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.

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.

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?

A Camel, a Horse or a Spaceship – Tax Law

The Law is not an ass.  It is a quadruped, designed by a committee, who, over many years and many different committee members, cannot quite recall whether they were designing a camel, a horse or a spaceship.

  1. Hands up all those who believe the Rule of Law is important?
  1. Hands up (in Magna Carta year) all those who think the Law should be applied consistently?
  1. Hands up all those who believe that professional tax advice should be clear and based on proper interpretation of the Law?

Hopefully, I have everyone’s hands up for each question?  At least mentally?  Those too embarrassed to react or having a quiet lunch snooze should, I hope, still have made a genuine twitch towards acceptance.  If not, please say.  I genuinely would be interested to know why.

I now move on to the recent cases of Gemsupa and Trigg.  They would make a superb exam question in terms of ‘compare and contrast’.

In Gemsupa, the Courts agreed with the taxpayer that the CGT legislation was so clear that, even though various steps were taken for tax avoidance purposes, this did not meant that they were ineffective legally (the case was pre-GAAR so query whether those new rules may have an impact?)

And Compare:

Trigg(onometry) and Lawyers

The Trigg case heard in the First Tier Tribunal concerned the definition of Qualifying Corporate Bonds for tax purposes.  This may sound esoteric and technical, but in fact they raise some very interesting issues.  [Remember ‘Tax is Fun’].

Amongst the reasons the case is interesting is that it may have an impact on both future and historic Commercial, Corporate Sale and Purchase agreements where some of the consideration is deferred in the form of loan notes.  As will be generally known, (at least in esoteric tax and legal circles) the loan note form of deferred consideration makes a profound different on the way it is taxed.

In Trigg, HMRC lost, which seems to have widened the definition of QCBs.  This could have a profound impact on Sales and Purchase Agreements so Solicitors need to beware!

Having reviewed many Sales and Purchase agreements over the years, I fear that sometimes matters may be glossed over.  Perhaps so because of infrequent HMRC review of the detailed documentation?  This is understandable, from a commercial perspective.  A precedent has worked in the past, so just tweak it?

The ‘purposive’ approach in Trigg contrasts with the legalistic interpretation adopted by Gemsupa.  Which is correct?  Which ought to be correct?  Bearing in mind most of us just wish to get commercial deals done to help business people achieve their commercial objectives, how many professionals believe the objectives suggested in 1-3 above are being achieved?

As they used to say in exam questions – Discuss!

Tax, Morality, and a Load of Balls!

I am a Tax Practitioner.  As a Chartered Accountant and former Inspector of Taxes, I have always been taught [and sought] to act ethically.

Unfortunately, I fear HMRC is at grave risk of becoming dysfunctional.  Too many cuts in expertise, perhaps?  Too many silly projects, instead of performing good service.  Generally a political problem, rather than the good Civil Servants trying to keep the ship afloat?  Questions!

From my experience, I understand that certain people have tried to disclose undeclared income to HMRC, but have then been ignored.  Understandably, this makes them a little reticent in sending a reminder!

I have just had a telephone call from a pensioner [not a client] who is [from information provided] not due to pay tax, but is having tax deducted at source from her widow’s pension.  A decent HMRC would provide her with a real person to talk matters through.  However, such local Help Desks have been abolished.  This seems to be on the grounds that you can get such assistance “online”.  There are [many] people who have never been online, and do not own computers.

Please do not suggest a telephone ‘Help Line’ is remotely equivalent – even if you have the patience to wait the extraordinary length of time for the telephone to be answered.

You may speculate where such saving in Government costs may fall, in terms of rich and poor.  In this particular case it is likely to fall upon the pensioner who cannot understand how to get her [deserved] repayment.

In our great democracy such matters may affect your vote?

Surely, a sensible and coherent Tax Policy should be a great vote winner?

With such an opportunity, then, you may speculate as to why Ed Balls decided to attack giving cash to humble workers, rather than focussing on the more complex area of multinational business [where the money is]?

Using straightforward cash?  We all realise, [surely] electronic monetary transfers would be far better than cash?  Electronic transfers would involve Banks that would impose charges on the small business concerned.  If the business was in overdraft, the Banks may take away control of day to day funds and then, at their whim may close the branch in the [it does not matter because it is out in the sticks] small town where the humble worker may reside?  Transfers to banks that may be computer hacked for millions?  Run “Trust Me I am a Banker” past your marketing department as a slogan?

The Westminster People know the Bankers, so obviously they understand how trustworthy they are.

The argument seems to be give your money to the big banks and supermarkets, because they are obviously less corrupt than the nice woman who cleans your windows and has done since she inherited the business from her father, when she decided to look after him after his stroke?

Tax is a social good.  It should be paid according to the law.  Please do not bring morality into it, because if we thought that way no one would wish to pay it, because in the diverse economy of modern society there will surely be something everyone could claim a moral objection to funding.

If paying tax is a moral duty, then presumably any radicalised Muslims have a good argument for tax exemption, because they would object to bombing the Islamic State?

As to Evil Tax Planning, I would suggest that anyone who is not planning on [at least] smoking 20 cigarettes and also drinking a bottle of wine this evening is guilty of planning to avoid, VAT, tobacco and alcohol duty.  I trust you will wake up appropriately ashamed of yourselves!

Boyle v HMRC: Crack down on Payroll Tax Avoidance Scheme Continues

In the recent Autumn Statement, George Osbourne announced several governmental counter-avoidance measures that confirm that the net is closing in on those who subscribe to tax avoidance schemes. A failed tax avoidance scheme marketed by Consulting Overseas Limited has been identified by a recent First-Tier Tribunal case of Boyle v HMRC. HMRC has vowed to pursue all other subscribers to the same scheme that Mr Boyle was involved with and will also target others who have used similar schemes to avoid tax.

Mr Boyle was a contractor who originally worked for a company called Sandfield Systems Limited (SSL) and subsequently worked for Sandfield Consultants Limited (SCL) when a significant fall in his income was noticed by HMRC. It is important to note that Sandfield Consultants Limited (SCL) was a company registered in the Isle of Man. The director of SSL was also the director of SCL and Consulting Overseas Limited (COL) which marketed the tax avoidance scheme. The scheme was marketed by COL to the employees as a remuneration package that could achieve income tax and national insurance contributions (NICs) savings.

The FTT found the conclusions of HMRC’s investigation to be correct. The significant fall in Mr Boyle’s income was explained by the fact that about 2/3 of the income generated by the taxpayer was withheld and then paid to him by way of a ‘loan’ made in Romanian, Byelorussian or Uzebekistani currency. When Mr Boyle entered into a contract of employment with SCL it was agreed that he would be paid a salary but he would also participate in the ‘soft currency loan scheme’ arranged by SCL to receive the remainder of his salary. All employees of SCL used the foreign broker Credex International SA, when taking out the loans in question. It was the currency trades organised by Credex that turned the earnings into what the scheme claimed to be “non-taxable foreign exchange gains”.

The FTT found that the loans were not genuine and also found no evidence to prove that the foreign currency ever existed or that Credex was a genuine dealer independent of SCL. Notably the FTT ruled that the monies which were allegedly paid to Mr Boyle as loans in foreign currency constituted emolument from employment/earnings under s.173 ITEPA 2003. Furthermore, according to s.188(1)(b), as the ‘loans’ that were made were essentially written off, the amount written off is deemed to be treated as earnings from employment for that year and therefore should have been subject to income tax and NICs. They also ruled that Mr Boyle was aware that the loans were a means of receiving his income to avoid tax.

The FTT also stated that even if they were wrong to state that the loans were emoluments of his employment, Mr Boyle should be liable to tax under the transfer of assets provisions so there would not be any further grounds for appeal. The numerous appeals raised by Mr Boyle including his claim that he was entitled to credit for income tax which ought to have been deducted by SCL, were rejected in their entirety. It was found that Mr Boyle was liable to income tax for the years 2001/02, 2002/03 and 2003/04 in respect of monies he received as employment income.

This case demonstrates that efforts to avoid tax using offshore vehicles are being increasingly targeted in the crackdown against tax avoidance. This case also suggests that schemes where employees receive ‘loans’ as a form of payment are also being treated with suspicion. It is estimated that more than 15,000 people have used schemes similar to Mr Boyle and that the pursuit of the outstanding tax and national insurance contributions associated with these schemes will amount to over £400 million.

With the courts continuing to find against avoidance schemes, and the host of new regulations designed to increase the pressure on such schemes, the viability of such schemes is seriously called into question. Genuine tax planning, rather than convoluted schemes, appears to be the way forward and Eaves and Co are here to help.