After 400 TaxBuzz blog posts - what now?

That last blog post was the 400th I've posted here. I thought I should recognise the fact as no one else will do so.

I started this blog around 4 years ago by offering comment, explanation and analysis of key UK tax developments. I made a classic mistake in that I was inconsistent. Sometimes I wrote for the general public. Sometimes I wrote for accountants. (Both can use the Tax Advice Network to source specialist tax advice). The blog was intended to help optimise the Search Engine attractiveness of the Tax Advice Network website.

Two years ago I wrote a Review of TaxBuzz blog 2009 in which I explained my thinking and explored the types of issues that had featured on the blog.

I have long enjoyed writing and sharing ideas and tips. Years ago I was complimented on my ability to explain complicated issues in an understandable way. I will let my readers be the judge of whether I have continued to exhibit that skill.

Two of the most common topics for my blog posts have been tax quirks benefiting MPs and explanations about the complexity of tax avoidance and tax evasion. I like to think I have adopted an even hand as regards the latter issue although I have not hidden my dislike of artificial and abusive avoidance schemes.

Sometime during 2009 I decided to focus the blog on debunking tax stories in the media. I felt this was a worthy service but I have received limited feedback and started to question who was I doing this for? In September 2011 I got bored and went for almost 2 months without posting any new items to this blog. I realised that much as I had enjoyed the blogging it was taking too much time and for no discernable benefit.

The nonsense written in the media about Vince Cable's VAT situation brought me back at the end of October. having written two posts on the topic I want to avoid slipping back into my old ways. Throughout the month of November I have been posting a new style of TaxBuzz in the form of, typically light-hearted, tax related awards. These rarely take much time to write. I have had little feedback to date ;-(

Whether I will continue posting an average of 2 items a week for the next 4 years I canot say. But 400 tax related posts is quite an achievement and I'm rather proud of myself.

Do let me know your thoughts.....

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?

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.

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.

Truncated Finance Bill is an affront to democracy

As part of the 'wash up' before Parliament finished its pre-election business, the 2010 Finance Bill has passed through in record time with very little debate. To facilitate this and to avoid extended arguments with opposition parties a number of contentious clauses were dropped.

If Labour are re-elected the dropped clauses will form part of a second Finance Bill that will also include those Budget announcements that were not in the first Finance Bill.

The key Budget proposals dropped from the 167 page Finance Bill published last week were:

• The increased duty on cider (clause 9)
• The abolition of the special rules related to Furnished Holiday Lettings (clause 65)
• The new landline duty on phone lines to pay for super-fast broadband (clause 23)
• The obligation to provide security for payment of PAYE (clause 58)

In another sad day for democracy other contentious issues have passed into law despite the absence of any material debate or discussion. I anticipated this scenario in my post last week: Finance Bill 2010 proves Parliament doesn't decide our tax laws. And some people wonder why I stopped giving tax advice!

"Have a look at this scheme and tell me what you think"

Years ago, when I ran the 'tax support for professionals' team at WJB Chiltern, we were frequently asked to provide a view on the potential success of tax schemes.

Despite being a specialist tax consultancy with dozens of in house tax advisers we chose not to offer such a service. The rationale was simple: Such schemes always carry risks. The promoters invariably underplay these and tap into the taxpayer's natural greed.

A worthwhile independent review can take many hours - obviously, given the inevitable complexity of such schemes and the need to review and consider all related paperwork including both the instructions to Counsel as well as the formal Opinion itself.

I was talking recently with the head of tax at another reputable tax consultancy. He shares many of my views about tax schemes. I was amused when he said he thought he could make a lot more money if he closed his eyes to the risks that pre-packaged tax schemes run. As it is, like any reputable tax adviser, he dutifully considers schemes that his clients purport to have an interest in. He goes through the paperwork carefully to ensure he understands the scheme sufficiently. He then explains the process, the hoped for benefits and the risks to the client, in words of one syllable. This, he tells me, invariably results in the client saying:

"Now I understand it properly, why would I want to go into a scheme like that?"

And, just as I concluded a few years back, there is a limit as to how much you can charge a client in such circumstances for the time and effort involved in reviewing, checking and advising on the scheme - especially if the client decides not to proceed. This is one of the reasons that promoters pay high commissions. It is partly to compensate for all of the conversations and meetings that do NOT result in a client signing up for the scheme.

Within the Tax Advice Network the tax advisers are generally just as reluctant to review third party schemes brought to them by prospective clients. And yet they are all tax experts and well aware of many schemes relevant to their specific areas of expertise. Why would anyone less experienced feel able to provide an informed objective view of a pre-packaged scheme?

What do you do when a client wants your opinion of such schemes?

Previous relevant posts:

• "Raise the white flag" - Are tax schemes worth the effort any more?
• Give me pure tax evasion any day
• Discovery assessments issued re film schemes in 2003-04
  
• HMRC challenge sideways loss relief tax avoidance
• HMRC confuse tax avoidance and tax evasion again
• Beware of HMRC spotlights - EBTs now included
• Were you wasting time advocating this tax scheme?
• The beginning of the end for structured tax avoidance schemes?
• Bending vs breaking tax rules

"Raise the white flag" - Are tax schemes worth the effort any more?

I believe the sentiment of this week's Accountancy Age Comment piece deserves a wider audience. It was penned by Lynton Stock, of accountants Shelley Stock Hutter. They were Accountancy Age medium sized firm of the year in 2008.

Regular readers will know that I agree with his views. Do you?
Lynton starts by stating:

"I'm not a quitter. I have never run away from a fight of any sort. However when it comes to tax avoidance schemes, the anti-avoidance legislation is no so onerous (and the interpretation of that legislation by the courts seems so weighted against the taxpayer) that the days of artificial tax schemes succeeding seem to be over."

Lynton goes on to refer to the Disclosure of Tax Avoidance Schemes (DOTAS) legislation - which we now know is to be tightened even further. By way of example he recalls reading Counsel's opinion about a tax scheme where it seemed certain that the taxpayer was bound to win a case going through the Courts. In the event however, not for the first time in such circumstances, the Revenue won.

"Then there is the case of Drummond v HMRC. This related to a tax avoidance scheme in which an artificial capital loss was claimed. Again, some of the largest accountancy firms were promoting this scheme and the tax opinions that I read would have made you think it was game, set and match to the taxpayer before the first ball was struck. Again the taxpayer lost all the way to the Court of Appeal."

Next Lynton highlights the Government's willingness to introduce retrospective tax legislation to counter tax avoidance schemes.

He also reluctantly accepts that "tax schemes are here to stay" and references the new 50% income tax rate and clients' requirement for what, is inevitably, "more and more aggressive" tax planning. By way of example he quotes a typical conversation:

Client: "I want to save tax and I want you to come up with a tax scheme to help me"
Adviser: "In all honesty, from my experience, the tax schemes I have seen don't work. They are expensive, there are no guarantees as to success and you will have no certainty for many years in view of HMRC's stated policy that they are willing to litigate."
Client: "If you can't help me - I'll go to somewhere else to someone who can."

Lynton concludes by suggesting that:

"The real problem, however, is that when the dust actually settles and the tax scheme undoubtedly fails, it really doesn't help to say to your irate client: 'I told you so'."

When I was in practice I was conscious of three further related problems:

1. The accountant wants to charge fees for his related time commitment. This starts with discussing the idea with the client and includes trying to ensure that the client's eyes are fully open. Clients do not however take kindly to being charged fees for their accountant discouraging them from trying to save tax! I developed such a talent for this that it contributed to my decision to stop giving tax advice myself!
   
2. Assuming the client goes ahead anyway the accountant has further time costs related to his involvement - however peripherally - in reporting the transactions on the client's tax return and for liaising with the promoters. However the client is only inclined to pay the latter for their advice and intellectual property re the scheme. And a hefty fee that is too (a substantial proportion of the tax saved/avoided). The client is not inclined to pay his adviser for anything related to this especially as he was not supportive of the client's involvement.
3. The relationship with the client will invariably worsen as the promoter's approach differs from that of the accountant. This will start by reference to their alleged naivety and inability to understand why the scheme is the best thing since sliced bread. It will continue if there is any disagreement as to how the scheme transactions and additional information are disclosed on the client's tax return. And eventually it will spill over into frustration when preparing the client for a Tribunal hearing and any subsequent court case.

What are your experiences and views on this type of situation?

Previous relevant posts:

• Give me pure tax evasion any day
• Discovery assessments issued re film schemes in 2003-04
  
• HMRC challenge sideways loss relief tax avoidance
• HMRC confuse tax avoidance and tax evasion again
• Beware of HMRC spotlights - EBTs now included
• Were you wasting time advocating this tax scheme?
• The beginning of the end for structured tax avoidance schemes?
• Bending vs breaking tax rules

Tax truism - our tax system is more complex than it needs to be

On his President's page in the January 2010 issue of Tax Adviser magazine, CIOT President Andrew Hubbard puts his finger on one of the many problems with our tax system that resulted in me choosing to cease giving tax advice myself.

Andrew says, in the specific context of a merger between two large accountancy practices, but referencing commercial transactions generally:

"It is extraordinary how often most of the big commercial issues can be agreed without too many problems, but then some obscure technical issue - which is of course completely impenetrable to all but the tax experts - comes up and threatens to derail the whole process."

I made a similar point as regards more day to day complexities in my Taxation article in 2008. I indicated that I had reached the limit as to the number of times I could explain to clients that:

• despite being law abiding citizens and in principle deserving of a widely available tax relief, their circumstances took them just outside the qualification criteria;
• there were apparently arbitrary distinctions in the tax code and inconsistencies in HMRC practice;
• there is a continued absence of tax rules to reflect the new working practices of the 21st century;
• we cannot appeal HMRC's refusal to apply a concession or statement of practice (as we are 'taxed by legislation, and often only untaxed by concession');
• tax credit claims can only be backdated by three months. Thus if you unexpectedly make a loss in your business, you cannot claim the tax credits to which you would have been entitled if you made a claim (for no credits) at the start of the year, just in case you made a loss;
• there are different rules for computing income for income tax, National Insurance and tax credit purposes;
• bizarre arguments and distinctions are highlighted in tax cases, albeit that I can sympathise with HMRC to a degree when it is evident that clever tax advisers have encouraged their clients to push the envelope.

Any more suggestions for undue complexities?

Too many marginal tax products are sold to too many unsuspecting people

Hot on the heels of the Taxation editorial to which I referred yesterday (The beginning of the end for structured tax avoidance schemes?) it seems the world is changing faster than I had anticipated. The following comments are included in a retrospective piece written by Stephen Herring in the 1,000th issue of the Tax Journal:

"I am disappointed that at some time in the early 1990s certain parts of the tax profession 'sold out' to the sales teams seeking to 'roll out' tax 'products/solutions/ideas' across the client base with little regard to their suitability."

"I agree that some products may succeed in the courts and some clients are capable of implementing and willing to defend them as far as is needed but what I'm saying is that too many marginal tax products are sold to too many unsuspecting companies and individuals."

Stephen concludes his piece with the following observations:

"I suspect that before too long, HMRC will come to the conclusion that the only way to restrict the marketing of artificial tax arrangements is to copy the stance adopted by the IRS in the US and seek criminal penalties in some situations to draw a line in the sand between acceptable, even if aggressive, tax planning and purely artificial schemes. This would be a hugely disappointing outcome but one which I consider at the moment to be almost inevitable"

Stephen is a tax partner with BDO LLP and has had a variety of managing partner and other management roles in leading accounting firms over the last 20 years. So he is well experienced in such matters.

As it happens Stephen shared such views with me during a recent BDO alumni party. I did not expect to see them in print. I know a number of other senior tax practitioners who would probably agree with the above sentiments. And I expect to see more serious commentators and practitioners publish their views now that Taxation and Tax Journal have opened wide the door that, I like to think, I unlocked a couple of years back when I explained Why I gave up giving tax advice.

I tend to suspect that we are more likely to see a draft General Anti-Avoidance Rule (GAAR) emerging in the not too distant future. However the developments I noted in my piece about the Vantis tax advisers facing charges of “cheating" re a tax scheme are not a million miles away from Stephen's view of the near future. And of course he wrote his piece well before that latest news leaked out.

Before today I felt almost like a lone voice in the tax profession. Now within 24 hours we have a senior tax partner at one of the largest firms of accountants in the country and also the Editor of the leading weekly tax publication in the country, both commenting publicly that some tax schemes are indefensible even if technically legal. The tax world is indeed moving quickly. Hold on tight. It'll be a rocky ride!

The beginning of the end for structured tax avoidance schemes?

Last month I referenced a watershed speech given by the Financial Secretary to the Treasury which made it clear that: Tax cheats need to think again.

I suggested that the debate is moving to consider whether those who do the deliberate and severe bending of the tax rules are just as much 'tax cheats' as those who consciously evade taxes and break the rules.

It comes as a great delight to note that the editor of Taxation magazine has just published a hard hitting editorial that further evidences the way this debate is moving. Mike Truman makes his view very clear that:

"It’s time to stop defending artificial pre-packaged avoidance schemes".

Regular readers of the TaxBuzz blog will know I am no fan of what Mike also calls "aggressive packaged schemes". And I have long disputed the view, put forward by some advisers, that accountants are at risk of negligence claims if they fail to make their clients aware of such schemes. It simply is not necessary to do this in my view.

Expect to see more debate on this subject and a draft General Anti-Avoidance Rule emerging in the not too distant future. It's inevitable in my view. Such a rule is easier to draft in theory than it will be to finalise and to apply in practice without introducing significant uncertainties in all fields of tax planning advice. I only hope that the Government consults effectively on this rather than rushing ahead with inadequately defined legislation as has occurred too often in the past.

Earlier relevant posts:
- Bending vs breaking tax rules
- Tax avoidance is a card game - the metaphors multiply
- Tax avoidance - what are you allowed to do? A simple guide.
- Tax avoidance schemes - a simple guide
- Naive promoters of tax avoidance schemes
- Five facts all accountants need to know about tax avoidance schemes
- Five more facts all accountants need to understand about tax avoidance schemes

Twice as much tax law under Labour as in previous 18 years

The Telegraph reports today that: UK has longest tax code handbook in the world. This allegation, proposed by the tax publishers, LexisNexis, is judged by reference to the size of their annual publication 'Tolley's tax guide". Apparently the handbook of tax legislation now runs to 11,520 pages, a 10pc increase on last year and more then double the number of pages from 12 years ago.

A similar point was also noted recently by the ICAEW, which monitors the size of Finance Acts since 1979. In it's fifth annual report of the Big Ben Statutory Tax Burden the ICAEW noted that Finance Act 2009 is one of the longest on record.

In the last 12 years, during which Gordon Brown was either Chancellor or PM, the annual Finance Acts have added over 5,300 pages of tax legislation to the statute books. This is more than a 25% increase over the previous 18 years (during which 'only' 4,000 pages were added). The average size of each Finance Act is now more than double what it was during that earlier period.

Average size of Finance Acts 1997-2009 = 382 pages
Average size of Finance Acts 1979-1998 = 190 pages

In 1982, when I first qualified as an accountant and started to specialise in the provision of tax advice it was normal to hope that one would eventually be able to advise across all areas of tax. My, how times have changed. These days few accountants and tax advisers are able to do this and even fewer would ever hope to able to do so. The wealth of new tax material each year is astonishing. And it's not just the annual Finance Acts one has to be monitor there are also:

• Statutory Instruments
• Case law
• Tribunal decisions
  
• HMRC publications and guidance
• Tax law rewrites
• and so on

I gave up giving tax advice myself 3 years ago. I decided that I no longer wanted to try to keep up sufficiently to advise clients. I admire those who continue to do so - but only if they are honest enough to admit that they don't know everything.

No one should expect their accountant or tax adviser to be fully conversant with all aspects of our tax laws. I continue to sit on the ICAEW Tax Technical Committee, alongside some of the top tax accountants in the country. Not one of them would pretend to have a full handle on all our tax laws - even in their specialist areas.

This is just one of the reasons for the existence of the Tax Advice Network - because even the best accountants sometimes need specialist tax support. If you have a serious tax problem, worry or challenge and want to consult a specialist simply use the drop down 'specialisms' menu above and choose from our members' profiles.

Naive promoters of tax avoidance schemes

I saw a promo flyer from a respected accountancy grouping last week. It contained an overt promotion of [presumably 'new style'] employee benefit trusts for accountancy firm clients. I'd like to clarify a few points in this connection.

Here's the gist of what was in the flyer:

• We've formed a strategic alliance with some tax avoidance gurus;
• They are working closely with some of our members who are now 'tax mentors';
• They have all signed confidentiality agreements and won't compete with your firm if you let them at your clients;
• One of the 'mentors' has shared a case study "to show how an Employee Benefit Trust strategy has actually worked for one of his clients".

The clear implication being that this case study should persuade readers to consider talking to their clients about similar such schemes. Even more so as many accountants have clients just like the one featured in the case study and who was seen for the first time in late 2006:

"One of the first things identified was that the directors were paying substantial amounts of both Corporation Tax & also personal tax, due to the voting of bonuses in order to bring the taxable profits down to the small companies Corporation Tax rate band, and then dividends thereafter."

Of course the 'substantial' amounts of CT and IT are simply a function of the level of profits. The previous accountants have evidently been advising the client how to withdraw profits in the most tax effective way - without adopting any abusive schemes. The case study continued:

"We presented to the Board regarding extraction strategies and the directors decided to undertake an Employee Benefit Trust strategy, sheltering £300k into the Trust which was then taken by the directors as a loan from their individual "sub-trusts". The initial saving in tax, net of costs, was in excess of £100,000."

"The directors have been so delighted with the process that they are currently undertaking their third EBT in advance of their 31st August 2009 year-end. Both directors are personally debt free, they have both bought holiday homes with no borrowings &, very importantly, the balance sheet of the Company now has no excess funds on it, above those required for working capital purposes, hence a minimum amount of funds exposed to commercial risks."

"Finally, do the directors happily recommend us to other businesses that they come in to contact with? - Absolutely!"

Love that last line. Of course the Directors are happy and great advocates. But I'd also bet that they are either unaware of the risks they have taken or omit to mention them to their friends.

There's a fair amount missing from this story. Let's assume it's due to naivety and the desire to make a compelling advert for the promoters.

Let's start with the fact that the enquiry window for the first year's transaction (y/e 31/8/07) hasn't yet closed. And what about the (inevitable) ongoing HMRC enquiries? The best practice advice to keep the money aside to fund the tax in case it does eventually becomes payable? The lack of certainty as regards the final outcome?

And what about all of the other clients who were approached to adopt the scheme but who did not go ahead once they understood the costs and risks? Is it really worth an accountant spending all that time and effort if only a small proportion of clients decide to proceed? Presumably that's part of the reason for inviting a third party 'tax mentor' to do the pitching. In this connection I wrote a separate piece offering a simple guide to tax avoidance schemes last month.

Is it me? Do share your views - anonymously if you prefer.

Tax avoidance schemes - a simple guide

Further to this morning's post about the difference between legal and illegal tax avoidance - where do tax avoidance schemes sit?

Most tax avoidance schemes are structured so as to be legal rather than illegal. And they tend to be more in the way of 'wipe-out' schemes than simple reductions in the overall tax liability. But that's not the whole story.

Anyone who gets involved in structured tax avoidance schemes needs to be aware of and willing to accept all of the consequences and risks as well as the headline (hoped for) tax savings. Many promoters focus only on these and minimise the risks - after all, they only earn their commission if you or your client go ahead.

At least one promoter I know claims to be more honest than most when talking to people who have expressed interest in his schemes. Apparently he explains that anyone who would be worried sick by the inevitable Revenue enquiry, the letters, the demands, the time it takes to resolve and the inconvenience should NOT get involved in his schemes – even though he also claims they are legal, have full Counsel’s opinion and are fully disclosed to HMRC.

He manages clients’ expectations and makes clear that these enquiries are almost inevitable and often last 3 – 7 years; and even though he claims they are usually resolved in favour of the taxpayer, he admits there are no guarantees.

All of these are generic risks and consequences of course. In addition there will be further risks and consequences inherent in each specific scheme. Too often these are underplayed, overlooked and misunderstood.

When I was in practice, I often found myself talking with clients about specific tax schemes. Often I had been approached to offer an independent view of a scheme put forward by promoters. In my experience, once clients really understood all the risks and consequences of getting involved in an otherwise tempting tax scheme, only around 10% of clients actually chose to go ahead.

I have since heard from various other advisers and promoters whose experience it seems is much the same. Less than 10% of well advised taxpayers choose to proceed. So maybe the appetite for legal tax wipe-outs has reduced in recent years.

What do you think and how do you manage your clients’ expectations? Please add your comments to this blog post.

Do you want to be taxed in principle or by the letter of the law?

One of things that struck me about the whole MPs' expenses debacle was the double standards and hypocrisy at play.

You'll recall that most MPs sought to justify their expenses as being within the rules. "Sod the principles set out in the Green Book. Sod the high ethical standards you might want to expect of elected officials. We just focused on keeping within the rules." That was pretty much the attitude.

On the other hand when it comes to tax planning and tax avoidance the Government and HMRC have adopted a very different approach. We all know the difference between tax avoidance and tax evasion. The former is legal, the latter is illegal. Tax avoidance often exploits flaws and loopholes in the law. In this context Treasury MPs and HMRC talk about abusive tax avoidance and artificial tax avoidance. That is, tax avoidance which is legal but which is contrary to the intention of the law.

If the MPs were consistent therefore they would have to either:
a) condemn each other for exploiting loopholes in the rules that determine which expenses they can claim; or
b) accept that taxpayers are entitled to adopt exactly the same approach when it comes to tax rules.

In effect, either one refers to the letter of the law/rules or to the spirit and intention of the law/rules. You can't have it both ways. It is evidently hypocritical to adopt one standard for taxpayers generally and a lower standard for MPs.

I raised a similar question on this blog almost 18 months ago in February 2008: Is it one rule for MPs and another rule for the rest of us?

What do you think?

Grant Thornton's tax avoidance scheme - again

This is a brief update on a post I published earlier today as the BBC has reported on further aspects of the GT 'tax avoidance' scheme.

According to the BBC:

Newspaper reports have accused Grant Thornton of devising a scheme to save high earners 40% of their tax bills.

These will be the reports to which I referred in my earlier post.

But a Grant Thornton director said it was not aimed at bankers with huge bonuses and that no income tax would be avoided by those using it.

"It doesn't fit HMRC's characteristics of a tax avoidance scheme," said Justin Rix, a Grant Thornton director.

One of his colleagues. Mr Fathers has claimed that "It is not a tax wheeze. It is a share based incentive arrangement to align employees' interests with those of the company."

However, Dave Hartnett the permanent secretary for tax, is reported to have said:

"We are well aware of this aggressive avoidance scheme and we're looking at it closely,"

In my earlier post I noted that the media seemed to be suggesting that it was 'bad' to get involved in tax avoidance even though it's legal and akin to what every taxpayer does when they ask their accountant to help them to pay no more tax than is legally required.

The BBC report contains further details of the scheme and seems to be quite a balanced piece. Having said that, in my view we can be pretty certain of 3 things:

1 - The motivation for the creation of the scheme in question was to find a way to reward employees without them paying as much tax as would be payable if they either received conventional bonuses or awards of shares;

2 - It makes good commercial sense for unquoted businesses to create a facility for their employees to be able to acquire shares in the company (should they wish to do so). This is not easy to do as it means it's also necessary for the employees to be able to sell their shares, someone needs to set the price for buying and selling the shares, there are probably Financial Services Act (FSA) issues to consider and there are certainly tax traps to avoid.

3 - If this was a disclosable tax avoidance scheme, then GT would have disclosed it to HMRC in accordance with the law that obliges them to so do.

Finally - I would imagine that GT now have very mixed emotions about the press coverage they have received about this scheme. On the one hand they are having to defend their approach publicly. On the other hand I'll bet they're loving the publicity which, from a commercial perspective, must be good for business. I would expect that many larger firms have created similar schemes. In practice the market for them is quite limited, possibly even more so given the reported views of HMRC.

Whatever any of us may think about legal but 'abusive' tax avoidance and 'harmful tax practices' - accountants and tax advisers are going to continue to advice on tax minimisation. It's what clients want. Personally though I struggle with the issue so gave up giving tax advice 3 years ago. What's your view?

Tax avoidance - the tangled terminology

It looks like some of the media have been swept away by the relentless bandwagon pushed by HMRC, the Treasury and Ministers that all 'tax avoidance' is bad and somehow equates with tax evasion.

I last commented on this here in a post: I'll huff and I'll puff - empty threats from the taxman?

Whilst part of me would like to agree that there is a clear distinction between acceptable tax planning and unacceptable tax avoidance (or "harmful tax practices") I know it's much more difficult in practice.

More recently we have seen ample evidence of MPs attempting to justify their expense claims by reference to the letter of the rules rather than to the spirit of them. I've commented before about the hypocrisy of such claims by Ministers who are in favour of applying tax law by reference to the spirit rather than the letter of the law. What's sauce for the goose...

Under a heading: City firms scheme to hide bonus boom from HMRC, the Sunday Times yesterday reported that Grant Thornton (GT) has sent a document to clients outlining one scheme that could afford a “potential tax saving of approximately 40%”. GT were quoted as saying that the incentive scheme in question was "not in any way related to the 50% income tax rate”.

The Independent today reports Francesca Lagerberg, the head of tax at Grant Thornton, going further and stating that the firm was not seeking to engineer tax avoidance schemes.

“These proposals, from us and all the other accountancy firms, are not the aggressive schemes that were sometimes employed a few years ago. There is no tax structure in place that will help bankers avoid the top rate of the income tax and other charges,”

“We are offering bespoke solutions to companies that want to incentivise employees. It often involves government-sponsored schemes such as salary sacrifice practices. The last thing our clients want to spark is an investigation by HMRC into clients’ remuneration polices.”

According to the Independent a spokesman for BDO Stoy Hayward, confirmed that the firm was also offering similar services to banks but also stressed that it was not trying to engineer tax avoidance schemes.

I tend to think that both GT and BDO have accepted here that 'tax avoidance' is being used by the media as short-hand for 'abusive' schemes and 'harmful tax practices'. I don't think they had any real choice.

Let's be honest - tax advisers (by definition) advice clients on tax issues. This will frequently involve them in advising clients on how to avoid paying any more tax than is absolutely necessary under the letter of the law. In its simplist form this is therefore tax avoidance. And equally I believe that most taxpayers want the right to obtain such advice. Let me stress (again) that one of the reasons I gave up giving tax advice myself was because of what I perceived as client demands for more agressive tax planning advice than I was myself comfortable to provide.
The time is coming however when there will be more public debate and discussion around the different terms and what is acceptable as distinct from unacceptable tax avoidance. I appreciate that the Guardian attempted to do this earlier in the year with their tax gap investigation. And there are some commentators (eg Richard Murphy) who suggest that the solution is easier than many of us would accept.

Having said that I did summarise a possible distinction on this blog almost exactly a year ago. If memory serves this originated with Richard - who knows that I share a number of his views even if we do not always agree on the most effective way of securing change.

What do readers of this blog think about the terminology used to describe different approaches and attitudes to tax avoidance?

Will this mean less tax advice given in writing?

The Daily Telegraph's latest revelation concerns Kitty Usher and a letter she received from her accountants. The article quotes from the letter as follows:

“I am enclosing a declaration to vary your previous main residence election for a period of one month to [Burnley home] and then back to [London home].

“The effect of varying the election is that [Burnley home] will receive the final three years’ main residence exemption and the gain will be completely exempt from capital gains tax provided [Burnley home] is sold before April 2007.”

As the article is careful to note - the advice and Ms Usher's actions in 'flipping' her main residence were entirely legal. In this context I have explored previously on this blog:

• Hazel Blears offer to voluntarily pay the CGT that she avoided after flipping her main residence; and
• Flipping properties - avoiding CGT when you have more than one main residence

Despite the legality of the advice and actions I'm not altogether sure that the letter from Ms Usher's accountants looks good in the light of public scrutiny. And this is closely linked to one of the reasons why I gave up giving tax advice. It also has a bearing on the draft HMRC Charter with it's promise that: "You can expect HMRC to... Pursue relentlessly those that break or bend the rules" - I addressed the ambiguities in a blog post: How far can you bend the rules?

Whilst few accountants will have dozens of MPs as clients, many accountants will have at last one or two public figures (from sportsmen and actors to Z-list TV celebrities) as clients. And the accountants will provide tax planning advice to them all in much the same way.

During my talks on 'avoiding negligence claims' I remind accountants of the importance of putting advice in writing, of setting out the facts on which the advice is based and any assumptions that are inherent in the advice. I also add the caveat: "Never put anything in writing that you would be embarrassed to have read out in a Court of law". To this I might add: "Or published in a National Newspaper". This applies to all clients but especially those whose tax affairs could be of interest to the media. If one would be embarrassed then perhaps the advice should be reconsidered.

The advice given to Kitty Usher involved the blatant exploitation of a tax rule. It's a rule that has been 'bent' in this way for many, many years. Whether the advice given is always as blatant as in the letter from the accountant's tax manager in this case, however I'm not sure.

As one of the commentators implied on my earlier blog post about 'flipping properties to avoid CGT': These revelations about MPs could lead to a tightening up of HMRC's interpretation of the rules even before the law is changed. Anyone remember Arctic Systems?

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?

Tax predictions from 2001

I've just found a list of predictions I made during a tax seminar at which I spoke in December 2001. If only I'd started the TaxBuzz blog back then I could have posted them here for posterity. OK - I'll post them now. How did I do?
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While everyone else is focused on short term predictions I'm going to have a go at predicting what will happen in 5-10 years time (ie: between 2006 and 2011) assuming there's no change of Government:

• The top rate of income tax will be increased to 45% on incomes over £100,000;
• The rate of CGT will remain linked to the income tax rate so as to avoid incentivising the conversion of income into capital;
• The small rate of corporation tax will be abolished after moving closer to the standard rate;
• The tax credits system will suffer constant tweaks in a continued effort to disguise the fact that it's not fit for purpose;
• Tax relief for pension contributions, favoured investments and personal allowances will only be given at basic rate;
• A statutory rule will be introduced to determine whether or not anyone is UK tax resident in each tax year;
• The merged Inland Revenue and HM Customs & Excise will become known colloquially as iTax;
• A tax scheme disclosure rule will require the promoters and users of all tax avoidance schemes to make themselves known to iTax - and this will move more tax avoidance underground;
  
• Non Doms will have to pay an annual fee if they want to avoid paying UK tax on worldwide income and gains;
• National Insurance charges will be increased by 0.5% and it still won't be called a 'tax';
• Electronic filing of all tax returns will become compulsory;
• Employers will receive an incentive payment to operate the PAYE system and pay witheld taxes over on time each month;
  
• The IHT nil rate threshold will become transferable between husband and wife;
  
• The tax rules will be changed so as to encourage one man businesses to incorporate and then, after a short time, there will be a crackdown on the tax efficiency of one-man companies;
  
• VAT will be reduced to 15% for a 13 month period to 'stimulate the economy';

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I didn't do badly now did I?!

OK - I admit it. I didn't predict all this 6 years ago. I doubt anyone could have done so - especially that last one!

This post was inspired by one written in a similar vein on a more general topic by Seth Godin. In it he notes how impossible it is for us to predict what life is going to be like just a few years into the future. He suggests that "being ready for anything is the only rational strategy."

Accountants and tax advisers have always known this. The constancy of change is one of the best known characteristics of tax work. It was one that attracted me into the profession over 25 years ago. And it was also one of the reasons I stopped being a tax adviser and set up the Tax Advice Network.

As we move into 2009 with the economy in recession I hope that the tax changes that are to come this year and over the next few years don't cause you to want to give up giving tax advice too.

If you're on Twitter you can tell your followers about this blog post by clicking here to: Tweet a link to this blogpost. You can send the tweet, which contains a shortened link, as is or edit it.
And you can follow me @bookmarklee and @TaxAdviceNet depending on your interest.

Who wants to pay the 'right' amount of tax?

The Freedom of Information Act only seems to reveal interesting results after 'battles'. I've just read about one in Private Eye (I was catching up during the Xmas break).

After a 7 month battle, HMRC has released the results of a survey conducted in 2004 amongst senior tax inspectors. Apparently they classified 16 of the 102 (sic) largest companies operating in Britain as "serial [tax] avoiders"and 40 as "opportunistic avoiders". Thus these Inspectors believed that 55% of the biggest companies were consciously avoiding tax (presumably in an "unacceptable" manner).

The Private Eye story suggests that this runs contrary to the alleged assumption within HMRC that:

"The majority of businesses want to pay the right amount of tax at the right time."

And that got me thinking. Does anyone really believe that mantra?

Coincidentally I was debating a similar point, concerning the general appetite for tax avoidance on another blog last week where I stated that:

I accept that many people do not want to ‘abuse the law’.

However I think that most people DO want to keep their tax liabilities to a minimum. They ask their accountants (and their friends) “What can I do to pay less tax?” “How can I pay less tax?” “How can I avoid having to pay all this tax?” And of course the weekend papers are full of ads for guides as to how to AVOID IHT.

To me this all indicates a desire amongst the general public to AVOID paying more tax than necessary.

Does that make 'most people' tax avoiders'? Of course not. But it does suggest to me that few people willingly pay their taxes without hoping that there are ways to reduce the sums due to HMRC.

Those who know me will know I am no fan of what some might describe as 'abusive' avoidance schemes. And, of course, I am no longer in practice myself as a tax adviser - for reasons that I described in detail last July. So I am keen to distinguish such schemes from simple 'good advice' of the sort that can be obtained from independent tax advisers.

Does it all come down to a question of what is the 'right' amount of tax? Is the 'right' amount of tax the same as the 'lowest' amount that can be paid without breaking the law, without lying, without hiding income and without overstating expenses?

What do you think? Do you agree with my definition or can you offer your own?