to persuade the Court to extend the LPP rule may be a blessing in disguise.

Friday, October 8, 2010

What view would Tax Counsel take of a General Anti Avoidance Rule?

The Tax Journal has published the results of a readership survey that reveals two conflicting views. On the one hand a clear majority (55%) of the 175 respondents do not favour the introduction of a GAAR. And the published comments from respondents largely reflect this.

On the other hand almost two-thirds' (64%) would support a GAAR if there was a pre-transaction clearance procedure. This is surprising as a smaller majority (53%) would only support a GAAR if all existing targeted anti-avoidance rules were repealed.

It would be interesting to know whether there is any difference in view between those Tax Journal readers who are accountants in practice, lawyers in practice or in-house Tax Directors. I suspect their views could be quite different. Indeed, in July I wrote a piece: Would a GAAR mean less work for accountants? In it I referenced a recent conversation with a Tax Director that had prompted that idea.

I'd like to raise a different issue now. That is: the reaction of Tax Barristers (Counsel) who advise on tax schemes.

If a GAAR is introduced the reaction of Tax Counsel will be key. I would expect that the more bullish members of the Tax Bar will continue to give their robust opinions. These will include a note that the Courts may take a different view and that (even after it has come into force) the effect of the GAAR is, as yet untested.

Thus the introduction of a GAAR will not stop the creation or marketing of tax schemes. Only the application of the GAAR will do this. Just as now, promoters of schemes only move onto the next one when the law is changed or after HMRC has succeeded in challenging the old one in court. This often takes many years.

In this context Tony Beare, Head of Tax at Slaughter and May, writing in the Tax Journal recently suggested that HMRC might not litigate the GAAR:
"One can easily foresee the possibility that HMRC might use a GAAR in a similar way to its past practice in relation to the TAAR in CTA 2009 s 441, which is to raise the possible application of the provision in any ongoing dispute but not take the matter to litigation, with the result that the exact parameters of the provision are never circumscribed by a court."
Which takes us back to my earlier point. If the rationale for introducing a GAAR is to limit the promotion of structured avoidance schemes, much will depend on the views of Tax Barristers. Until then the promoters will continue to proudly announce that they have yet to lose their arguments in court.

Wednesday, October 6, 2010

The 300th blog post on TaxBuzz - tax insights and clarity

A little self celebratory I know. But an achievement worth recognising anyway I think.

I started this blog at the end of 2007, to coincide with the launch of the Tax Advice Network.

There were 86 TaxBuzz posts in 2008 and 113 in 2009. We already have over 100 posts so far this year - which should mean this becomes a bumper one - easily beating my initial target of an average of 2 posts a week. Although, to be fair, I have slowed down a little over the last month!

Readers(?) feedback as to topics to address here are always welcome.

Monday, October 4, 2010

"The taxman is happy with my return' - Sure?

As we move towards the first filing deadline for 2009/10 personal tax returns you may find it helpful to reflect on a key aspect of our tax system. Many people seem to misunderstand how things work. They mistakenly assume their affairs are in order long before they have any real evidence that this is actually the case.

The concept of "Process now - check later" - is a key element of our self assessment tax system. It means that tax returns are processed by computer long before a real person checks them. In most cases the computer then generates statements showing the tax payable or repayable based on the entries on the tax returns as submitted.

At this point no one has reviewed any exception reports generated by the computer and no real person has checked any of the entries or disclosures on the tax returns. So little comfort can really be drawn from the statements issued confirming that a tax return has been 'processed'.

And it is especially important to keep this in mind when you hear stories about how people have supposedly got one over on the taxman. This includes those who have claimed what might be spurious deductions on their tax returns, omitted to report potentially taxable income or secured the hoped for tax treatment of a tax avoidance scheme.

So when you hear anyone boasting about their own success or that of their clients just remember that the real timescales are much longer than they might imply. This is especially true for anyone who is referring to transactions they have undertaken since 6 April 2009. Transactions undertaken from that date through to 5 April 2010 will be reported on tax returns that need to be filed (online) by 31 January 2011. HMRC then have 12 months from the date the return was filed (so potentially until 31 January 2012) to start asking questions.

So it's a little premature to determine your own attitude and approach by reference to the way that someone else has supposedly beaten the taxman on a tax return that has yet to be checked or challenged.

Monday, September 20, 2010

No - ISAs are not a form of tax avoidance

Kirsty Wark on BBC's Newsnight has just put it to Vince Cable that:
"at one level, using ISAs is tax avoidance."
She was suggesting that Nick Clegg and Danny Alexander had made a mistake by referring to plans to challenge both tax avoidance and tax evasion. Except that they were deliberate in their choice of words. There was no mistake.

Throughout my 25 year career as a tax adviser I stuck to the old adage that tax avoidance is legal and tax evasion is illegal. When I started to be troubled by the morality of tax avoidance I gave up giving tax advice.

As former British Chancellor of the Exchequer Denis Healey memorably explained:
“The difference between tax avoidance and tax evasion is the thickness of a prison wall”.
This distinction remains true today. But something has changed. As Nick Clegg stressed, the Coalition Government wishes to stamp out (as did the previous administration) tax avoidance that is:
"perfectly legal but morally questionable"
For Kirsty's benefit - and that of anyone else who is confused, let's be clear. It is self evident that investing in in an ISA (Individual Savings Account) is not 'morally questionable' and thus not under attack. As long as all the published conditions for saving through an ISA are met it is simply good tax planning to make use of the facility to save money in a tax-free structure (ISA) specifically intended for this purpose. So perhaps we do need to be able to distinguish acceptable and unacceptable tax avoidance.

In this connection I again refer back to a post on this blog from over two years ago: Distinguishing Tax Evasion, Tax Avoidance and Tax Planning.*

* The distinction was first made by Richard Murphy and I note that he has more recently published a new tax briefing on the subject. Whilst I may not agree with his politics or all of his views, I think on this he may be right.

Doesn't everyone try to avoid or evade taxes?

In the light of recent announcements to limit tax avoidance and tax evasion I am forced to ask an uncomfortable question: Doesn't everyone try to avoid or evade taxes?

Well maybe not 'everyone' but certainly a large majority. I'm thinking of those who, for example:
  • Are self employed and are keen not to have to pay tax on all of their trading income (perhaps taking 'cash in hand');
  • Are employees and are keen to receive benefits, gifts and bonuses without them being subject to tax;
  • Are receiving a pension and do some work 'on the side'
  • Claim personal expenses as deductions from their taxable income (profits) when they 'put it on the business' despite the primary 'non-business' rationale for the expense;
All of the above constitute 'tax evasion' of one sort or another. It's just that many people tend to assume that it's something that only the rich and famous do and for much larger amounts of course. (And don't get me started on the MPs again!)

Again, many ordinary people are keen to avoid tax (legally). This may simply be a question of wanting to do all they can to avoid falling within 'tax traps' and thus avoiding that tax otherwise payable if they are within the rules for:
  • IR 35 (the freelance contractors tax)
  • Inheritance tax
  • The new top rate 50% income tax (which can create an effective liability of 60% in some situations)
And the financial pages and websites are full of adverts tempting us to avoid or reduce our tax bills. Where should the line be drawn? Last year I wrote a piece here: Tax avoidance - what are you allowed to do? A simple guide. And two years ago I wrote a piece: Distinguishing Tax Evasion, Tax Avoidance and Tax Planning.

Many of those supposedly targeted by the Coalition Government's new initiative will continue to accept advice that they can reduce their tax bills using tax avoidance schemes that are within the letter of the law. They will be unfazed by the suggestion that such tax planning is 'legal but morally questionable'.

And everyone else will continue to do what they can to keep their own tax bills low. To the extent that this is simply sensible tax planning there should be no problems. I wonder though whether accountants ever come under pressure to overlook, what we might term, amateur tax evasion by their clients?

£900m to tackle tax avoidance and tax evasion

During his speech at the Lib Dem party conference yesterday, Danny Alexander said that:
"Tax avoidance and evasion are unacceptable in the best of times but in today's circumstances it is morally indefensible."
He announced that £900m will be made available for a:
"package of new measures to crackdown on tax avoidance and tax evasion".
Speaking earlier on the BBC's Andrew Marr Show, Nick Clegg criticised Labour for not doing more to clamp down on tax loopholes that he described as
"perfectly legal but morally questionable".
I said last year that I thought the tide was turning. See: Tax cheats need to think again.

Now Danny Alexander has referenced tax avoidance and tax evasion as if they were one and the same activity. And Nick Clegg implicitly referenced legal tax avoidance as being 'morally questionable' and liable to be blocked.

HMRC still has the same desire to introduce anti-avoidance legislation as under the previous Government. The difference now is that they are under even greater pressure to close the 'Tax Gap' and yet they have fewer resources than ever before to do this. But they need to be seen to be clamping down on 'rich' tax avoiders and evaders, to at least the same extent as they clamp down on benefit cheats.
The £900m will apparently include measures such as:
  • a fivefold increase in the number of criminal prosecutions against tax evasion;
  • a crackdown on offshore evasion with the creation of a dedicated team of investigators to catch those hiding money offshore;
  • a much tougher stance on evasion and avoidance by those liable for the 50 per cent tax band;
  • further investment in in-house collection capacity to increase HMRC’s internal debt collection rates; and
  • more registration checks to stop people claiming tax repayments when they are not due.
These are all worthy activities but will the £900m really make a difference in the face of continued cuts? I really hope so but sadly it's far more likely that this is simply a 'spin' story to placate the Lib dem conference. Time will tell.

Sunday, September 19, 2010

The Tax Gap is big - probably bigger than HMRC have admitted

HMRC have published their second (annual?) publication concerning the Tax Gap. This contains HMRC's estimate of the difference between total taxes paid and those that should have been paid if all individuals, partnerships and companies complied with both the letter of the law and HMRC’s interpretation of the intention of Parliament in setting law (referred to as the spirit of the law).

The total Tax Gap is estimated to have been £42bn in 2008-09 as compared with £38bn in the previous report - although that figure was restated as £40bn in the 2010 report due to a desire to present comparative figures to the nearest £5bn. The split of the Tax Gap across different taxes is revealed in this chart:

Of course the very idea of trying to estimate what is not being reported is fraught with difficulties. And HMRC's document admits this with statements such as:
"All of the tax gap estimates shown are subject to error.The main sources of error are random errors due to sampling and systematic errors due to assumptions used to derive the estimates. Where possible the range within which the true estimates would be expected to lie has been estimated. However for some taxes and components it has not been possible to provide a robust estimate of the error margin."
Whilst the report explains how the figures have been computed it does seem likely to underestimate the true Tax Gap. This must be due either to inadequate expert scrutiny within HMRC, incompetence or a deliberate effort to reveal how inadequate have been previous efforts to estimate the Tax Gap.

The report colour codes figures to distinguish how the figures have been computed:

Established methodology, estimate updated annually

Developing methodology, estimate updated annually - Used, for example, to estimate IT, CGT and NIC avoidance by individuals

Experimental methodology, not updated annually and illustrative indicators for gaps with no direct measure - Used, for example, to estimate IHT avoidance.

One critic of HMRC's calculations, Richard Murphy, explains some of the inadequacies on his Tax Research blog:
That Inheritance tax avoidance and evasion is £0.1 billion when this tax is so widely known as an ‘honesty box’ tax – requiring for a start retrospective declaration of gifts made in the seven years prior to death – of which the executors may well be wholly unaware?

That tax avoidance of income tax, Capital Gains Tax, and national insurance combined is just £1.4 billion when George Osborne admitted that avoidance of CGT alone was more than £1 billion in his June budget speech? So there’s almost no income tax avoidance at all then?

That the 20 million or so people who do not receive tax returns each year – including every single person who trades in the shadow economy – between them evade just £0.3 billion in income tax – when the World Bank says that the UK shadow economy is 13.5% of GDP?

He has also suggested that the real Tax Gap must be more than double the official figures. He estimates are also worked out carefully and suggest that tax evasion costs Britain £70bn and that tax avoidance costs us £25bn. He notes, for example that if the Tax Gap for VAT is estimated to be 16% of the VAT that should have been accounted for, then this suggests in turn that 16% of turnover that should have been subject to VAT has not been reported. I don't wholly agree with this simplistic approach but I do entirely accept that HMRC's figures probably UNDER-estimate the full extent of tax avoidance and tax evasion.

Equally, according to the FT, David Gauke, exchequer secretary, has said by reference to the official figures that:
The tax gap number is staggering and this government is committed to taking the necessary action to bring it down – taking steps to reduce tax avoidance and evasion, including by the richest people in our society, so that everyone pays their fair share and we reduce the tax gap over the coming years.”
And this brings us onto my next blog post by reference to Danny Alexander's speech at the Lib Dems Conference.

Wednesday, September 15, 2010

Evan loves tax

The BBC's Evan Davis has a series of programmes at 9am each morning on Radio 4 this week in which he explores our vexed relationship with tax.

I caught part of yesterday's episode during which Evan interviewed:

John Whiting twice - once in his capacity as Technical Director at CIOT (and an ex PwC partner giving tax advice) and later as "interim head" of the new Office for Tax Simplification.

Dave Hartnett (before last week's media frenzy) - who explained his distinction between tax avoidance and aggressive (and implicitly unacceptable) tax avoidance - which results in HMRC petitioning Government to change the rules.

Lord Howe and Lord Lamont - two ex-Chancellors

Each episode is available on BBC iplayer for a few more days if you care to listen.

Tuesday, September 7, 2010

The PAYE tax system is now working as it should...

I was invited to appear on BBC 3 Counties radio twice yesterday to explain some of the facts behind the big PAYE tax news story. Sadly I could not get phone reception at either of the appropriate times but here are extracts from the notes I made in preparation for the interviews. I would never have been able to cover all of these points of course:
  • No - this is not a deliberate attempt by HMRC to sting taxpayers as part of a 'let's collect as much money as we can' approach [A suggestion put to me by the researcher who had called]. More people are due refunds than appear to owe money to the taxman anyway.
  • The new PAYE computer system has brought these errors to light. There have always been unders and overs as the PAYE system isn't perfect. This year we know about them all and the new system makes it more likely they will be resolved faster than in previous years. So in some ways its a good news story. HMRC changing their systems to try to get things less wrong than in the past!
  • References to a figure of 10m people due tax rebates are wrong. HMRC have said 4.3m have overpaid in the last 2 years and 5.8m in earlier years. This is likely to be many of the same people.
  • The PAYE tax system has been creaking for years. Not designed for people who change job more than once a year or who have more than one part time job at a time.
  • Many of the people who owe money do so because they have a company car that was not properly taken into account in their tax code. And they probably know this and hoped they would get away with it.
  • References to employers using the wrong tax code for an employee are a touch unfair. Employers use the tax codes issued by the taxman. If it's wrong it's because the taxman didn't have or didn't use the right information. Often the taxpayer hasn't told the taxman everything they need to know.
  • Tax Codes are not something that the taxman and employers can work out between themselves. The taxman tells the employer what to do based on information given to them by the worker.
  • PAYE is a simple idea - Pay as you Earn. It's a way of paying tax by instalments but it can only get to the right figure every year if your affairs are very straightforward. In most cases there will be unders and overs that get sorted out by an adjustment to your tax code the following year. This happens to millions of people every year. It always has done and always will do.
  • To get everyone's tax spot on each year we would all have to file annual tax returns. In fact most people on PAYE don't do this. They can if they want to though....
  • The previous Government added layers of complexity to the tax rules and calculations which the PAYE system was not capable of easily dealing with. (Tax codes can only charge 40% and not 50% tax if someone liable to the top rate has a second job, so they will always underpay tax through PAYE on that second job)
  • Where you owe less than £2,000 any unpaid tax will normally be collected by adjusting your tax code for next year. So again, it's good news. If you do owe tax, instead of being asked to pay it back straight away you'll be given loads of time and the repayments will be spread over 12 months.
  • Only a small proportion of the 1.4m PAYE taxpayers who owe money will be able to use what is being misleadingly called a 'loophole' to avoid repayment of any tax they have underpaid. It's a concession and not a statutory right. ESC A19 only authorises HMRC to write off the debt if the taxpayer can prove they have provided all relevant info and HMRC has evidently not used it AND taxpayer could reasonably have expected their tax deductions to be right.
  • The taxman may well ask for a full tax return for the year before agreeing to write off a tax debt. Do you have any undeclared casual earnings, investment income or rental income?
  • If your affairs are complicated or you have any undeclared sources of income, do take professional advice from a specialist tax adviser before contacting the tax man.
  • You may also want to speak to a tax specialist if you are willing to pay for one-off advice rather than an accountant to help you every year.
Postscript: In the event I went on the show this morning and in 4 minutes of airtime I think I made 4 or 5 of the above points!

Wednesday, September 1, 2010

Tax planning schemes

I was intrigued to see this in the newsletter of a substantial firm of accountants recently:
Certain niche promoters of tax planning arrangements have recently chosen to increase the extent to which they promote directly to businesses, rather than, as historically has been the case, to advisors such as ourselves for evaluation.

We undertake due diligence on such proposals on a regular basis and, with a few honourable exceptions, find that we are unable to recommend them. This is because of concerns over, for example, the robustness of the tax law analysis, the conviction and strength of supporting opinions, the cost vs benefit ration, the evidence of success when faced with HMRC enquiry, the professionalism of documentation and implementation, and not least of 'after-sales' care.
The direct promotion of schemes to businesses reminds me of just such a situation I encountered almost 20 years ago when I was the tax partner at a large firm of accountants. The FD of a client company told me that the owners had been made aware of a scheme that would enable them to extract monies tax free from the company. The promoters had appealed to the owners' greed and their belief that their 'large firm of accountants' were overly cautious when it came to dealing with (what was then) the Inland Revenue.

We checked out the paperwork and Counsel's opinion and expressed doubts as to the prospect of the scheme achieving the desired outcome. Our advice was ignored and the directors paid thousands of pounds to the promoters. I left the firm a couple of years later and only heard quite recently that my advice had in fact been spot on. Ten years down the line the Directors accepted the Revenue's arguments. The scheme didn't work after all. The promoters kept their fees as is often the way.

The reason that some promoters now try to go direct to clients is because an increasing number of accountants are becoming more cynical. And are becoming more effective at helping clients to understand the risks inherent in a pre-packaged scheme - and, when they do this the clients' reaction is typically:
“Now I understand it properly, why would I want to go into a scheme like that?”
Previous posts that address similar issues:

Tuesday, August 31, 2010

So what was that HMRC survey all about?

You may have seen headlines in the printed and online media last week claiming that "One in five businesses consider relocation over punishing tax regime" or that a 'poll' reveals that companies claim that "Red tape burden is on rise". I'll save the publishers' blushes by not providing links to them.

The background to this 'story' relates to a survey commissioned and published by HMRC last year. The results have only just been published.

In 2009 HMRC engaged TNS-BMRB to conduct their Large Business Survey. This involved 1,088 telephone interviews with large businesses in autumn 2009.

So the first thing to note is that the data is at least 9 months and possibly a year old. It may have a value to HMRC but it is almost irrelevant as a measure of current opinions.

HMRC have published the telephone questionnaire that was used and this shows that the target respondent was head of tax. If there was no one in that role the caller asked for the head of finance. It is also clear that this was:
a survey for HMRC to explore large business customers’ experiences of doing business with them.
and that:
The research will focus in particular on perceptions of change to HMRC’s relationship with it’s customers. The aim of the research is to help HMRC to be more responsive to businesses such as yours.
Deep in the questionnaire there are two questions which have been the focus of media coverage:
To what extent does HMRC's ADMINISTRATION of the UK tax system affect how competitive the UK is as a place to do business?
In the last 12 months. has your organisation considered re-locating the business, or parts of the business, from the UK to another country for TAX PURPOSES?
Looked at in the context of the whole questionnaire these seem startlingly out of place. Almost every other question relates to the relationship with and service provided by HMRC.

Going back to the 'news' stories referenced above, there are no 'claims' here. The first of the two questions asks for opinions out of context. The second question also seems designed to secure partisan responses. Many company Chairman and Chief Execs, seeing reference in the papers to the subject last year will have wanted to "consider" moving their business offshore. Once their Head of tax or FD has explained the necessary consequences however, few are taking the idea forward. Indeed, going back to last autumn when the question was asked, most will have wanted to wait for the outcome of the election. Views expressed under the previous regime are almost irrelevant now.

So what was the point of these two questions? Any ideas?

Copies of the full questionnaire and the report (outputs from the survey) are available on HMRC's website.

Sunday, August 22, 2010

Don't be fooled. HMRC are NOT going soft...

The FT has published an article headlined: Tax officials to soften stance on avoidance. This is being picked up and widely misinterpreted in my opinion.

AccountingWeb asks: Is Dave Hartnett going soft? Elsewhere the FT's headline has been bastardised as: HMRC goes soft on tax avoidance and: Revenue 'to go softer' on tax avoiders. In the latter case at least the difference between avoidance and evasion is not made clear. The implication given is that tax evaders and avoiders will have an easier ride in future. This is misleading to say the least.

The author of the FT piece is the highly regarded Vanessa Houlder (although I suspect the headline was picked by a sub-editor). Let's see what's really going on.

I'll start by picking out a couple of key quotes from the article:
The Revenue’s fresh approach is primarily focused on business rather than wealthy individuals.

Mr Hartnett said: “If it is a strong case, we will fight to the death.”
Now let's go back to the opening paragraphs:
Revenue & Customs will adopt a less combative approach to resolving tax disputes with businesses in a move designed to cut a mounting legal logjam and unlock billions of pounds tied up in court battles over avoidance.

Dave Hartnett, permanent secretary for tax at HMRC, said there had been examples of officials being too “tough” in disputes over tax assessments. “HMRC is packed full of very intelligent people, but we are sometimes too black-and-white about the law,” he told the Financial Times.
I know Dave. The prospect of him going 'soft' on 'abusive' tax avoidance, whether undertaken by individuals or businesses is as likely as Gordon Brown being invited to join the coalition government.

Bottom line. This is all about a welcome change in the way HMRC approach tax disputes with large corporates. The central themes of the Litigation and Settlement Strategy (LSS), launched in 2007 are:
  • Seek non-confrontational solutions where possible.
  • Focus on issues that will best serve HMRC’s goal of tax gap reduction.
  • Choose cases for their wider impact, as well as for their own value.
  • Where we have a strong case we should seek full value from settlement, or take the matter to litigation.
  • Do not pursue weak arguments.
The LSS was introduced in line with the Varney Review (Links with Large Business) principles which commit HMRC ‘to fewer enquiries, focused on material items and concluded more quickly’.

Not surprisingly HMRC are under pressure to reduce costs. They want to reduce the resources they tie up in long-lasting disputes and the number of cases they lose. In the real world of course even if HMRC are advised that they have a more than 50% chance of winning, it's likely that the taxpayer has been told the opposite (ie: that HMRC have a less than 50% chance of winning). Either side could still lose.

No doubt HMRC also want to speed up the collection of funds due to them from settlements. As the FT reports:
The recent £1.25bn settlement of the five-year dispute with Vodafone was an early indication of the policy change.
All of which points to a more commercial (as distinct from a 'softer') approach. Certain elements of the LSS may well be changing and that may be perceived as good news for companies in dispute with HMRC. Everyone's legal costs may fall as a result. There may also be a return to more 'horse trading'.

Overall though this only really affects companies involved in large scale disputes with HMRC. It should lead to faster resolution of disputes on realistic terms and less risk of having to go to court to prove your case.

As the FT report, HMRC are 'softening' their approach. They are not going soft. Only very naive or mischeivious advisers and commentators would suggest that this change in approach means HMRC walking away and letting more companies get away with 'abusive' tax avoidance activities. And as I highlighted above, "The Revenue’s fresh approach is primarily focused on business rather than wealthy individuals."

Friday, August 20, 2010

Why does it take HMRC 2 months to register the self employed?

A contributor to the blog brought this to my attention. On HMRC's website they say that the expected turnaround times for paper based self assessment and self employed registrations is currently 8 weeks. And that it will stay at 8 weeks until November.

The implication is that they would prefer the time lag was shorter than this. And that the position will improve but not until November. But 8 weeks from the posting of an application until confirmation is received of the self employment/assessment registration? As my anonymous contributor notes:
"Are they trying to ENCOURAGE the black economy?"
HMRC explain that the delay is due to the redeployment of resources to higher priority work. It is this that will result in the lengthy turnaround times for paper forms handled by the Central Agent Authorisation Team until 31 October 2010.

This seems to be yet further evidence that HMRC's staffing numbers were cut too sharply by Gordon Brown and that MORE staff are required to deal with basic functions such as the prompt registration of compliant taxpayers who want to register their liability to pay tax on time.

Thursday, August 19, 2010

What if HMRC did the same as SOCA?

A comment on a recent blog post here has drawn my attention to a report in the FT: Deterrent letters put criminals on notice.

It seems that the Serious Organised Crimes Agency (SOCA) is writing to known criminals when they leave the country to tell them their departure has been noted and to “wish them a nice time”. And "welcome back" cards are sent to them on their return through ports and airports.

Apparently the rationale for this is the idea of rational choice theory, where people weigh up the potential benefits and costs of their actions. The cards and letters are intended to say to the individual: you have to make a choice, you can either play the game or not. And that every action and choice has its consequence.

I remember when the Disclosure Of Tax Avoidance Scheme (DOTAS) regime was first introduced in 2004. At the time I was Chairman of the ICAEW Tax Faculty and had many discussions about DOTAS with colleagues and Revenue personnel. I don't recall anyone referencing rational choice theory but I'm sure DOTAS was intended to have a similar impact to SOCA's letters and cards. The idea being that only the most positive risk takers would want to flag their involvement in structured tax avoidance schemes.

The practice seems to have been quite different. Many promoters (especially the naive and deceitful ones) tell taxpayers that DOTAS means the Revenue have approved the scheme. They haven't and they now make this clear on the Spotlights page of their website. Nevertheless taxpayers have NOT found their tax affairs generally bearing increased scrutiny as a result of the obligatory inclusion on their tax returns of their involvement in a registered tax avoidance scheme.

It's too late now but can you imagine the impact if, over the last 6 years, HMRC had written to everyone with DOTAS numbers disclosed on their tax returns? Such letters could have thanked taxpayers for complying with the law. The letters would also have explained that the taxpayer's affairs would now be under increased general scrutiny. This would only have had the desired impact of reducing interest in discloseable schemes if HMRC were seen to carry through with their threats. In practice they don't have the resources to do this. And these days any such letters would therefore be dismissed by the promoters of schemes as empty threats.

Do you agree? What do you think would be the impact of such letters?

Wednesday, August 18, 2010

Taxman says "pay up or else" to its 'customers'...

I've been reading an article in Taxation magazine about a new style of letter being sent out by HMRC. The article is titled: 'Just pay’ demands omit contact details. I too would have assumed this was an oversight but Taxation reports that HMRC have confirmed that the
"Lack of address and phone no. is deliberate."
I am afraid this reveals that (whoever authorised this within) HMRC has a complete lack of awareness and understanding of real life.

You can't blame HMRC for wanting to collect the monies that are due to them. It's absolutely right that they should write seeking immediate payment of overdue sums. And that their letters point out the consequences of a continuing failure to pay.

Taxation reports that:

While the ['just pay'] letters shows the company’s PAYE reference number, there is no HMRC office address included. Instead, space is used to say ‘No contact required. Please pay on receipt.’ The telephone number is given as 000 000 000.

HMRC have apparently explained that the reason for this deliberate exlcusion of a phone number or office address on what they call 'just pay' letters is that:

‘they are used on low-value, high-volume debts where the use of people-resources to chase would not be efficient’.

A department spokesman is also reported to have explained that:

‘Where a debtor has been repeatedly advised of their liability, through correspondence with contact details, but has not taken steps to contact us to resolve the issue, it is not unreasonable for us to assume that they have no need of contact and to ask them to “just pay” their debt,’


In the case reported the tax wasn't due, there had been a mistake by HMRC. It's just as likely that the taxpayer hasn't opened previous correspondence or has put it to one side and forgotten to deal with it. Many people do not give their tax affairs the priority perhaps they should. Some taxpayers are more focused on generating profits from their business and put off dealing with papers from the taxman. Sometimes they simply forget despite good intentions.

When the taxman pursues outstanding monies it should ALWAYS make it as easy as possible for its CUSTOMERS to pay. It does that fine. HMRC must also make it as easy as possible for taxpayers to SEEK CLARIFICATION or to QUERY the amounts being claimed. A failure to recognise the need for this to be made EASY to do is poor CUSTOMER service. And, as we know HMRC does like to refer to taxpayers as 'customers'...

I'm sorry some people abuse such enquiry facilities. This is no reason though to deny all taxpayers the facility to easily check the veracity of demand notices. Especially when, as in the case of 'just pay' letters, these threaten legal action, including the seizure and sale of goods or bankruptcy, if payment is not made.