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?

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.

Making Tax Digital – Your Thoughts Welcome

As you may be aware, new proposed rules on tax compliance, called Making Tax Digital, are being consulted on at present.  We are planning on preparing our own response to the consultation document, and would welcome your thoughts to take on board and incorporate into our thoughts on a response.  In fact, we would suggest you send in your own response, but we would still welcome your input on the points raised.  They are important.

Of the proposed changes, the “digital tax system” is perhaps the one that will cause the biggest changes to advisors, businesses and individuals.  It is under this that the proposed “end of the tax return” would occur.  Individuals will make changes to their digital tax account throughout the year and it is proposed that information would feed in automatically from real-time PAYE and banks and building societies.

A significant proposal is that, under these rules, businesses will be required to keep digital records and to provide quarterly updates to HMRC with summary data from these records.  There appear to be no proposals to help businesses with the cost of appropriate software.  Bearing in mind there would then be an annual taxable profit calculation due after the year end, what is the reason behind the proposal for quarterly reporting?

It is proposed that this would commence from April 2018 for income tax purposes.  The main exemption from the rules will be businesses with turnover of under £10,000, which would seem to help few.

Some of the particular issues that we will look to raise concern the following:

  • The rules are proposed to be mandatory. This certainly raises concerns for certain taxpayers as noted below.  One has to wonder why the rules should be mandatory, when it is claimed by HMRC that they will be welcomed by most taxpayers?
  • Certain individuals and sole-traders may find the rules particularly difficult. These might include elderly taxpayers and those who are not computer literate, or do not own appropriate equipment/software.  Whilst it may be news to those in power, not all people have a PC and certainly not all have mobile phones with internet access (which was claimed to be the solution to not having a PC).
  • Entering sensitive and important financial information on one’s phone may not be ideal in any event. Other HMRC suggestions include asking a family member for help.   However, this overlooks the fact that financial information can be sensitive even (or perhaps particularly) amongst family members.  We feel that this aspect should not be overlooked in the drive towards digital taxation.  We would commend the article in Taxation by Robin Summers FCA on this point.
  • Businesses will be required to submit information to HMRC on a quarterly basis. This could be particularly onerous in the case of small businesses where a multitude of things could [and will for some] cause problems. It may be fine when things are running smoothly, but why add extra burdens?   Life suggests that, unfortunately, there can be upsets…Family problems, business problems, partnership splits, illness, death of [someone] …etc. etc.…  In such circumstances surely no- one would expect the first priority of a business should be to file an HMRC form, ahead of [say] visiting their dying mother?  Once behind, such a short reporting period would make it increasingly difficult to get up to date.  Recent practical experience with HMRC would suggest a “reasonable excuse” let out may be insufficient!  [See previous blogs and recent case law.]
  • Even for the biggest business, access to accurate up-to-date information at short notice could be difficult. Hence, the idea is likely to cause a significant increase in work on administration.  The proposals suggest this would fall disproportionately on small business.  Such businesses, especially start-ups, may therefore decide to opt out of being “HMRC Customers”.  Creating barriers to joining the “Tax Club” would not, in our opinion, appear to be a sensible way forward.  Do people agree?
  • It may be noted that Stock Exchange listed plc’s do not have a compulsory requirement to publish detailed figures every quarter. Why should it be fair to make a small family firm subject to more onerous conditions?
  • The requirement to keep digital records, “as close to real time as possible” again could cause issues for those with limited access to/comfort with technology. There may also be many in businesses where keeping digital records in real time could prove an excessive burden in a practical sense. For example, someone travelling on a music or comedy tour, where time pressures are high.  For them building a pile of receipts is the best that can be hoped for in the short term.  Their Accountants can then help them do the reporting at the end of the year.
  • Business innovation requires flexibility and imagination, not an obsession with bureaucratic record keeping? Such a tight time table as proposed may be ok for a smooth running, continuing business, but growth and change require intensive resource.
  • Importantly, for those with any conception or imagination on what it is like to run a business, [for example, Accountants with real clients] they may blanche at the thought that the first objective of an entrepreneur should be to file Government forms when he is working all hours to try to get a business to produce a profit.  Yes, there should be an obligation to report to HMRC, but there should be a fair interval between striving for an objective and sending in a report on the result.  Sending in a football score after 22.5 minutes is a waste of resource all round. Outcomes can change over time.  Income Tax is based on the profit for the year.
  • Many businesses are seasonal, so use “quiet periods” to catch up with administrative matters. This often enables them to keep staff employed throughout the year, rather than laying them off.  How does the Government wish such businesses to cope with the change?
  • We feel adding extra administrative burdens can only put up an extra barrier to entrepreneurship. Does the Government wish to reduce the economic benefits inherent in the creation of small business, or just encourage them to join the Black Economy?

Of course, others may have other views.  We would like to hear. Please let us know.

The full consultation documents can be found at https://www.gov.uk/government/collections/making-tax-digital-consultations.  Honestly, we would be very interested to hear your thoughts.

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.

HMRC Consultation on Unapproved Employee Share Schemes

A consultation is currently in progress relating to proposed changes to the rules on unapproved employee share schemes and employment-related securities.

The changes proposed could be quite radical and therefore advisors who deal with such schemes would be wise to consider responding to the consultation. Eaves and Co are currently preparing our own response to the proposals and we would welcome any further feedback that you may have, to be incorporated into our response.

The Proposals

The summary of the proposed changes is as follows:

  • Individuals would potentially be able to choose whether the tax charge on employee shares arises at the time they are acquired or, at the time at which they could be sold for their “unrestricted market value” (when they become ‘marketable’). Income tax and NICs would then be payable at this time.
  • The rules on marketable shares could potentially mean that shares in private companies (without an EBT) would not be treated as marketable until arrangements were put in place for a sale of the shares. This would potentially enable tax charges to be significantly deferred compared to the current rules, although an election could still be made to pay tax upfront.
  • Changes to the rules on readily convertible assets (RCAs) which determine when NICs are payable on employee shares. The proposals are that all such shares would be RCAs (with NICs payable at the point at which the shares became ‘marketable’ unless an election was made to pay tax upfront on similar terms to a current s.419 election.
  • Dividends and other income received from employee shares before they became ‘marketable’ would be taxed as employment income

Whilst the proposals seek to provide a simplification of the current rules, it remains to be seen whether this will be achievable bearing in mind the necessary anti-abuse clauses that will no doubt be required to prevent unforeseen uses for such rules. Our thoughts are that these proposals require detailed critical thought.

The consultation document proposes a ‘simplification’ in order to encourage the use of employee share ownership. Whilst there may be some cases where deferring an upfront tax charge might make such schemes more attractive, the fact that all of the uplift would be taxable as employment income might raise questions about what the purpose of entering into such schemes would be.

Similarly, one wonders what the policy thinking behind charging dividend income as employment income is, and how such a proposal would encourage the use of share schemes? If it is felt that dividends are taxed at the wrong rate, why are complicated rules like these proposed, rather than simply raising the tax rate on dividends?

As advisors, it will be important to ensure clients are fully aware of the pros and cons of making elections under these rules and the impact of paying tax at employment income rates on any profits and/or dividends arising on the shares if no elections were made.

Do you think these changes would improve the position for unapproved share schemes and encourage more use of such schemes, or would the new position with potentially increased amounts taxed as employment income have the opposite effect? Please let us know in the comments section below.

‘Raising the Stakes on Tax Avoidance’ – A Response

For those of you who failed to find the exciting Government Consultation Document, ‘Raising the Stakes on Tax Avoidance’.  It is a fluffy, woolly document which proposes that the HMRC should have discretion to label someone as a “High Risk Tax Provider” [of Tax Avoidance] and then fine them up to £1m (plus £10,000 per day) for … well read and find out.

I am sure HMRC may mean well, but surely this is not the answer?  It is extra resources they need not new powers?

Anyway, for those now champing at the bit, here is my submission to HMRC on the Consultation.

“Please accept this as a formal response to the Consultation Document “Raising the stakes on tax avoidance.

SUMMARY

In my opinion the approach suggested is:-

a)     Wrongheaded.

b)    Risks bullying, corruption and, in the longer term, a reduction, rather than increase in tax compliance.

c)     Is an abuse of Parliamentary process, because (according to HMRC figures in Section 8 of the Document) the estimate is that there are only 20 businesses who may be affected.  Such as issue could and should be dealt with under existing powers.

d)    It risks undermining the Rule of Law, because it proposes severe sanctions (including £1m initial fine plus £10,000 per day subsequent fines) with the penalties being imposed on woolly, ill-defined criteria which are ultimately at the whim of State dictat.  This is particularly a concern because none of the alleged criteria require there to be any criminal behaviour on behalf of the so called ‘high risk promoter’.  Fines of such a size would ruin most individuals – taking their families down with them.  How can such penalties be compatible in human rights or any version of equity with recent lenient policies on penalties for theft and burglary?  Those activities are illegal.  On the other hand tax avoidance is generally thought to be legal. [Collins Dictionary 1995: tax avoidance n. reduction of tax liability by lawful methods].  How can it be appropriate to punish someone for obeying the law to a greater extent that the sanction chosen by the state for illegal attacks on an individual citizen’s property?

QUESTIONS

I           Identifying a ‘high risk promoter’.

  1. Question I incorporates a value judgement and states (in 3.16) that ‘the lack of flexibility leads to the conclusion that this would not be workable, consequently the Government does not intend to adopt this approach’.

I agree the lack of flexibility represents a problem, especially as common professional advice is (in relevant situations) to request HMRC use formal powers, so as to avoid the risk of the client suing the advisor for breach of confidentiality.  However, to then make it down to the whim of a Revenue Official whether a law abiding citizen and his/her family could be financially ruined is totally unreasonable.

  1. The ‘key individual’ concept is especially iniquitous as it could effectively lead to a person being unemployable in their field of training without having committed any crime whatsoever.
  2. Whilst the consultative document uses the currently fashionable term ‘transparent’, this does not take account of:-

a)     The risk that the client may not be truthful to the advisor, so what looks like a reasonable assumption/conclusion to him may not tie in with all the facts – especially events occurring after his input.

b)    The fact that any commentary on planning must, by definition incorporate assumption on future events.

  1. A key risk of a taxpayer using an avoidance scheme is that it does not work.  It is the role of HMRC to identify such schemes and challenge them.  If they are quickly shown to fail taxpayers will not waste money on purchasing them!  I agree they should be diligent and do this.  They need extra resources, not extra theoretical powers
  2. If (Para 3.6) the schemes have negligible chance of working and rely on ‘concealment and mis-description of elements’ then surely they are fraudulent, representing illegal tax evasion.  This is not avoidance and should be subject to separate penalties/criminal sanctions.  However, HMRC does itself no favours, nor any to the debate on tax compliance to mix up, as it seems to deliberately, lawful and unlawful behaviour.
  3. I agree that taxpayers should have the right to see the pros and cons of technical advice and if necessary, the right to show that to different advisors.  Advisors (and HMRC) should then be obliged to debate the merits of any technical issue in a reasonable timescale in full light of the facts properly disclosed.  Similarly though the client should be entitled to claim professional privilege in terms of the advice elements.

 I am conscious in this context that when asking for data under the Freedom of Information Act I was told that keeping the advice of legal counsel secret was vital to the administration of justice and good governance.  If a taxpayer is not allowed to see the advice given to public servants he has effectively paid for via taxation in the context of a ‘consultative document’, why should the State have the right to see advice given to him  specifically with regard to his own affairs, to his possible prejudice?

  1. Although penalties are proposed for doing ‘it’, tax avoidance is not even defined here.  However, readers considering the current provisions should recognise that the recent comments by Jamie Oliver promoting home made healthy food, would (under the last published HMRC definition of tax avoidance) amount to ‘tax avoidance’.  This is because he was promoting zero rated food purchases rather than take away food liable to VAT at 20%.

II          High risk promoter regime

  1. Without identifying a proper definition of High Risk Promoter and Tax Avoidance it is totally inappropriate to have a ‘regime’ at all.
  2. A better route may be to consider HMRC ‘endorsing’ professional advice by advertising those regulated by ICAEW, CIOT, ACCA etc., are subject to proper professional standards and then naming those who failed to live up to it – within the normal and limited restrictions imposed by libel and defamation.  It would only seem fair that a business so challenged should have access to those standard defences.
  3. There should be no need for extra time limits.  If the time limits are not long enough then that should be addressed generally.  HMRC needs sufficient resources generally to carry on, but that compliance effort should be targeted widely and fairly.  By all means focus sensibly on perceived targets and risk areas.  It is sensible.  However, all should be equal before the law and it is not just this week’s ‘Group Hate’ Victim.  Others may turn out to be equally naughty.

III         Penalties for Users of Failed Schemes

  1. My experience both as an advisor and Inspector of Taxes is that people do not like the risk of litigation, let alone the consequences of losing.  If a judicial decision goes against them, or their technical stance most well advised litigants will be only too willing to drop the case and ‘amend’ their returns.  I would therefore be surprised if there was evidence that taxpayers were simply ‘stringing things out’, because of the resulting high professional cost to them.
  2. It follows that the risks of failure with costs being awarded against them are already a dis-incentive to taxpayers, in which case there should be no requirement for a ‘penalty’.  This would just seem to be an arbitrary risk to be imposed by HMRC for going second, enabling them to bully taxpayers into settling where in law they may have valid distinguishing features.

CONCLUSION

I used the words ‘wrongheaded’ to describe the proposals.  In my view this is because it is seeking statutory measures to try to solve a problem of resources.  HMRC does not need more powers, it needs the personnel, resources and training to impose the powers it already has.

In the 17th Century Governments chased lawless behaviour by imposing greater and greater sentences on people without really addressing the probability of being caught.  It resulted in the saying that someone ‘might as well be hung for a sheep as a lamb’, because the sentences got so arbitrary that sheep stealing was a capital offence.  Tax compliance is a delicate flower.  It has been nurtured over time by HMRC fairness and the associated co-operation resulting from qualified professionals.  It is never going to be perfect, but generally I believe the profession wishes to continue to help by encouraging good compliance.  However, this will not happen if they are bullied out of explaining reliefs and the ‘upside’ of compliance.  That is another way of interpreting the tendency for professionals to avoid giving tax advice.

I think it unlikely there would be a change of behaviour by diligent professionals.  It will follow the financial services advice model of 20 years ago, where independent professionals will be excluded with the result that clients will go to the unscrupulous.  Reality in the commercial world being as it is, I fear clients would be likely to refuse to pay fees to learn what they are not allowed to do, without associated sensible advice on what they may do lawfully.

Whilst I still have admiration for many HMRC staff, the fact remains it has suffered and is suffering from a lack of trained staff, and people who are authorised to take decisions.  My colleague was on the phone for 1 hour this morning (without getting through) to ask why we were being threatened with penalties for ‘failing’ to file a form which has already been filed.  Currently, I have more than 1 case where we have written to HMRC to try to pay extra tax due but have been ignored or fobbed off for over a year.  Give HMRC the resources to do their job properly.  Do not impose extra arbitrary penalties and lose the sympathy of the majority.  When HMRC think it ‘reasonable’ to seek penalties for a ‘late return’ when it was actually lodged 10 days early as they did recently [Estate of Teresa Rosenbaum (deceased) 2013].  I fear they risk moving the rather fickle mood of public opinion against them.  It is an example of a bullying bureaucratic mind set which promotes a natural fear that, if not now, at some stage in the future, the arbitrary powers envisaged by the Consultative Document may be misused – to the detriment of us all as free citizens supposedly equal under the law.

I recommend the provisions are abandoned.  Use the money to train some Inspectors.

Paul Eaves”