For those of you who failed to find the exciting Government Consultation Document, ‘Raising the Stakes on Tax Avoidance’. It is a fluffy, woolly document which proposes that the HMRC should have discretion to label someone as a “High Risk Tax Provider” [of Tax Avoidance] and then fine them up to £1m (plus £10,000 per day) for … well read and find out.
I am sure HMRC may mean well, but surely this is not the answer? It is extra resources they need not new powers?
Anyway, for those now champing at the bit, here is my submission to HMRC on the Consultation.
“Please accept this as a formal response to the Consultation Document “Raising the stakes on tax avoidance.
In my opinion the approach suggested is:-
b) Risks bullying, corruption and, in the longer term, a reduction, rather than increase in tax compliance.
c) Is an abuse of Parliamentary process, because (according to HMRC figures in Section 8 of the Document) the estimate is that there are only 20 businesses who may be affected. Such as issue could and should be dealt with under existing powers.
d) It risks undermining the Rule of Law, because it proposes severe sanctions (including £1m initial fine plus £10,000 per day subsequent fines) with the penalties being imposed on woolly, ill-defined criteria which are ultimately at the whim of State dictat. This is particularly a concern because none of the alleged criteria require there to be any criminal behaviour on behalf of the so called ‘high risk promoter’. Fines of such a size would ruin most individuals – taking their families down with them. How can such penalties be compatible in human rights or any version of equity with recent lenient policies on penalties for theft and burglary? Those activities are illegal. On the other hand tax avoidance is generally thought to be legal. [Collins Dictionary 1995: tax avoidance n. reduction of tax liability by lawful methods]. How can it be appropriate to punish someone for obeying the law to a greater extent that the sanction chosen by the state for illegal attacks on an individual citizen’s property?
I Identifying a ‘high risk promoter’.
- Question I incorporates a value judgement and states (in 3.16) that ‘the lack of flexibility leads to the conclusion that this would not be workable, consequently the Government does not intend to adopt this approach’.
I agree the lack of flexibility represents a problem, especially as common professional advice is (in relevant situations) to request HMRC use formal powers, so as to avoid the risk of the client suing the advisor for breach of confidentiality. However, to then make it down to the whim of a Revenue Official whether a law abiding citizen and his/her family could be financially ruined is totally unreasonable.
- The ‘key individual’ concept is especially iniquitous as it could effectively lead to a person being unemployable in their field of training without having committed any crime whatsoever.
- Whilst the consultative document uses the currently fashionable term ‘transparent’, this does not take account of:-
a) The risk that the client may not be truthful to the advisor, so what looks like a reasonable assumption/conclusion to him may not tie in with all the facts – especially events occurring after his input.
b) The fact that any commentary on planning must, by definition incorporate assumption on future events.
- A key risk of a taxpayer using an avoidance scheme is that it does not work. It is the role of HMRC to identify such schemes and challenge them. If they are quickly shown to fail taxpayers will not waste money on purchasing them! I agree they should be diligent and do this. They need extra resources, not extra theoretical powers
- If (Para 3.6) the schemes have negligible chance of working and rely on ‘concealment and mis-description of elements’ then surely they are fraudulent, representing illegal tax evasion. This is not avoidance and should be subject to separate penalties/criminal sanctions. However, HMRC does itself no favours, nor any to the debate on tax compliance to mix up, as it seems to deliberately, lawful and unlawful behaviour.
- I agree that taxpayers should have the right to see the pros and cons of technical advice and if necessary, the right to show that to different advisors. Advisors (and HMRC) should then be obliged to debate the merits of any technical issue in a reasonable timescale in full light of the facts properly disclosed. Similarly though the client should be entitled to claim professional privilege in terms of the advice elements.
I am conscious in this context that when asking for data under the Freedom of Information Act I was told that keeping the advice of legal counsel secret was vital to the administration of justice and good governance. If a taxpayer is not allowed to see the advice given to public servants he has effectively paid for via taxation in the context of a ‘consultative document’, why should the State have the right to see advice given to him specifically with regard to his own affairs, to his possible prejudice?
- Although penalties are proposed for doing ‘it’, tax avoidance is not even defined here. However, readers considering the current provisions should recognise that the recent comments by Jamie Oliver promoting home made healthy food, would (under the last published HMRC definition of tax avoidance) amount to ‘tax avoidance’. This is because he was promoting zero rated food purchases rather than take away food liable to VAT at 20%.
II High risk promoter regime
- Without identifying a proper definition of High Risk Promoter and Tax Avoidance it is totally inappropriate to have a ‘regime’ at all.
- A better route may be to consider HMRC ‘endorsing’ professional advice by advertising those regulated by ICAEW, CIOT, ACCA etc., are subject to proper professional standards and then naming those who failed to live up to it – within the normal and limited restrictions imposed by libel and defamation. It would only seem fair that a business so challenged should have access to those standard defences.
- There should be no need for extra time limits. If the time limits are not long enough then that should be addressed generally. HMRC needs sufficient resources generally to carry on, but that compliance effort should be targeted widely and fairly. By all means focus sensibly on perceived targets and risk areas. It is sensible. However, all should be equal before the law and it is not just this week’s ‘Group Hate’ Victim. Others may turn out to be equally naughty.
III Penalties for Users of Failed Schemes
- My experience both as an advisor and Inspector of Taxes is that people do not like the risk of litigation, let alone the consequences of losing. If a judicial decision goes against them, or their technical stance most well advised litigants will be only too willing to drop the case and ‘amend’ their returns. I would therefore be surprised if there was evidence that taxpayers were simply ‘stringing things out’, because of the resulting high professional cost to them.
- It follows that the risks of failure with costs being awarded against them are already a dis-incentive to taxpayers, in which case there should be no requirement for a ‘penalty’. This would just seem to be an arbitrary risk to be imposed by HMRC for going second, enabling them to bully taxpayers into settling where in law they may have valid distinguishing features.
I used the words ‘wrongheaded’ to describe the proposals. In my view this is because it is seeking statutory measures to try to solve a problem of resources. HMRC does not need more powers, it needs the personnel, resources and training to impose the powers it already has.
In the 17th Century Governments chased lawless behaviour by imposing greater and greater sentences on people without really addressing the probability of being caught. It resulted in the saying that someone ‘might as well be hung for a sheep as a lamb’, because the sentences got so arbitrary that sheep stealing was a capital offence. Tax compliance is a delicate flower. It has been nurtured over time by HMRC fairness and the associated co-operation resulting from qualified professionals. It is never going to be perfect, but generally I believe the profession wishes to continue to help by encouraging good compliance. However, this will not happen if they are bullied out of explaining reliefs and the ‘upside’ of compliance. That is another way of interpreting the tendency for professionals to avoid giving tax advice.
I think it unlikely there would be a change of behaviour by diligent professionals. It will follow the financial services advice model of 20 years ago, where independent professionals will be excluded with the result that clients will go to the unscrupulous. Reality in the commercial world being as it is, I fear clients would be likely to refuse to pay fees to learn what they are not allowed to do, without associated sensible advice on what they may do lawfully.
Whilst I still have admiration for many HMRC staff, the fact remains it has suffered and is suffering from a lack of trained staff, and people who are authorised to take decisions. My colleague was on the phone for 1 hour this morning (without getting through) to ask why we were being threatened with penalties for ‘failing’ to file a form which has already been filed. Currently, I have more than 1 case where we have written to HMRC to try to pay extra tax due but have been ignored or fobbed off for over a year. Give HMRC the resources to do their job properly. Do not impose extra arbitrary penalties and lose the sympathy of the majority. When HMRC think it ‘reasonable’ to seek penalties for a ‘late return’ when it was actually lodged 10 days early as they did recently [Estate of Teresa Rosenbaum (deceased) 2013]. I fear they risk moving the rather fickle mood of public opinion against them. It is an example of a bullying bureaucratic mind set which promotes a natural fear that, if not now, at some stage in the future, the arbitrary powers envisaged by the Consultative Document may be misused – to the detriment of us all as free citizens supposedly equal under the law.
I recommend the provisions are abandoned. Use the money to train some Inspectors.