Response to Making Tax Digital – Sanctions for late submission and late payment

 

Eaves and Co have submitted a response to the HMRC consultation document of 20 March 2017 in relation to sanctions for late submission and late payment as part of Making Tax Digital.  We have reproduced our response below.

 

Please feel free to comment.

 

Response to Making Tax Digital – Sanctions for late submission and late payment. Consultation document – 20 March 2017

 

This is a very difficult document to respond to, because it is so wrong headed.  When Chancellor Osbourne announced it, it was alleged to be a liberating move.  He has since been relieved of his position.  The legacy of ‘Making Tax Digital’ remains.  My concern is that, as currently drafted, it runs a high risk of ‘Making Tax Dysfunctional’.

 

  1. Fundamentally, if it is such a good idea, and is going to work well, so that ‘businesses flock to it’, there is absolutely no reason to make it compulsory.

 

  1. In a free society, businesses should have the discretion to run their own affairs as they see fit.  The proposals extend the historic system of annual filing to filing 5 income tax returns per year.  This is not ‘liberating’, it is adding extra commercial pressure and cost.

 

  1. The Federation of Small Business puts the costs at 10 times the HMRC estimate.  For bigger businesses the extra costs may be more.  As one provider put it, even the cost of a training seminar may well exceed FSB estimate.

 

  1. These costs would just be a burden if the system was compulsory with ‘sanctions’, as proposed.  If there was a benefit, which added to efficiency businesses would (and should) pay for appropriate software at market price.  No need for Government interference.

 

  1. On this theme, which bit of the equation:-

Government + Big Computer Idea = Cost Effective Happiness

has even been proven true?

 

  1. HMRC say that the Making Tax Digital programme will not save them material costs.  If the benefits therefore ensue to business, should they not be given the choice?

 

  1. There should be no sanctions if they decide their current systems are adequate, or perhaps even better than the HMRC ‘private licensing’ proposals?

 

  1. Everyone should be equal before the law.  Self-employed tax payers already suffer extra burdens in that they are more often called upon to file annual tax returns.  To make it 5 returns per annum is unfair and oppressive, especially if the stress of potential sanctions is imposed.

 

  1. Businesses are already obliged to maintain and produce adequate records to prepare relevant annual returns.  Understandably most view it as an unprofitable burden, accepted as part of the benefit of being a citizen of a democracy such as the UK.  Politicians should recognise though that the equation and relationship are each fragile and based on mutual trust.  To multiply by 5 the burden risks suggesting a taxpayer is untrustworthy and (with sanctions) ought to be punished for errors in compliance.  This is not a route to encourage the levels of voluntary compliance that the UK has been fortunate enough to experience historically.

 

  1. Recent case law on ‘reasonable excuse’ highlights the lack of HMRC sympathy and understanding on the pressures imposed by tax compliance, so would not seem to be adequate protection.

 

  1. In any event, this is starting from the wrong perspective.  Individuals and businesses should be free to act as they see fit to benefit the economy as a whole.  They should not be restricted by regulation to act in accordance with Government dictat, unless the action they propose is harmful.  There is already an obligation on business to keep adequate records.  This should include the freedom to keep them in accordance with specific, tailored business requirements, suitably for the business concerned, rather than following a generic algorithm designed by someone with no knowledge/interest in the particular business.  Surely it is patently obvious such freedom must be better for the UK economy as a whole.

 

  1. To suggest that a single ‘app’ can successfully organise management accounts from every business from baking creak cakes to running a portfolio of investment properties is too bizarre to be believable.  Any accountant will tell you the key profit indicators are going to be different.  The business software market can respond, as appropriate, but buying a government approved Trebant (historic reference) will only end in tears.

 

  1. Distorting the business software market by imposing ‘Government Requirements’ is providing anti free market protection for the software houses concerned.  This must be unfair and an inappropriate use of Government power.  Why?  Would this not be illegal under EU rules whilst we are still a member, pending finalisation of Brexit?

 

  1. In a secular, capitalist society, why can there be an exemption for ‘religion’.  Why not allow a simple commercial decision: ‘This adds cost, stress and burden for (no) business benefit.  I choose (or choose not) not to do it’?  That would allow those believing in Making Tax Digital to move ahead, without distorting the rest of the crucial, small business economy.

 

  1. The benefit claimed by HMRC is that small businesses would keep better records.  Some small business have poor records, it is true, but they tend to be at the bottom end of the spectrum.  As businesses grow, especially when they take on staff, record keeping becomes more important.  To state the obvious, losing a cash receipt when it goes to a pilfering employee costs 100% of the receipt.  This is undesirable for the business!  Compare to saving 20% on income tax?  Bigger business have controls.  Bigger businesses tend (by definition) to make more profits, so the ‘tax saving’ by imposing MTD is I suspect mythical.

 

  1. In any event, to put it into context Tesco recently paid £108m to avoid being prosecuted for financial fraud, plus more again in compensation.  How many window cleaners taking the odd tenner in cash would that amount to?  Compulsory MTD looks like a sledgehammer to crack a nut, and so, in the way of many such initiatives has the appearance of overzealous behaviour by the State for little/no benefit.

 

  1. There may well be an argument to say that the idea is discriminatory in that it prejudices:-

a) Entrepreneurs who do not have English as their first language.

b) Those self-employed with learning difficulties etc., who may well earn a decent living with a ‘hands on’ a labouring job making them proud and independent, but would find quarterly reporting unfairly daunting.  Should they be forced on to Government benefits?  To what end?

c) Entrepreneurs who do not trust electronic intercourse for financial transactions.

 

  1. With regard to the latter HMRC have been somewhat patronising about ‘elderly’ taxpayers.  It is age discrimination in itself?  They have then pointed out that such people often use mobile telephones etc.  True, but there is a huge difference between making a telephone call and engaging with third party electronic transactions which may not be totally secure.

 

  1. The internet is inherently insecure as has been proven by a series of hacks into various Government and Business computer systems.  The NHS was recently severely disrupted by ‘relatively unsophisticated’ hackers.  The CIA has been hacked – despite (presumably) top quality security and operating protocols.  Why would any nation therefore risk putting much of its economic output on to a single system, which is also going to have the ability to demand money?  Do you think the odd criminal or foreign Government might fancy the ability to have even just a day of receipts (I’ll take 31 January, please)?

 

  1. The underlying ethos is that ‘Digital’ is the best.  It is new.  It is the way forward for the future.

 

Fine; then let it compete in the Market Place.  If it is good then there is absolutely no need to make it compulsory and penalise those who trundle along behind.

 

‘Digital’ is best [as a hypothesis].  Prove it by not requiring sanctions.  Freedom for taxpayers to choose.  Yes, comply with the law to submit annual returns but no to 5 times that obligation.  (Choice for business to focus on their own key profit indicators – not arbitrary rules set by centralised dictat.  If we were customers we would have gone elsewhere!]

 

  1. The proposed exemptions for MTD are noted.

 

There is a religious exemption.  How do HMRC intend to ‘police’ claims under that heading.  In this context I note the firm swearing by Elizabeth I on her Coronation, that the State should have ‘no desire to make windows into men’s souls’.

 

What is to happen if someone claims the exemption?

Making Tax Dysfunctional

Those Impossible Situations – A Fair Tax System?

HMRC have over recent years spent a fortune on “Management Consultants”.  Consultants preaching efficiency often talk about an 80:20 rule, pointing out that the majority of “profits” come from the “best” customers.  Great, if you are a focused, private sector profit generator.  What though if you are a Government body, which surely ought to be run by Civil Servants trained to treat all citizens equally?  We are not “customers”, despite HMRC Newspeak.  As a Firm we tend to deal with taxpayer exceptions and unusual situations, so understand that not everyone is “average”.  We believe that the tax system should cater for those who, for whatever reason, do not fit within the “normal” generality.

We are keen that the tax system should be administered fairly, in accordance with the law.

A current fear is that the present HMRC focus on penalties, with much greater fines than in the past, may result in unfairness.  The current system may result in a breakdown of trust.  Currently, it is common place for there to be greater penalties for innocent arithmetic errors in tax computations, compared to deliberate theft, say in terms of shoplifting, which apparently is below the police threshold in most cases.  Current treatment appears bias against the small business or individual taxpayer.

Here is a ‘hypothetical’ situation to consider:

  • A UK resident taxpayer leaves UK part way through year to take up a new job abroad

  • Technically, having been resident at the start of the tax year, he would be resident for the whole of it, but his new job contract means he can expect to meet the conditions for “split-year treatment” for full-time work abroad. This means he is treated as non-resident from the date he leaves the UK.  This would be common sense in most peoples’ view, not tax avoidance.  Practically, in such a situation, it also means he does not write to tell HMRC about his overseas employment.  He pays tax to the local country where he lives and works.

  • However, to get the split year UK treatment, the rules require that the taxpayer be non-UK resident in the following tax year too, by virtue of work abroad. Of course, the happy recipient of the new job offer expects to meet this, because he is going to be working abroad and intends this to continue.

  • Suppose though, for whatever reason; say, illness/ sickness/ redundancy/ war/ sheer misery at the job not being what was promised, the taxpayer returns to the UK after some months. As a result therefore, he becomes UK resident again.  Not only does this affect his tax residence status for the year of return, it also means he fails to meet the conditions for non-residence for the preceding year.

  • As a result of this, the worker is now taxable on all worldwide income for the whole of the previous tax year as well.

  • Technically, HMRC may then argue for late notification and issue penalties, even though the individual involved acted perfectly properly, in terms of his anticipated and existing circumstances at the relevant times for notifying HMRC. The required dates altered after the event, because of changed circumstances!

  • HMRC may say “They may not take the point.” With respect, that is not the principle at stake.  Ordinary, innocent actions should not be subject to a potential fine, which may [or may not] be released by State discretion.   That is not the Rule of Law, but the empowerment of bureaucrats, with obvious dangers of corrupt dealing.  We are not suggesting HMRC are corrupt, but experience with history and other jurisdictions makes the risk…kind of obvious!

We would be interested to hear people’s thoughts on how a fair tax system can potentially impose a punitive penalty on ordinary law-abiding citizens for being as “morally suspect” as to get unexpected illness?

Practical experience and thoughts on the principles welcome!

Spring Budget 2017 and End of Year Tax Planning

This year’s budget did not bring a great deal for advisors to get their teeth into.  There are some points that will certainly affect millions of taxpayers though, so we have summarised the key points below.

There are also steps that taxpayers should consider taking before the end of the tax year, when various new rules and rates will come into effect.

  • The tax-free dividend allowance (the band on which dividends could be received free of income tax) is to be reduced from £5,000 to £2,000 from April 2018. Having only been introduced in April 2017 the allowance is already being reduced which will affect all taxpayers receiving dividends, including business owners and investors.

 

  • There will be a 1 year delay for quarterly reporting under the Making Tax Digital (MTD) rules for businesses that have a turnover below the VAT threshold (£85,000 for 2017-18). This will be good news for those businesses but unfortunately there do not appear to be any changes to these controversial proposals for other businesses.  Plus, the so-called pilot scheme will not have run its full course, so there is no chance of everyone learning lessons from the process.

 

End of Year Planning

 

  • Residential property rental. From April 2017 the phasing in of restrictions on relief for interest costs for higher rate taxpayers will begin. Initially 25% of such costs will be affected, however this will rise 25% each tax year until all higher rate relief on finance interest is blocked.

 

  • If pension contributions or pension scheme planning might be desired, setting up and contributing to a pension scheme before the end of the tax year (if one is not already in place) could ‘bank’ allowances for the year under the carry-back rules. Those with existing pension schemes have until the end of this year to use up any unused annual allowance from 2013-14.

 

  • If possible, consider declaring dividends where the tax free allowance of £5,000 has not been used up yet.

 

  • Consider new deemed domicile rules if non-UK domiciled. From April 2017 deemed domicile rules may apply to individuals who have been resident for 17 of the previous 20 years.  Previously these only applied to inheritance tax but the new rules extend to income tax and capital gains tax meaning those affected will have to report their worldwide income and gains on an arising basis.

The Result is in …..

We have opened the right envelope!

Congratulations and thank you for all who correctly entered our ‘Twelve Days of Christmas’ Quiz.  Eaves and Co are pleased to announce that the winner is Catherine Rogers of Ashford Rainham Ltd.  David Stebbings recently handed over her prize.

 

IMG_20170217_154204 (1)

For completeness here are the answers:-

 

The name Santa Claus evolved from Sinter Klass, a nickname for Saint Nicholas. What language is Sinter Klaas? Dutch

 

What fruit is traditionally used to make a ‘Christingle’?  Orange

 

Who ‘Rattle and Hum’ along to Angel of Harlem?  U2

 

Which carol is about a 19th Century Duke of Bohemia? Good King Wenceslas

 

“Christmas won’t be Christmas without any presents” is the first line from which literary classic by Louisa May Alcott? Little Women

 

Christmas Island, in the Indian Ocean, is a territory of which country? Australia

 

In the song ‘The Twelve Days Of Christmas’, how many swans were a-swimming? Seven

 

The North Pole, said to be Santa’s home, is located in which ocean? Arctic Ocean

 

The name of which of Santa’s reindeer means ‘Thunder’? Donner

 

Marzipan is made mainly from sugar and the flour or meal of which nut? Almond

 

Which traditional Christmas plant was once so revered by early Britons that it had to be cut with a golden sickle? Mistletoe

 

Who was Jacob Marley’s business partner?  Scrooge

 

The initial of each answer spells out DOUGLAS ADAMS.  The quote attributed to him on our website is ‘I’m spending a year dead for tax reasons’.

We are not, so look forward working with you again this year.  Remember the new tax year starts on 6 April.

Private Residence Relief Denied – A Oliver

The tax law surrounding the sale of residences and Private Residence Relief continues to cause disputes between taxpayers and HMRC.  With the disparity between capital gains tax rates on most assets and the higher rate now applicable to sales of residential property, this is only likely to continue.

In a recent case at the First-Tier Tribunal (A Oliver, TC5521), the taxpayer purchased a flat in January 2007 and then sold it in April 2007.  He claimed he purchased it following a trial separation from his partner (which was recommended by their counselling sessions).  However, the flat had a relatively short time remaining on its lease which made it difficult to sell.  Mr Oliver asked the vendor to begin the process to extend the lease before exchange of contracts; otherwise he would have had to wait two years before he could make the application following completion.

The extension of the lease resulted in a substantial increase to the flat’s value, and HMRC argued that Private Residence Relief (PRR) should not apply, on the basis that he had been ‘engaging in adventure in the nature of a trade’.  The rules state at TCGA 1992, Section 224(3) that PRR should not apply where a property is acquired with “the purposes of realising a gain from the disposal of it”.

Interestingly, the Tribunal agreed that Mr Oliverʼs actions did not amount to a venture in the nature of a trade and that he did not have an intention to sell the flat when he first acquired it.  However, they instead considered whether the taxpayer’s presence in the flat was sufficient for it to qualify as his main residence.  They found that there were inconsistencies in his evidence and ultimately concluded that the quality of occupation lacked any degree of permanence or expectation of continuity.

Mr Oliver’s appeal was therefore dismissed.  Had Mr Oliver made a more convincing witness, and perhaps been able to demonstrate his intent to reside in the property more permanently he may have succeeded.  In cases such as this, taking advice in advance would help to avoid problems arising later.  We would be delighted to hear from you if you or your clients might be caught by these rules.

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.

Corporation Tax and VAT Loans

Whilst as tax advisors we tend to focus on [what we think are] interesting technical tax issues and considering how much should be payable having calculated that answer. Another possible difficulty with tax is the practical one of cash flows and actually paying it!

You may or may not be aware that it may be possible to obtain a loan to spread the cost of Corporation Tax or VAT bills to free up working capital. For example, with a Corporation Tax loan you could spread the cost over a 12 month period rather than paying all in one go.

We are not able to advise directly on such funding, but if you are interested in such opportunities for your clients, please contact Jonathan Smith at JGS Finance (http://www.jgsfinance.co.uk/) on 07778 523 499 and he will be happy to assist.  Please use reference EVL when you make contact with Jonathan.

Jonathan Smith (Head of JGS Finance) is a Chartered Accountant who I know and have trusted over many years of working with him.

Paul Eaves

The Importance of Advanced Planning – VAT Registration

A recent case at the First-Tier Tribunal, DJ Butler v HMRC, highlighted again the benefits of taking professional advice in good time. The taxpayer operated as a sole-trader working as a decorator, project manager and carpenter.

In the absence of the project management turnover the taxpayer would have been below the VAT registration threshold. After HMRC identified that his turnover was above the limit, the taxpayer argued that the project management was run as a partnership with his wife; however he had always declared it on his individual self-assessment tax returns as sole trader turnover.

The Tribunal considered that the project management work should rightfully be considered an extension of his sole trader activities and that no partnership existed. It did not help that no profits were reported on his wife’s tax returns, and nor were there separate partnership bank accounts or sales invoices raised in its name. The taxpayer’s appeal was therefore dismissed.

It would appear that if the taxpayer had taken steps in advance to create a separate legal entity for the project management, whether a partnership or a company, and followed the correct reporting and legal steps, the planning may have been effective. As it was, it was difficult to argue that self-assessed sole-trader income was in fact from a partnership.

Taking professional advice in advance would have helped this taxpayer, is there anything we can help you with?

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.