Open letter to ICAEW President – Subscriptions and Tax

Subject: Subscriptions and Tax

To the ICAEW President,

Imagine a world in which the Government suggested that a lawyer should be fined if their barrister lost a case. What would be the reaction of the Law Society?

Now, we have a Government proposal for something similar for the accountancy profession. It says (see 5 December – Sanctions and Tax Deterrents) that Government policy is to reduce the size of the tax advice ‘industry’, by threatening fines on ICAEW Members, even where they were acting legally and honestly, with a side effect of deliberately adding mayhem to Professional Indemnity Insurance quotes.

I fear this would affect all members in practice. Some may say, “I do not advise on tax avoidance,” but the trouble is that tax avoidance is not properly defined in the proposed legislation. The scope is wide, with the Government proposing that the State should have the power to fine professionals for ‘enabling advice to be given’ [not just advising] on what amounts to any commercial transaction which involves tax. Advisors would not necessarily know for some years whether their conduct was “incorrect”, because it would apply if the State subsequently won relevant litigation. Then, suddenly, advice given in good faith may become a punishable offence. Work out the justice in that.

Why should ICAEW Members, taught to act ethically and responsibly, be fined and punished, for example, for simply referring a client to advice from a QC?

This brings us to a key question. Are the ICAEW going to protect members from penalties, which are unjust? I feel the initial response from the ICAEW is disappointing. Yes, the new HMRC document is better than the original consultative work, but they are still far too broad and wrong in principle. HMRC admit this particular policy is not targeted at the true purveyors of ‘tax avoidance’, but to impose sanctions on “enablers”. Why should bystanders be punished, because HMRC find it difficult to administer the tax system?

The Institute document also notes that HMRC has announced that they “Do not expect that members acting ‘wholly within the spirit’ of the standards contained within the recently-updated Professional Conduct in Relation to Taxation” would normally be affected by the enabler provisions. Well super! So you can hope [not guarantee, note] you may not get punished, if you act under Ethical Guidelines. I would hope that all Members would act under ethical guidelines. However, if I acted under such guidelines to give independent advice, I would “hope” that I would be backed by ICAEW in saying I had acted in a proper professional manner. I would not expect it to be second guessed by some State Official most likely without similar professional training to determine if they agreed I was in the “spirit” of such guidelines.

I totally agree HMRC should be properly resourced to review the system they have to work with, with an efficient, trained and motivated staff, but then it must have a parallel, independent appeals system. It is the way of Dictators to “improve” an appeals system by persecuting appellants and their advisors. It should not be a route a UK Government aspires to, however “efficient” it seems to have no-one disagree with the State. Maybe the policy is designed to help in “Making Tax Digital”? If “enablers” of independent advice have been eliminated and if incorrectly arguing with an official means a fine, then surely 99.9% of the population will agree their tax assessment is correct, probably even if the Government computer “proves” it was 117.5% of them.

I worked hard to get my qualifications as an FCA. It has been something I have been proud of. Thanks to Government propaganda, it now feels like I am one step down from a shoplifter.

I believe such propaganda is lazy, because it suggests the problems in the tax system are down to ‘Accountants – and other such slimy creatures’. I could suggest other causes? HMRC staff and administrative cuts, poor policy co-ordination, vast systems and culture changes at HMRC which do not seem to have worked? Perhaps even a level of competence at Government level which drafts a referendum bill which then needs to go to the Supreme Court to determine whether Parliament meant “Yes or No”, or were only joshing? The Institute should point this out to the Press, rather than kow-towing to Press oversimplification because accountants seem ‘easy meat’.

ICAEW, please stand up for your Members. You want our subs. You should protect all of us, even if that means telling the Government they are wrong.

Manuel alive and well and working in Whitehall – Tax Avoidance Deterrents

After the recent tragic death of Andrew Sachs, there are rumours that his spirit for competence lives on in our legislation.

 TAX AVOIDANCE DETERRENTS

An open question for the above.  How do the current proposals (published on 5 December 2016 as Sanctions and Deterrents) fit with The Rule of Law?

I believe in the vital importance of the Rule of Law.

I believe it can only work with;

a) Clarity

b) Independent Judgement

c) Consent

Naively; having been trained as an Inspector of Taxes, I believe that the intention of Parliament was as set out in the words they enacted.  There is a lot of case law which supports this.

With 17,000+ pages of legislation the situation is complex.  There may be a dispute as to interpretation.  That arises, almost certainly, through lack of clarity (see (a) above).  The disputing parties are then dependent upon ‘independent judgement’ which hopefully they can both trust – effectively the Rule of Law (cf Tom Bingham).

If they do not trust the independent judgement then (c) Consent is lost.  That is dangerous.

Probably with good intentions (I am told they pave the Road to Hell) HMRC are saying that certain professionals need their behaviour modifying.  To quote the ‘Strengthening Tax Avoidance Sanctions and Deterrents in their paragraph 5.4:-

The government noted the views and responses provided. It recognises that the avoidance market is not static but is constantly evolving. HMRC will further develop the options set out in Chapter 5 of the discussion document to supplement the important work undertaken in this area to date, whilst looking at new and emerging threats in the avoidance market. Alongside this, HMRC will continue to explore ways to further discourage tax avoidance by:

  • working collaboratively with businesses, individuals, industry and representative bodies to identify opportunities to further shrink the avoidance market
  • exploring how behavioural change techniques can positively affect decisions and choices for enablers and users
  • tailoring communications and engagement with users to support them to make the right choices and decisions including outlining the risks and consequences of entering into these kinds of arrangements
  • meeting the challenges and opportunities that current and proposed legislation, HMRC’s Making Tax Digital Programme and other cross-sector initiatives may present

In paragraph 5.5 they go on to say:

The government will continue to take decisive and necessary steps to ensure that those who seek an unfair tax advantage, or provide services that enable it, should bear the real risks and consequences for their actions.

So that is clear now?

Quite apart from their appalling grammar, and resulting lack of clarity, the proposed result of this appears to be:

i) An advisor may introduce a client to (say) a Queens Counsel who suggests a course of action he believes to be legal.

ii) Sometime – [likelihood, at least 10 years from final date of action bearing in mind current complex litigation process] – advice and action may be proven correct.  End of story.

iii) Alternatively, in the litigation lottery of the Courts (talk to lawyers!) the advice may prove to be incorrect.  In this case penalties would be sought against the person who introduced the QC, in all good faith!  Is asking for professional advice to be subject to a penalty?

iv) The proposed legislation encompasses virtually all commercial arrangements, not just ‘artificial’ ones.  ‘Tax Avoidance’ is not properly defined.  It rests on ‘losing’ under untested legislation.  There is no safe harbour.

v) The level of penalties (see time line) may be after the advisor retired.  If the professional involved advised clients wealthier than him, which I am sure the majority do, then they could result in severe financial embarrassment, perhaps even bankruptcy, of said pensioner.

The tone of the HMRC document of 5 December 2005 suggests that would be [perhaps in Chairman Mao’s words?] a good behavioural adjustment.

vi) Maybe?  In contrast, if the advisor had introduced his client say to a robber or a drug dealer, rather than a (presumably respectable) Queens Counsel, then these sanctions would not apply.  In considering this, what is ‘the Clear Intention of Parliament’ to quote a phrase.

I would be grateful if any of the parties to whom this is addressed could explain to me how it fits in with the idea of any penalty fitting in with the criteria proposed in HMRC’s 2015 penalties discussion document:

  • The penalty regime should be designed from the customer perspective, primarily to encourage compliance and prevent non-compliance.  Penalties are not to be applied with the objective of raising revenues.
  • Penalties should be proportionate to the failure and may take into account past behaviour.
  • Penalties must be applied fairly, ensuring that compliant customers are (and are seen to be) in a better position than the non-compliant.
  • Penalties must provide a credible threat.  If there is a penalty, we must have the operational capability and capacity to raise it accurately, and if we raise it, we must be able to collect it in a cost-efficient manner.
  • Customers should see a consistent and standardised approach.  Variations will be those necessary to take into account customer behaviours and particular taxes.

From an initial review, the proposed penalties fail all counts.  Specifically, they do not seem

1)     Fair

2)     Proportionate, nor even remotely consistent.

They are potentially an invite for state bullying.

An easy way around the problem is the one which worked for many years historically.  It was for independent, disinterested advice with proper, well-resourced HMRC review.  In such a case ‘reasonable care’ all round could be provided by someone, properly qualified, who was not rewarded as to outcome and gave independent advice as to the law, with subsequent full disclosure of any relevant arrangements.

Open letter to John Pugh MP, House of Commons

UPDATE:  Please See Below for Response from Mr Pugh MP

Dear John,

We have met before some years ago to discuss tax and the financial situation generally.

I realise you are no longer in power, but I would draw your attention to two of the consultations released by HMRC over the Summer with the following comments:

Strengthening Tax Avoidance Sanctions [HMRC 17 August 2016]

1. I fear the proposals put forward by HMRC are disproportionate, ill-defined, with a gap of potentially years between the behaviour HMRC allege they have a problem with and ‘punishment’. Further the proposed punishment would not necessarily fall on the person who may benefit from the behaviour, which encompasses ‘any agreement, understanding, scheme, transaction or series of transactions (whether or not legally enforceable)’ but, it is proposed by HMRC, would be imposed on an independent advisor.

2. Tax rules are incredibly complicated. Surely it is not in the public interest to discourage a market for independent, professional advice?

3. The above definition would seem to encompass every commercial action, unless I am mistaken? Can you think of anything not caught in the proposed rules. Thus, under these proposals, every commercial action appears to be within the scope, if (probably many years later litigation finds they have been caught by a technicality). This means what amounts to an offence would only be determined ‘ex post facto’? Surely, wrong in principle, constitutionally. How can any responsible person act professionally and be sure they are compliant?

4. The proposal from HMRC is that an advisor would have a defence if they followed the opinion of HMRC(!) How is that ‘independent advice’? What about the occasions when HMRC are proven wrong by the Courts?

5. In addition to the proposed penalties being wrong in principle, the level suggested is such that an individual advisor could be made bankrupt and thus losing their professional membership and livelihood without actually performing nor even suggesting any action with illegal intent. Surely, this is disproportionate?

The HMRC consultative document actually says that it does not expect those devising what they see as ‘artificial schemes’ to be caught by the penalties. Apparently they ate typically companies based offshore. Is it fair to punish UK professionals when the authorities believe that the true problems lie elsewhere?

Conclusion

It seems to me to be a much simpler and more equitable system to be to allow a ‘reasonable defence’ for both taxpayers and advisors that they had received/given independent advice (with appropriate professional qualification/experience) without that advice being in any way compromised by being rewarded as to results.

If desired, this could be combined with professional rules to prohibit fees being linked to outcome. That way there would be no incentive to bias any advice towards ‘aggressive’ behaviour.

Making Tax Digital

This sounds as though it might be a good idea. Certainly, it has some sound points in terms of efficiency. However, there is an underlying principle of compulsion which is disturbing, especially when the computer systems referred to do not yet seem to exist, have not been fully tested, and seem to anticipate that all businesses will have to pay for them.

Points

a) A big concern is the idea that businesses will have to file every 3 months in ‘real time’. The current requirement is that businesses have to file an annual return within 10 months of the year end. The new proposal represents an enormous extra burden, which in practice would fall particularly hard on small businesses many of whom are currently not even aware of the consultation.

b) As an accountant, I would generally encourage keeping good management accounts. This though should not be compulsory, nor be State monitored. The idea seems to come from someone with no empathy for the pressures on running a small business. No lack of work/sickness benefits for the owner, etc. etc. Compulsion on this scale would have to cover such items as:-

  1. Serious business disruption through unanticipated economic events
  2. Illness, death of a parent/spouse/child.
  3. Emotional/financial impact of divorce.
  4. Internal commercial problems, such as management disputes, employee problems, fraud etc.

These are serious issues which can hit everyone, and create further potential for subjective interpretation and ultimately undesirable court cases. HMRC suggest the 3 month filings may not be used for anything as this stage. If so, why impose an unnecessary burden?

There are a number of points of detail which need to be addressed, but fundamentally, with such huge powers on their side already I do not believe HMRC are short of powers. Giving arbitrary powers such as suggested would be counter-productive. Not everyone has access to/is comfortable with a computer, perhaps especially the elderly. Suggesting family help may seem good as a ‘sound-bite’, but then how much family tension/concern may it give rise to, particularly in cases where family finances are a sore subject?

I realise some of the points above are probably somewhat deliberately provocative. I believe the process though is important. Key issues as far as I am concerned is that the proposals are too vague to enable honest compliance and in addition risk stilting economic progress by imposing State burdens for no benefit and (according to the HMRC commentary on the 3 month reporting) to no required end.

I look forward to your considered reply.

Yours sincerely,

Paul Eaves

cc Consultation body

Response from John Pugh MP:

“Dear Paul,

Thank you for your email regarding the two recent consultations launched by HMRC.

The proposals on strengthening tax avoidance do seem broad and vague. It appears that the punishment for avoidance would fall not on the person who is benefitting from tax avoidance but on those who facilitate it. Moreover, the Government is not at all specific on what constitutes avoidance. I hope that the Government’s response to the consultation will define what constitutes facilitating tax avoidance more clearly in order to give firms such as yours better guidance on how the law will change.

On quarterly reporting, I have had a number of Southport businesses and accountancy firms contact me in recent weeks who are concerned about the increased administrative burden this will have on them. They are also worried about reporting their accounts incorrectly under this new system.

I accept that quarterly reporting may make it easier for HMRC to identify accounting errors, ensuring that businesses pay the taxes they owe. However, I do not think that the benefits it provides are enough to justify the extra administrative burden it places on companies, independent of the requirement to keep records digitally. It seems to run against the Government’s stated aim of “putting people and profit, not paperwork, first”.

The Government must ensure that companies pay the tax they owe, but their approach must recognise two things. First, it must minimise the additional burden placed on businesses. Second, the enforcement of new regulations should not be a cash cow for HMRC.

Because of the large number of companies who have contacted me on this issue, I will be raising my concerns with the Minister in the next few weeks, and I will let you know what response I receive.

Many thanks and best wishes,

John”

Thank you for your response.

Bayliss – HMRC Seek Extra Penalties From Failed Avoidance Scheme

Another week and another case involving a failed tax avoidance scheme.

This time, perhaps more worryingly, HMRC were arguing that the return was submitted fraudulently or negligently by the taxpayer and therefore sought the extra penalties that would be due in such circumstances. This shows a new aspect of the targeting of anti-avoidance schemes and suggests users of schemes could expect the costs of failure to rise higher, whether in penalties or fees for defending them.

Ultimately, the taxpayer won in this case. Of particular interest was the fact that the Tribunal found that relying on the advice of a trusted accountant was helpful in suggesting that he had not acted negligently. It appears the courts confirm that obtaining suitable professional advice is worth paying for in the long run!

Mr Bayliss participated in a scheme marketed by Montpelier Tax Consultants (Montpelier). The scheme involved a Contract for Differences (CFD) and was sold as generating a £539,000 capital loss for Mr Baylis in 2006–07. It was agreed by all the parties that the scheme had failed and additional tax was due, however the taxpayer appealed against penalties raised by HMRC on the basis that ther return was submitted fraudulently or negligently.

The Tribunal determined that in accordance with established case law, in order to prove fraud HMRC had to prove that the appellant did not have an honest belief in the correctness of the return. The Tribunal was persuaded on the basis of the evidence and facts that Mr Bayliss did believe that his tax return was correct and so there was no fraudulent behaviour.

On the question of negligence, the Tribunal felt that the correct test was that set out in Blyth v Birmingham Waterworks Co (1856), that of ‘the omission to do something which a reasonable man, guided upon those considerations which ordinarily regulate the conduct of human affairs, would do, or doing something which a prudent and reasonable man would not do’. They also considered the test in Anderson (decʼd) [2009], ‘to consider what a reasonable taxpayer, exercising reasonable diligence in the completion and submission of the return, would have done’.

HMRC used a number points to support their argument that Mr Baylis was negligent, including that:

  1. the transaction did not stand up to commercial scrutiny and the appellant failed to check the commercial reality;
  2. the appellant had not kept copies of the documentation, whereas a reasonable person would have done so;
  3. It was a complex financial transaction and the appellant should have obtained proper independent financial advice, but he relied on informal advice.

The Tribunal agreed with HMRC that some of the taxpayer’s behaviour could have been deemed to be careless, but on balance found that HMRC had not done enough to prove that the appellant was negligent in filing an incorrect return.

Interestingly, they felt that relying on his accountant was helpful in this respect, stating “We are persuaded that the appellant relied fully on Mr Mall, a chartered accountant on whom he had relied for a number of years, and on what he believed (based on Mr Mallʼs recommendation) to be Montpelierʼs expertise.”

The tribunal allowed the appeal on the basis that HMRC had not proven that Mr Bayliss acted fraudulently or negligently in submitting an incorrect return.

Comments on Strengthening Tax Avoidance Sanctions and Deterrents Consultation

This Blog is addressed to All Accountants.  The majority of you will give ‘tax advice’, but would you care to pay your clients’ tax bill if it proves to be technically incorrect?  [Under the proposals discussed below the client will pay the newly imposed bill as well so there is at least ‘double jeopardy’].  My worry is a conceptual one.  Should there really be multiple punishments for the same purported ‘offence’?  Would this not be disproportionate?  I do not know if the words are meant to be forceful and intimidating but the ‘deterrent’ seems to envisage liabilities which could lead to the bankruptcy of professional accountants who were merely part of the ‘supply chain’.  Concerned yet?  Read on.

In due course, I hope to give intelligent feedback to HMRC on their Consultative Document; Strengthening Tax Avoidance Sanctions and Deterrents.  In the meantime, I would like opinions from professionals (and others) to the proposals.  I have an open mind, and certainly do not approve of dishonest behaviour = evasion.

However, when I was an Inspector of Taxes the next level up on the spectrum – avoidance was legal.

Initial thoughts for discussion:-

 

  1. Logically, people indulging in ‘avoidance’ are obeying the law.  Why should they be punished in that case?  Even if incorrect on a technicality there is no ‘mems rea’.

 

  1. The definition of ‘tax avoidance’ seems very vague.  It is also the subject of post event review in that a court will judge – probably some years later.  This makes it difficult to judge at the time of giving advice.  Surely, HMRC should be encouraging independent professional advice, not discouraging it.  If clients know the ‘safe harbour’ for accountants is always to advise against a tax saver, they will know they are not getting independent advice.  (See HMRC document on protection against penalties).

 

  1. Should it really encompass ‘any transaction’ as suggested by the discussion document?

 

  1. Should advisors really be subject to such harsh penalties, which may well be orders of magnitude above their fees for client behaviour (not the accountants behaviour) which, after complex litigation, the Courts have found ‘unreasonable’ under GAAR.  This means the behaviour was determined to be technically flawed but probably not illegal?  This is deterrence, but deterrent to giving advice to key entrepreneurs and wealth creators in a highly complex area.

 

  1. Again, initial thoughts for discussion, if the HMRC target is (as stated) a ‘small minority’.  Why try to affect the general economics of professional advice?  Surely, the penalty risk could have a profound impact on PI insurance costs?

 

  1. Could not the HMRC objectives be achieved by:-

a) Stating that a protection from penalties (not tax) may be achieved by getting a written opinion from an appropriately qualified professional (to be defined – but relevant professional qualifications).

b) Stating that a person/firm receiving a monetary benefit/commission based on the scheme may not qualify as ‘independent’.

 

Surely this would be easier and more proportionate.

Beware New Rules on Liquidations – HMRC Refuse to Give Clearance

As you may be aware, new rules are being introduced with effect from April 2016 as part of the Finance Act 2016.  These relate to distributions in a winding-up/liquidation and are designed to target certain company distributions in respect of share capital in a winding-up. Where a distribution from a winding-up is caught, it is chargeable to income tax rather than capital gains tax.

The rules apply where the following conditions are met:

  1. The company being wound up was a close company (or was within the two years prior to winding-up)
  2. The individual held at least a 5% interest in the company (ordinary share capital and voting rights).
  3. The individual continues to carry on the same or a similar trade or activity to that carried on by the wound-up company within the two years following the distribution
  4. It is reasonable to assume, having regard to all of the circumstances that there is a main purpose of obtaining a tax advantage.

Whether or not Conditions C or D are triggered could be a cause for some contention, and so HMRC note that they have received a number of clearance applications relating to these new rules.

In the absence of a statutory clearance procedure under the new legislation, HMRC have clarified that it is not their general practice to offer clearances on recently introduced legislation with a purpose test.  They have instead sent out a standard reply providing some examples of how they think the rules will apply.

Clearly this is a developing area and HMRC’s reaction is somewhat disappointing as taxpayers often require certainty before carrying out commercial transactions which could be caught.  HMRC have stated that further guidance will be published, however in the meantime we advise that care be taken, and seeking professional advice, as always, may save time and costs in the long run.

We would be delighted to assist if you think you may be affected by these rules and have any queries.

Law, Interpretation and Common Sense

Here is a conundrum.

A long, long time ago … in a galaxy far, far away (a.k.a. York, England 1981) I was a newly created Inspector of Taxes.

I was taught that the tax rules were strict and should be followed to the letter. However, that should not mean artificial impositions and ridiculous decisions. In those days (what is now HMRC) had ‘care and management’ of the Tax System.

Hence, my training was that, if during a Tax Investigation (of which I did quite a few!) I ‘discovered’ (see S29 TMA 1970) that some profits from one year, really ought to have been taxed in a different year, I should adjust it accordingly – but on both sides. So, in adding the profit to one year (per the correct accounting) I should then deduct the profit from the year I have moved it from. I should not seek to tax it twice, because that would be blatantly unfair!

A recent case [Ignatius Fessal v HMRC] reached the same conclusion, albeit using complex legal arguments concerning the European Human Rights Act. In this case the question was one of interpretation. In analysing it the Tribunal have resorted to the Human Rights Act to get to a fair conclusion. In other (older) leading cases, Justice Rowlatt, said that there was no ‘Equity’ in tax, you just read the words stated by Parliament and interpreted them strictly. However, the fact that there was no ‘Equity’, did not mean there should be no fairness. It was simply a method of how best to analyse the statute, bearing in mind the underlying fundamental principle that no Government would wish to impose double taxation.

So the answer should be – No Double Tax.

That truly should be the end of the story.

BUT NO!

In the Fessal case (which as Andrew Hubbard rightly says is complex in the 19 May issue of the leading professional magazine, Taxation) the First Tribunal spent 36 rather closely argued and difficult pages, including analysing a key issue as to whether the ‘European Human Rights Act’ should apply?

To be fair to the Tribunal, they gave detailed legal analysis, which is impressive in scope and response. However, should it have been necessary to invoke such complexity on what surely should have been determined as a simple question of fairness? As certain Old-Fashioned English Common Law Chaps might have concluded – You cannot tax a person twice on the same profits!

To use the current jargon “End of …”

Would the Revenue in the days of their duties for ‘care and management of the tax system’ objected to this ‘as a matter of law?’ It would be hoped not.

In present times though – they did. As the Court pointed out, the way HMRC handled the matter put the taxpayer in a worse position than if they had not made a Tax Return at all! Surely, this could not be just and would (fairly quickly) lead the tax system into disrepute? This would cost HMRC far more in lost goodwill and compliance.

In addition, the Fessal case does raise rather interesting issues as to the impact of Double Tax Treaties, where maybe they do not work as well as anticipated. Could the Human Rights principle established against Double Taxation assist in cases where there is effective Double Taxation not strictly protected by a Double Tax Treaty? (See the Anson case?)

Moving on, business needs certainty. If the system is to be strictly on a ‘rules basis’ then surely that should be the same for both sides – taxpayer and HMRC. This brings us on to the latest Finance Bill proposals for penalties under GAAR. Are these well thought out and balanced?

Taxpayers who have indulged in tax avoidance have obeyed the law, by definition. Otherwise they would be guilty of tax evasion – a criminal offence.

I hold no brief for artificial tax schemes. In my experience, many of them fail either because they do not meet the underlying commercial requirements, or in truth they depend upon a sham. Some are correct under the law though. Surely they should not be punished severely because the opinion of a bureaucrat finds them objectionable? The Finance Bill proposal for a tax geared penalty of up to 60% may seem disproportionate? Could this be challenged as a breach of ‘Human Rights’?

My opinion is that to protect Government Revenue, HMRC do not need greater powers, nor heavier penalties. They need more, better trained personnel, so that cases can be dealt with and if necessary investigated properly.

I believe the issue is an administrative one – not one for even more legislation.

Opinions please?

Osbourne Budget – IR35 Targeted Again!

I thought you may be interested in this story I found on MSN regarding IR35: Budget to close tax loophole which disguises employees as freelancers:  http://bit.ly/1RZho2f

Unfortunately, I was unable to contact Sam Lister ahead of posting this blog.  I will continue to try and get in touch with Sam at the Press Association so that I can update this blog as necessary, but my initial comments follow:

“Sources” can be saucy, especially pre-budget!

1. 90% of earners do not comply?  Is there real evidence of this?  On what basis?  As a former Inspector of Taxes and now a Chartered Accountant, I can truly say in my opinion HMRC do not (for perhaps understandable reasons) empathise with small business.

2. Depending upon the wording of this new legislation, it seems likely that state-backed organisations will be naturally risk averse and so deduct tax at source.  Sounds good?  Except then the individual earner will be having to pay taxes out of post-tax income.  How will this affect the economics related to (say) an independent worker who is expected to travel from job to job (at their own expense) whilst not being paid in the interval between jobs?

3. Will the “deemed employee” automatically get the same rights to employment protection/pension etc?  if not, how is this fairer?  If they do, will it cost more?  If not, how is the new arrangement “fairer”?

4.  The distinction between “Employed” and “Self-Employed” is complex.  It is not a clear line.  It never has been simple as case law has shown over many years.  The Chancellor may try to define it on one sheet of paper – but I fear he will fail, and/or create a mindless tick box bureaucracy which restricts business innovation.  Does a Government really wish to discriminate against independent small business?  They are not all “rich BBC Fat cats”!

5.  Why should there be different rules for “state” organisations vis a vis the private sector?  Should there not be a single law for all?

6.  Paying the “right” amount of tax under the law is surely correct.  The rules and rates though are a matter of policy and should be subject of thought and debate.

Example; An independent computer programmer with a project to help develop systems for a large corporation earning say £60,000 a year will face a marginal tax rate of 42% (income tax plus NIC).  The large corporation on the other hand would face a tax rate of 20% whether it earned £60,000, £60m or £600m.  The tax rate for the large corporation is down from 30% less than 10 years ago.  Fairness and where best to invest scarce HMRC resources are questions which may be coloured in the eye of the beholder.

The proposed rules seem to be designed to hinder certain small businesses from operating as limited companies.  Is it good policy to hamper independent commercial choice?

7.  If the independent earners did operate as a limited company, the earners would still have to pay extra tax to extract any money for their own use.  If they are genuinely independent, what is the “abuse”?

8.  If there is a genuine lack of compliance with existing rules, would it not be more efficient to employ more HMRC staff to police them, rather than adding another set of bureaucratic and complex rules?

A properly informed debate would be useful.  Anyone wishing to contribute to this debate, please leave a comment below.

Offshore Update – HMRC Clamp Down and Starbucks EU Tax Case

HMRC have recently purchased advertising pointing out that offshore income and gains may be taxable in the UK. This is true. In general, for UK domiciled residents, all worldwide income and gains are taxable (even where you reinvested the proceeds and did not remit them to the UK). For non-residents, UK source income may be taxable.

This is where it gets complicated (as if it was not before!). Like many other matters in the international tax world, circumstances can alter cases . Domicile, double tax treaties and all the new statutory residence test may all have an impact.

If you have offshore assets, review them now, before HMRC really clamp down next tax year. If in doubt, seek tax expert advice.

In an interesting twist to the European Question, the EU authorities have just issued a decision on the advance tax ruling given to Starbucks by the Dutch Revenue, helping Starbucks avoid tax in other jurisdictions. This was done by Starbucks having higher tax deductible costs with a lower tax rate in the Netherlands, thus meaning there was only immaterial profit in countries such as the UK, so minimal UK corporation tax. The EU Authorities feel this amounted to illegal State Aid, such that Starbucks should be enforced to repay it in full.

The political question is whether this is:

a) A good example to tax abuse by multinational corporations?

b) An unacceptable interference in Dutch sovereignty because tax is not supposed to be controlled at EU level?

Is that the smell of coffee or the protagonists’ lawyer preparing their morning shot of napalm?

Brain Disorders plus Tax Avoidance equals Ramsay Robust

Those (like me!) who appreciate the significance of the above headline will be thinking ‘Tax is Fun’ and ‘This is Fascinating’.  For the rest I challenge you to struggle on to the end.

The case (Brain Disorders Research Limited Partnership – TC4510) is interesting because the complex, highly cogent, judgement goes through the arrangements as a whole.  Then the Court decides that overall they do not make commercial sense (on the grounds that 6 ≠ 99).  As a result, the Court strikes down the whole structure as a “sham”, and hence ineffective from a tax perspective.  This is oversimplification, of course, but in this case the First Tier Tribunal have struck to the heart of a manufactured tax avoidance scheme by destroying it as having crucial aspects which meant the whole scheme effectively amounted to a sham.

Where does the case leave us?

Analysis of the detailed judgement is interesting in itself, as will be the question of whether the case is appealed to a higher court.

For the moment though, in looking at the commercial picture and looking at steps obviously inserted for tax purposes the First Tier tribunal could be said to be adopting an approach on the lines of ‘Ramsay Robust’.  Those of you familiar with the classic anti-avoidance case of CIR v Ramsay will know that it analysed tax planning schemes and then surgically excised steps inserted just for tax planning purposes and then re-analysed the result.

It seems to me the Brain Disorders judgement follows similar principles, but, in simile, perhaps by using a large axe rather than a scalpel!  It does though leave interesting (and relevant) thoughts, especially as in terms of the claim, the underlying scientific research seemed to be accepted by the Courts to be genuine and cutting edge.  The issue was whether the price had been artificially inflated.  Effectively, therefore it leaves open the question for future commercial planners of what makes the tax axe fall?  All of us need to use the tax system.  You can’t opt out!  How do we know we are not ‘abusing’ it?

In the case, the fact that (blatantly) 6 ≠ 99 was a key determinant, and understandable in may people’s eyes as an inherent misrepresentation.  Where though is the cut off?  Where 6 moves and then tends to approach 99?  Does ‘abuse’ stop at 12 or 50 or where?  Surely there cannot be a ‘fixed’ level?  As is clear from my insurance quotes, in a free market, there seems to be little that approaches a fixed price.  It depends upon the precise terms of the contract, plus the expertise and reputation of the provider.  There must therefore be a range of values which would be acceptable and thus ‘non-abusive’?  Crucially though, how is this ‘non-abusive’ range to be determined in advance by advisors?

The Court’s technical analysis and indeed the scheme details are highly complex, but essentially (to use the round numbers adopted in the case) the higher rate taxpayers investing in the scheme sought to claim 99 or 96 of interest/scientific research allowances, for true research expenditure that was actually being sub-contracted out for 6.

HMRC convinced the Court that it was never remotely considered (or even possible) for the investors to undertake the research themselves, in the Partnership Structure established.  This was believed, to be because of the bank borrowings and lack of relevant resources for the Partnership Structure meant that it would be problematic in raising the finance to undertake the research itself.  As a result, the Courts held it was thus inevitable that the research would be subcontracted to the true scientific experts at the agreed price of 6.  Thus it was ‘false wording’ in the documentation to suggest that 99 (or indeed any amount other than 6) was to be paid to procure the research.

The Court judged;

“Most of the money movements related entirely to the borrowing arrangements and had nothing to do with genuine royalties derived from scientific research”.

It went on;

“Everything in relation to the refund of capital expenditure should the research project be abandoned was uncommercial”.

The FTT held that the scheme was a sham.  It was based on the premise that the recipient of the borrowed/invested funds may undertake the relevant scientific research.

A previous case, Tower M Cashback, showed that the price paid had to represent fair value for allowances to be available.  A valuation exercise was undertaken by the designers of the Scheme to show that a number of “traditional” researchers in institutions or universities would have charged 99 or 100 for the work.  However, the Courts criticised this exercise as being effectively a self-fulfilling prophecy, undertaken in a hurry by a party associated with those involved through past work, and not actually comparing like with like.  The Courts also pointed out that a genuine commercial arrangement would have made the most of the quote of 6 from Australian leaders in the relevant brain research.  Any true commercial investors would have been unlikely to do anything other than go for that price, rather than committing to 99 or 100 created via the inflated borrowing.

The internal un-commerciality of the finance arrangements was apparent by the fact that some of the quotes compared US $ prices to AUS $ prices without ‘noticing’ the 22% currency exchange difference existing at the time.

The First Tier Tribunal was scathing:-

“We agree that there was a sham in this case [None] of the parties or indeed the investing partners were intended to be deceived into thinking that the possible aim of sub-contracting was just one of two realistic possibilities. Of course it was known that it was the only conceivable way of proceeding.  [Hence] the alternative contractual provision, suggesting that [the Partnership Structure] might itself conduct the research was false. The significance of the false claim was that, had it been deleted in accordance with reality, it could not possibly have been suggested that [the Partnership Structure] was ever to pay more than 6, let alone 99 or 96, in order to procure the scientific research. The falsely worded clause was therefore the foundation of the Partnership’s claim for vastly excessive capital allowances, and this is why we decide to strike it down as being a sham.  The [HMRC] counsel was slightly more hesitant in describing the whole pricing of the scientific research in the Schedule to the top-level contract, sub-dividing the total expenditure and allocating elements of it to each step and stage in the research, as a sham. We are not so hesitant. By sub-dividing the alleged expenditure of 99 or 96 in this way, inserting all this elaborate nonsense into the Schedule, it becomes clear that the critical drafting of [the Partnership Structure] clause is not just some mistaken reference to one irrelevant possibility. The Schedule shines the light on the fact that the whole fiction is indeed intended, and that it is indeed the foundation of the Partnership’s claim. [My emphasis].

Comments please on whether you feel my idea of ‘Ramsay Robust’ makes sense and what needs to be done to aid commercial certainty.  Obviously everyone needs to act in accordance with tax law.  Similarly commercial enterprise needs to know tax consequences of their actions.