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)

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

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).

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