Courts find against two avoidance schemes – are new rules really needed?

We wrote recently about HMRC’s consultation on ‘Raising the Stakes on Tax Avoidance’, with new proposals to target the promoters of avoidance schemes.

Two recent cases heard by the courts considered whether two such complex schemes were actually effective.

Tower Radio

The First Tier Tribunal (FTT) ruled that PAYE tax and National Insurance Contributions should have been paid on bonuses paid to directors through companies which were specially set up to receive funds, and then be liquidated, paying out the cash in the process.

The scheme was promoted by accountancy firm Barnes Roffe LLP, and would presumably be the target of the new rules, with the scheme having been used by 104 other companies to try to avoid PAYE/NICs on bonus payments.  The scheme was DOTAS registered however.

The defendants’ case revolved around the Ramsay principle but this was dismissed; the tribunal ruled that the scheme had no commercial purpose, other than the intended obtaining of a tax advantage.  As such PAYE/NICs was found to be payable on the bonuses.

P&O avoidance scheme

British shipping company P&O also lost its case, concerning a convoluted international tax avoidance scheme, designed to avoid paying corporation tax.

P&O had attempted to gain £14m in tax relief by artificially boosting the tax credit due on dividend income.

The scheme was found to fail by the FTT, who ruled that the transactions were all part of an “elaborate trick” that was “designed and implemented for no reason other than tax avoidance.”

Conclusion

In both cases, the fact that the schemes were implemented for no reason other than tax avoidance was found to be of importance by the courts.  This is before the new General Anti-Abuse Rule (GAAR) is even taken into account.

With the courts already finding against such schemes, and the new GAAR set to undermine such schemes still further, it is reasonable to question whether any new provisions on avoidance are really needed.

HMRC “closing in on undeclared income”

HMRC is continuing with its anti-evasion publicity campaign, “closing in on undeclared income”, through targeted advertisements on over 3,000 billboards in public spaces.

The basic poster is perhaps tacky and to some eyes a little sinister in terms of implicit State Surveillance, but clamping down on evasion has got to show the idea is in the right place.

I was delighted to see that the website had a link saying, “Remember you can get independent advice”.

When you click on this however, you get a list consisting of:-

–          Tax Aid

–          Citizens Advice Bureau

–          GOV.UK setting up

–          Business Finance and Support

The latter entry cross refers to getting public finance for business and GOV.UK.  Bearing in mind the problem highlighted in the (inherently unauthorised) use of public finance through not paying tax, it would seem the latter two sources are inherently unsuitable for independent advice on such tax problems!

Further, assuming the tax problem is large enough to make it worthwhile having an expensive, publically funded publicity campaign, the first two organisations are also inappropriate as they focus on small matters and those who cannot afford professional advice.

As an advisor, I am forced to ask, why is there no mention of real independent tax advice, through qualified professionals?  It seems insulting to qualified professional advisors, who seek to act ethically, that they are not mentioned at all as “independent advisors” but obviously rank behind “family and friends” in terms of expertise, according to the GOV.UK article.

Bearing in mind the recent consultation on so-called ‘High Risk Tax Providers‘, it appears that there is a running theme of mistrust of the profession from HMRC which does not bode well for the future of tax advisory work.

When Does VAT become Unpaid? – Taste Of Thai Ltd (TC2721)

The recent tribunal case of Taste of Thai Ltd (TC2721) dealt with a penalty for late VAT registration; specifically when the VAT became due for the purposes of calculating the penalty rate.

Background

The restaurant deregistered for VAT in 2008 as its turnover fell below the threshold.

On 17 November 2011 the business notified HMRC that it should have been re-registered for VAT from 1 March 2011.

HMRC checked the figures and found that it should have actually been re-registered for VAT from November 2010 (it had failed the historic test at 30 September 2010).

As a result a penalty for late registration was issued, with HMRC acknowledging that the failure to notify was not deliberate and the disclosure unprompted.

HMRC said that the disclosure was made more than 12 months after the tax became due. Therefore the penalty range was 10% to 30%.

HMRC levied a penalty of £966; equivalent to 10% of the tax due, so full mitigation for the quality of the disclosure was given.

The Case

The taxpayer appealed the penalty on the basis that the disclosure was made within 12 months of the tax being due.

The legislation states that a lower minimum rate of 0% will apply if HMRC ‘becomes aware of the failure less than 12 months after the time when tax first becomes unpaid by reason of the failure’.

Therefore the tribunal had to establish when the tax became unpaid.

It was agreed by both parties that the taxpayer should have re-registered for VAT from 1 November 2010.

However, HMRC felt that the tax become unpaid at this point, i.e. from when they should have charged VAT on their goods and services. Therefore as the disclosure was made on 17 November 2011 more than 12 months had passed.

Conversely the taxpayer argued that the VAT did not become unpaid until it was required to be paid over to HMRC, i.e. a month after the quarter end.

The earliest possible quarter end would have been 30 November 2010, with the tax being due on 31 December 2010.  Therefore the taxpayer argued that the disclosure was made within 12 months.

The Decision

The tribunal said ‘it would have been a very simple matter, if parliament had intended Date 1[the date tax becomes unpaid] to be…. the effective date of compulsory registration, for it to say so’.

The logic behind the wording was so that a taxpayer who is initially a repayment trader is not deprived of the opportunity of a 0% non-notification penalty until, broadly 12 months after he becomes a “repayment” trader.

‘There is a link between the 12 month period starting to run and the start of the potential loss to the public purse’.

Therefore they found ‘no reason not to take these words [of the legislation] at face value’

As a result they agreed with the taxpayer and concluded that the ‘time when the tax first becomes unpaid’ is the due date for payment of the VAT.

The earliest possible date for payment was 31 December 2010 and the disclosure was made on 17 November 2011; therefore the disclosure was made within 12 months.

The tribunal found ‘no reason to interfere with HMRC’s view that the quality of the disclosure merited 10% mitigation within the available range’.

The taxpayer’s appeal was allowed and the penalty reduced to 0% – i.e. no penalty would be due.

Rather interestingly as an aside the tribunal said that if the disclosure had been made later (i.e. January 2012), they would have required evidence of HMRC policy on the first VAT accounting period which would have been allocated.

‘Raising the Stakes on Tax Avoidance’ – A Response

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.

SUMMARY

In my opinion the approach suggested is:-

a)     Wrongheaded.

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?

QUESTIONS

I           Identifying a ‘high risk promoter’.

  1. 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.

  1. 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.
  2. 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.

  1. 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
  2. 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.
  3. 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?

  1. 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

  1. Without identifying a proper definition of High Risk Promoter and Tax Avoidance it is totally inappropriate to have a ‘regime’ at all.
  2. 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.
  3. 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

  1. 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.
  2. 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.

CONCLUSION

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.

Paul Eaves”