The thought police and the right amount of tax

Secret denunciations against anyone who will conceal favors and services or will collude to hide the true revenue from them. (Photo credit: Berthold Werner via Wikipedia)

Being shot at

 

These days it is really tough being a tax professional in the UK. There is hardly a day goes by without some media frenzy about supposed immoral tax avoidance, and we get all the blame as the villains of the piece. Many of us might be forgiven for being confused by all the hot air and smoke and mirrors into forgetting what tax avoidance is, so if you have, please remind yourself here.

The Jimmy Carr affair was the worst flare-up this year with the “comedian” being lambasted for wanting to pay less tax on his surprisingly high income. Yet in truth while only 26% of the population think tax avoidance is morally acceptable as against 64% who don't, 42% would probably employ someone to help them avoid tax as against 29% who wouldn't. On the face of it there are double standards among those asked, but perhaps not if we think about this a bit more.

I do not advise my clients on tax avoidance. If they engage in a scheme provided by someone else, that scheme will not have been recommended by me. I would likely brief the client on the risks of an HMRC enquiry and that the scheme might not work and that the client will very likely have to wait a long time to find out if it does.

What I do offer my clients is ways of paying the least amounts of tax under the current law as intended by Parliament. That is as morally acceptable as telling someone petrol is cheaper at one service station than it is at another, isn’t it?

Oppressive Culture 

 

The current climate or political culture, supported joyfully by the media, is that people and especially businesses should pay as much tax as possible. This now extends to international or multinational companies being expected by the press to pay tax when they have not made any money in the UK. Normally if one has no profit (i.e. no net income) one should not have to pay tax, but apparently it is thought that Facebook and Starbucks should, just because they are big and make profits elsewhere.

In a tax forum a well known tax commentator likened our tax system to the East German model, and it seems that some learned judges have been intimidated by the political climate into reaching decisions which favoured HMRC, but seemed strange. I had better not say more because there would be nothing worse than being sued by a lawyer.

Just the same, there is no public political dissent from the notions that not only should we not indulge in tax avoidance schemes, but that reasonable tax planning with contractors working through personal service companies is somehow morally beyond the pale. That is notwithstanding that so many Government agencies have insisted on contractors working through companies to avoid their obligations as employers on the human resources side, including giving notice, redundancy, providing pensions, as well as avoiding paying Employer's National Insurance on their tight budgets.

The new Communism

 

So the three main political parties all sing from the same hymn sheet, and anyone in politics brave enough to disagree would be instantly lambasted and attacked by the media, with the Treasury and Opposition spokespeople getting on their high horses. They would be joined by the usual suspects, purporting to represent the best interests of the workers on whose behalf they claim to speak.

Sadly, what has happened somehow over the last dozen years is that the State has instilled this belief amongst so many that there are others who are up to something, somehow fiddling their taxes down. Because so many people have suffered in the economic downturn, this belief is whipped up by politicians and their willing media by envy (it sells newspapers).

So in many ways our capitalist state has become like an old Communist State. I recommend this if you can spare ten minutes more of your time. Privately no one really believes everything they are told but publicly they are afraid to speak out simply to say that the picture painted is totally false.

From the public opinion poll mentioned above, we might infer that some of the 64% who say that tax avoidance is unacceptable say it because the thought police would get them, but privately admit they might do it themselves given the chance. Somehow, those of us who advise on tax but do not do tax avoidance have just the same been tarred with the same brush as the tax avoidance promoters.

We are innocent, OK?

 

The tax avoidance “industry” is a relatively small and accounts for £5 billion out of the £32 billion tax gap estimated by HMRC. That is not small beer even at less than one-sixth of the tax “lost” but very few tax professionals are involved in tax avoidance anyway. We are not wicked for assisting our clients through the diabolical bureaucratic tax maze that has been created. We help our clients get on with their lives and their businesses, to help stimulate the economy and help get the country out of the mess created on the watch of many of the current leading politicians.

Are we allowed to be heard outside our own cloisters?

HMRC wasting our money on trivial matters

Posting paper

These two cases nearly slipped by without my noticing, but really we have to wonder why HMRC do not use their resources rather better.

In Eamas Consulting LLP v HMTC 4.4.12 TC 02009 a partnership received a paper Tax Return for 2007-08 in April 2008. HMRC issued a penalty notice in February 2009 indicating they had not received it back. The partnership said they had submitted a nil return as soon as they had received it, and indeed paper Self Assessment Returns had been submitted on behalf of the two partners also in April 2008.

The lead partner then requested a duplicate paper Return, which was eventually both received and completed in August 2009 also showing “nil” partnership income, but by which time a second penalty notice had been issued as the July deadline had passed.

There were telephone calls with HMRC and letters written to different offices which no doubt caused confusion. Anyway, the partnership appealed on the grounds that a Return had been submitted in April 2008 and HMRC should be able to find the original Return, even though the partnership could not find a copy.

A second First Tier Tribunal (referred from the Upper Tribunal) found that on the balance of probability the partnership had submitted the original Partnership Return in April 2008 since the Returns of the individual partners, with nil profits from the partnership, were submitted then. The appeals against the penalty notices were allowed.

What a waste of money with HMRC staff going to three tribunal hearings, when a little common sense would have saved everyone time and worry!

In Kathleen Lomas v HMRC TC 02010 the older lady taxpayer received a letter on 10^th January 2011 telling her that she needed to complete a Self assessment Tax Return for the year ended 5^th April 2010. She called HMRC and was sent a paper Tax Return which she sent back, duly completed on 17^th January 2011.  This Return was "captured" by HMRC's system on 27th January. The lady had an underpayment of £270.84 which she paid in March 2011, the day after she returned from abroad, having been away since 18^th January.

The lady had upon her return found a penalty notice because she had not submitted the Return on-line, the deadline for paper returns having been 31^st October 2010, two and a half months before she was sent the paper return for completion.

The taxpayer appealed against the penalty notice and the First Tier Tribunal found that HMRC had waived the requirement for e-filing by issuing a paper return in January. Again, common sense should have prevailed, and only did when the case reached the FTT. Judge Geraint Jones Q.C. said “The appellant is a lady who, it is accepted, has no blemish on her tax return or tax payment record over the last 40 years. There is no reason whatsoever to doubt her veracity.”

In neither case was there any great precedent being set. “Reasonable Excuse” allows HMRC to cancel penalty notices. Once upon a time, more junior staff of HMRC, or perhaps historically in the Inland Revenue, could exercise their discretion and cancel charges which seemed unreasonable. Since these cases went to the Tribunals, it seems that even very senior staff of HMRC have no power to make sensible decisions or they are incapable of doing so.

It does not inspire confidence in HMRC's ability to extract “the right amount of tax” from the taxpaying public whether errant or otherwise when they apparently show such incompetence in dealing with trivial matters and waste our resources at the same time. What do you think?

HMRC's review of Extra-Statutory Concession A19

Her Majesty's Revenue & Customs (HMRC) office, Wellington Place, Belfast, Northern Ireland, October 2010 (Photo credit: Wikipedia by Ardfern)

As you may know, HMRC is currently resisting all claims under Extra-Statutory Concession (ESC) A19, which for the uninitiated is a concessional treatment for taxpayers, usually unrepresented and who have not been required to submit tax returns, who find themselves with tax liabilities where PAYE codes have been issued incorrectly.

HMRC has issued a consultation document which is here. 

This is the response I am sending to HMRC. It is based on my own experience with no cribbing from anyone else.

Response begins:

5. Summary of Consultation Questions

Taxpayer responsibilities

5.1 Do you agree with the removal of 'reasonable belief' to be replaced with an objective test based around 'taxpayer responsibilities'?

No. Most taxpayers under PAYE are not tax specialists and have no need to employ agents since their affairs should be simple. Many claims under ESC A19 arise where individuals have two or more small occupational pensions. With modern software they are entitled to believe HMRC will get their tax liabilities right even if they have no concept of the automated system. A majority of such taxpayers will believe reasonably that their affairs are in order even if they are not.

HMRC responsibilities

5.2 Do you think that the introduction of HMRC responsibilities makes it clearer in regard to what information HMRC must act on? Has HMRC identified the correct responsibilities and/or are there others that should be included?

It is important that HMRC does take responsibility for taking action in relation to all information received and this should include all P14 and other end-of-year information. It is inexcusable that HMRC even resists currently claims under ESC A19 where it is clear they had relevant information as per Forms P14 received from employers and pension providers, which should have been deal with timeously.

'Exceptional Circumstances' test

5.3 Do you agree that the 'Exceptional Circumstances' section is now redundant and can be removed from ESC A19? If not, for what circumstances do you think it should be retained?

This question is slanted in itself. Low income taxpayers could endure serious hardship if information not properly used by HMRC involves notice of further liability less than 12 months after the relevant period or which had built up over two years.

Capital gains tax

5.4 Can you identify any issues with the removal of CGT from ESC A19? HMRC would be particularly interested to hear examples of where a recent request has been made in relation to CGT and ESC A19.

It is less likely that a claim would be necessary in relation to capital gains issues since most taxpayers should be aware of the tax.

Time limit for requesting HMRC looks at ESC A19

5.5 Do you agree with introducing a time limit for individuals to contact HMRC? Can you identify any issues with HMRC adopting this approach?

The time limit should be a fixed period of at least nine months after receiving Form P800, in the interest of fairness. To change the dates in HMRC's example:

“HMRC notifies Mrs Smith of an underpayment for the tax year 2015-16 by sending her a P800 Tax Calculation on 15^th March 2018. Mrs Smith considers it was HMRC’s failure to deal with information which led to the underpaid tax. Mrs Smith should contact HMRC: as soon as possible after receiving the P800, or, upon receiving her Tax Code Notice for 2018-19, but in any case, before 6 April 2018.”

This would leave Mrs Smith three weeks to notify HMRC of her claim, which would be unfair. Theoretically on HMRC's proposed change Mrs. Smith might have no real time to notify at all. Surely nine months is a fair and reasonable period to make a claim?

Other considerations

5.6 HMRC plans to issue supporting guidance alongside the revised wording. What format would be most appropriate for this? For example, online guidance, a Question and Answer document or updates in the PAYE Online Manual.

5.7 Are there any terms within the revised concession which you feel require further explanation or expansion?

On-line information should always be available, but a paper Question and Answer Document should be available for all taxpayers should they need it.

However HMRC has not demonstrated that there is any need to amend the current guidance on operation of ESC A19. Clearly the present Concession has been reinterpreted in HMRC's favour in the last two years with even very excellent and one would have thought irrefutable claims being denied, requiring taxpayers to make formal complaints.

HMRC should view the Concession not as a drain on Treasury revenue, but as it was formerly; to bring justice to taxpayers who can ill-afford late and unexpected tax demands when HMRC should have properly collected the tax at the time the relevant income was received.

End of response

I am very unhappy both about the proposed revision of ESC A19 and agree with Keith Gordon that there is no need for any change. If you have not done so already, please hurry to sign Keith's petition against the change. 

Related articles

• HMRC errors and the older taxpayer

HMRC errors and the older taxpayer

Post-modernism

Recently I was looking on-line for the first time at the record of a taxpayer who has been retired for thirty years. As one would expect, he isn't exactly in the first flush of youth, and although very much “on the ball” to the extent of doing his supermarket delivery order on-line, I don't expect him to be well up with our modern tax system.

Modern is a term I should use loosely. Of course I mean “current” in that the system creaks badly because HMRC relies too much on automation and their computer systems, and have extracted the human element too much or too early.

Mystery

My older taxpayer's record showed that he had had £1,500 tax coded out from his pension in 2011-12. That is quite a lot, and I could not see where this previous apparent underpayment of tax had arisen. The on-line details were not sufficiently specific.

We asked for an explanation from HMRC over the telephone, but the agent could not help and said he would arrange for a letter of explanation to be sent.

To HMRC's credit, that letter arrived within two weeks. However it explained that the underpayment of tax had arisen in 2005-06 but had been collected in 2008-09 so it hadn't needed to be collected again.

Goalpost shifting

All this is a bit worrying. In an era where HMRC wants to move the goalposts further than they have already done informally with regard to ESC A19 because they say they are better at end-of-year reconciliation of liabilities, I cannot see how they would have picked up this error from way back if someone like me hadn’t picked it up.

Crying foul

We expect HMRC to hold errant taxpayers to account. We expect them to collect “the right amount of tax” by which I mean the amount properly due under the law. Unfortunately we as taxpayers do not seem to be able to hold HMRC to account over their errors.

I am going to ask for interest on the refund due as a consequence over and above the generous 0% currently prescribed. I will be wasting my time no doubt, but my older pensioner has been deprived of a not inconsiderable amount of money over twelve months. He should be entitled to compensation, don't you think?

Sympathy for tax dodgers?

Would they steal from Sainsbury's? (Photo credit: Wikipedia)

The Daily Mail is not my favourite newspaper, but in view of its significant readership on and off-line, it must be one “the public” likes and therefore its readership is representative of “the public's “ views.

As I write this there is more faux outrage because the BBC had decided to save licence-payers money by avoiding paying Employer's NIC on the pay of many of its staff's remuneration by engaging them as contractors. Additionally they avoided falling foul of the considerable costs which would be incurred in having these people as employees, including pension schemes and paying them off when they were sacked; this as opposed to waiting for their service company contracts to lapse. Very sensible, I would have thought.

As we know, the BBC's practice in this regard is in line with many Government departments, local authorities and the NHS. We should all be upset if those bodies didn't do their best to save taxpayers' money.

Yet somehow the couple in this story of tax-dodging crooks in the same newspaper attracts sympathy from the commenters. You will not have time to read all the comments. It is hard to read very many without getting annoyed. A couple of classics are “at least they weren't scrounging benefit from the state as well as earning money” and “victim-less crime”.

For the record I think this pair of tax dodgers deserved everything they got, but judging from the comments I am in the minority in “the public”. Apparently it is not so bad to fiddle your taxes as it is to fiddle a claim for benefit. I suppose the person who thinks robbing the State of £85,000 is a victimless crime probably believes that it is the same as shoplifting at Sainsburys. After all, no one gets hurt so it must be all right.

Except of course people do get hurt. Honest taxpayers have to pay more because some are on the fiddle. Sainsburys' shareholders (including our pension funds) lose and customers have to pay more to subsidise the losses. Where is the difference? It is stealing. In both cases it amounts to stealing from you and me.

I suppose it is too much to suppose that the politicians quoted in the BBC story would have much grasp in understanding the issues before feeling free to comment, so at the other end of the spectrum I shouldn't expect the Daily Mail readership to grasp that most of them are being robbed by these market traders outside the system.

We are all being mugged by the fiddlers. I think tax avoidance (legal) is a question of personal morality for individuals and as long as they abide by the law it is up to them. I can have a view but accept it may not be the same as theirs. Tax evasion is breaking the law and I am sure we are all agreed it is immoral. Or are we?

HMRC tip-off hotline and catching the crooks

Grassing up

We are told that 74,000 calls were made to HMRC's tip off-line in 2011, reporting suspected tax evaders. That is apparently rather fewer calls than were made in 2010.

I would like to see all dishonest tax-dodgers caught. The so-called black economy consisting of people who offer to re-lay your drive or clean your house soffits and fascias for cash and all the other “cash-in-hand” people who knock on your door cost the country billions in lost tax. Dave Hartnett banged on about this, I remember. He was right in that respect.

Burst water mains

The tax leakage through dishonest tradespeople is very likely much larger than the (legal) avoidance by large corporates and the illegal VAT fraudsters though I am always very pleased when tax crooks are caught and sentenced. Even the driveway-laying tax evaders can apparently get large scale. 

Most of the 74,000 tip-offs will relate to small scale tax-evasion though in aggregate there will be a large amount of tax lost. That is tax stolen from honest taxpayers' back pockets, considering that the rest of us have to make up the deficit caused by the fiddlers.

Resources

What concerns me about the tip-off line is HMRC's resources to deal with the information received. They may have the profiling software, but the false and malicious allegations will need to be weeded out and then the others followed up. Logically, it would be easier to concentrate on the bigger fish because the potential tax recovery would be greater. With any investment in business, the yield is important because it means more profit, even when we are talking about HMRC. Apparently they lack resources even in that area.

HMRC have “task-force” campaign around specific types of businesses but it seems to me this is just nibbling around the edges. I think that, coupled with the profiling software, more well-trained and preferably experienced staff should be taken on. That is anathema to those on high who want to see further staff cuts in Government departments, but potentially the yield should justify the investment costs.

If HMRC want experienced tax people with noses for weeding out the crooks, maybe they should hire some tax practitioners from the private sector. I could make myself available on a part-time basis if I had a suitable offer (I mean it) but my point is that experience in real tax issues is what HMRC requires to sniff out smaller-scale tax evasion. Unfortunately with the cuts and early retirements, experience is what HMRC staff lack.

Tax avoidance and the avoidance of doubt

This is most of a response I wrote in a private forum when amongst other absurd suggestions I saw it suggested that claiming expenses against business income was a form of tax avoidance. It may have been tongue in cheek but it did wrong-foot a couple of other posters in the forum.

Post the Jimmy Carr affair it is still worth repeating in addition to earlier posts here.

I think it is useful to say that tax avoidance is not:

• Claiming expenses against business income to determine taxable profit. That is what our tax returns require us to do.
• Using tax breaks given to us by our Treasury such as (in the UK) ISA investments and putting money into Enterprise Investment Schemes and Venture Capital Trusts, thus getting relief from income tax and capital gains tax.
• In the UK, paying out our company profit in dividends with minimal salary to avoid paying Employers and Employees' National Insurance Contributions. Despite the hue and cry over people contracted through their companies to work for Government departments and Quangos, the Treasury is quite aware that this is common practice so again we must assume that it is “the will of Parliament”. That is an important phrase, by the way.
  

What is generally accepted as “tax avoidance” in the world of tax professionals is using arrangements which have a degree of artificiality and that are without commercial reality; there would be no commercial reason for doing them other than to reduce or avoid tax.

The current furore is over Jimmy Carr. Apologists for more aggressive tax avoidance quote the words of Lord Tomlin in Inland Revenue Commissioners -v- Duke of Westminster; House of Lords 1936, when he said “Every man is entitled if he can to order his affairs so that the tax under a tax statute is less than it would otherwise be. Whatever the substance of the arrangements may have been, their fiscal effect had to be in accordance with the legal rights and obligations they created.”

However it is no longer 1936 and Lord Templeman told us back in 1986 that tax avoidance was reducing a tax liability by means within the law, which were not intended by Parliament. Tax mitigation is arranging our affairs and those of our clients to reduce our liabilities in a way that Parliament has considered. This followed from then recent history in tax litigation.

In 1982 the Inland Revenue, as it then was, had two major successes with cases known as Ramsay v. IRC and IRC v. Burmah Oil Co. Ltd. Basically it was determined that any arrangement which has pre-arranged artificial steps with no commercial purpose other than to reduce tax liabilities would effectively fail. This is a simplification, but the rulings established what has become known as the Ramsay Principle, which would mean that any wholly artificial scheme to reduce tax would fail. The General Ant-Avoidance Rule (GAAR) which the Government has decided to implement following an enquiry conducted by Graham Aaronson QC will seek to reinforce that principle, though I rather think we will see a great deal more work for the lawyers.

I worked on avoidance schemes myself. I enjoyed the intellectual challenge way back and I make no secret of it. Avoidance is something I have returned to in writing several times and also see here.

If tax avoidance is a moral issue it is a personal one as I say here, and apologies for all these links. I feel that there are certain things that need to be said for all professional tax practitioners, and I have an article along the same lines published in one of the professional newsletters.

My concern over many of the tax schemes being sold is that those who go into it often do not appreciate the risks any more than do the non-tax professional introducers and “financial advisers”. I use the term loosely. While the introducers are often to a degree covered by the insurance of providers, their professional reputations are at risk as many of these schemes will fail.

The individuals trying to avoid tax often do not understand that HMRC will dig into their tax affairs and those of their companies, and if their families are involved, their affairs too. Anyone using a scheme should have a strong stomach and a capacity to sleep at night whatever the stresses and strains of daily life. The tax relief, if it arrives, may be a long time coming, and it may be clawed back later.

Some schemes I would advise any client of mine not to touch with a bargepole knowing who is behind them. Because they have been “approved” by Counsel, a leading QC or whatever it says in the blurb is no sort of guarantee. Other Counsel may disagree and they might be appearing for HMRC in the future. What Counsel provide for a scheme is a protection for the providers in not getting sued, and you can always find a tame barrister to agree your arrangement will work. I should know because I have.

For one of the reasons above I would not be happy if my client chose the scheme I saw circulated this past week. However it would be my client's decision and we would declare the scheme in the tax return under the “Disclosure of tax avoidance schemes (DOTAS)” box unless it didn't have a scheme number. If it did not, I would write an essay for HMRC with every detail I knew, unless the client asked me not to. If she or he asked me not to disclose I would resign.

The professional bodies don't want their members involved in creating aggressive schemes anyway, so if I did work on an extreme one myself as a designer I might be subject to disciplinary action (not that I am an ICAEW member), even though I think it should be my call and not that of a professional body.

The public's double standards over tax avoidance and tax evasion

Outrage
To be in Britain in 2012 means that it is quite impossible to avoid strident headlines about wealthy and earning individuals avoiding tax by utilising schemes. The case of the comedian, Jimmy Carr, has attracted particular publicity and it has led to confusion among not only the public but also journalists as to the difference between avoidance and evasion of tax.

In case anyone here is still confused. “tax avoidance” means avoiding paying tax by perfectly legal means if often rather arcane and somewhat artificial. “Tax evasion” means failing to declare to HM Revenue & Customs income, gains or commodities or services which should be taxed according to the law. Therefore tax evasion is illegal.

Avoidance of doubt

I believe my position on tax avoidance is clear.  and I am aware of my own responsibilities as a provider of taxation advice.  However, may I spell it out a bit further? I do not recommend any tax avoidance scheme (a cunning plan devised by some specialist provider), and will not introduce my client to any arrangement which has any degree of artificiality. If one of my clients is approached by someone else then I will ensure she or he understands the risk and pain of close scrutiny by HMRC before making a decision.

I do not go as far as the politicians in saying that tax avoidance is morally wrong. In the case of large corporate entities, the duty of the directors is to their shareholders, and that means preserving as much of the pie as possible to feed those who have invested their money in the business and incidentally in the livelihoods of their employees. There is an awful lot of confusion and strident headlines from irresponsible or plain ignorant journalists about avoidance. Most recently I saw a large corporate which had been in the news over a tax avoidance issue being accused of further avoidance because it had made a real, not artificial loss, and therefore had no profit to tax.

I suppose in defence of journalists, many are being bombarded with material from so-called experts who may be campaigners with bees in their bonnets.

Morality
Really, in respect of money which is legally ours, the moral judgement as to its use is in our own hands. I may not respect someone who makes no contribution to society, but I will not set myself up publicly to pronounce on moral issues. I have known vastly wealthy and successful people who gave absolutely nothing to charity, and of course personally I thought they should. Many years ago I also knew a very famous person who gave a great deal of his money to charity in a very low-key way. I wish the public knew what a really good and decent person he was (and a very nice man anyway), but I don't think he would have wanted the public to know, quite apart from my being bound by confidentiality. My lips are sealed.

Of course I do help my clients to pay less tax by claiming every possible relief and arranging their affairs to pay less tax in a way “that Parliament intended”, which is a phrase becoming popular with tax judges.

Shady customers
The public is swept along by the media hysteria about avoidance and yet there is still so little about tax evasion. Tax evasion is illegal. Every time someone offers to re-felt your flat roof or re-surface your driveway with a really good discount for cash, that means they will probably not declare the income in their tax returns. Of course, being the dishonest fraudsters they are, that means that if you have a problem later, you probably won't be able to get them back to fix it.
Some of these driveway people actually don't believe in paying any tax at all and this lot robbed the Exchequer of over half a million pounds which is our money. If they don't pay their share, we honest taxpayers have to pay more. This dodgy plumber also got caught too.

Accessories to fraud?
As long as the public aids and abets fraudsters by paying them cash, everyone else loses out. It is likely that far more tax is lost to dishonest small traders than in respect of legal tax avoidance by a far smaller number of wealthy individuals.

In the end we can all do our share of ensuring that everyone pays their “fair share” of tax, and that means not parting with bank notes when a cheque or credit transfer or payment be card would normally be appropriate. Just because a few avoid tax legally is no excuse for assisting dishonest people to dodge tax, because they might as well be nicking that tenner from your back pocket.

HMRC loses the plot over ESC A19

HM Revenue and Customs seen from Parliament Square (Whitehall, London, England). Photographed by Adrian Pingstone in June 2005 and placed in the public domain. (Photo credit: Wikipedia)

The Concession

For those not familiar with Extra Statutory Concession A19, here is HMRC's own commentary on the subject. To quote the beginning:

“If you think that HM Revenue & Customs (HMRC) should have already collected the tax due in your Tax Calculation (P800) because the information had already been provided to it and HMRC have failed or delayed to use this information, then in some limited circumstances HMRC may agree not to collect it.

An 'Extra Statutory Concession' (ESC A19) allows HMRC to do this and it only applies to individual taxpayers who owe Income Tax and Capital Gains Tax. It does not apply in any other circumstances where amounts owing to HMRC are in dispute.

The circumstances are that HMRC should have used the information provided within 12 months after the end of the tax year in which it is received to notify the taxpayer of any arrears.”

As it says on the tin, the relief is concessional and therefore discretionary. So what am I complaining about?

Recent history

Back in the summer of 2010 HMRC had improved their software for finding overpayments and underpayments of tax mainly in respect of the majority of people taxed under PAYE who are not required to submit tax returns under Self Assessment. These differences covered a number of years generally from 2006-07 onwards though I believe there were an odd few from a year or so earlier.

If HMRC were not fairly quick in recovering what tax they thought they were owed, they would have been statute-barred from collecting it. So they set about sending out calculations of tax generally outstanding for the previous three or four years.

Many of the people caught out were pensioners with usually more than one occupational pension, though the pensions themselves are often quite modest. Obviously there was a furore and a campaign in the newspapers, many of which drew attention to ESC A19. Individuals with unexpected tax demands of often £5,000 - £6,000 made claims under ESC A19 and many, possibly most of the claims by pensioners in this situation were allowed. Great, and it seems only fair that people of modest income with almost none from savings (with such low interest rates) should not be landed with such an unexpected tax burden.

However, not all the underpayments of tax (yes, and some overpayments) were found in the first wave. HMRC have continued to run their program, many more differences have been found, and calculations sent to unsuspecting taxpayers including many more pensioners.

A sad tale

Consider the case of one lady, who following the death of her husband a few years back, actually visited an HMRC office back in the days when one could, and went through her income sources requesting that HMRC made sure her tax affairs would be in order. Four-and-a-half years later (at the end of 2011) she received a demand from HMRC for more than £6,000. Apparently she had been given allowances against more than one occupational pension.

She made a claim under ESC A19, which has been refused and her appeal turned down. Yet all pension providers must have advised HMRC by 19th May annually of the amounts paid to their pensioners in the previous tax year. Surely “HMRC... failed to use information received about a source of income, within 12 months after the end of the tax year in which the information is received” especially when you consider the lady visited HMRC's office back in 2007.

Yet HMRC says the lady fails the “reasonable belief” test. Presumably because the HMRC officer she saw in 2007 did nothing following her visit and did not type a note into the computer system, HMRC is prepared to call the lady a liar.

Patent unfairness

HMRC seems to be resisting every ESC A19 claim now. I suppose there has been an internal memo that to much tax was being lost or leaked because of the claims made.

Yes, we are dealing with a concession. Yet the current attitude of HMRC is patently unfair as I have no doubt that if the initial claim had been made in December 2010 rather than December 2011 it would have been allowed and the tax written off. It is hardly the lady's fault that HMRC took an extra year to re-calculate her tax liabilities and certainly not her fault that HMRC failed to act following her visiting their office in 2007 at her own initiative. Except, as I said, that they seem to be calling her a liar.

In my view it is patently unfair that almost identical claims made a year apart have been treated entirely differently. I have no doubt that back in 2010 some more extreme claims were allowed by mistake.

I do not think it unreasonable to expect that HMRC should be even-handed in dealing with similar cases where taxpayers really were entitled to believe that HMRC had all relevant information. Internal directives (yes, there must have been one) should not mean that one British taxpayer should be treated differently from another.

What is your experience?

Hypocrisy and unreasonable expectations of tax reduction

Or a cat in the West Indies

I have been writing recently about tax avoidance schemes and the Sirens who lure unsuspecting business owners and higher paid employees towards their rocky outcrops.

Please don't misunderstand me. I am certainly not against people managing their affairs to pay less tax, and it can be done without worry. It is just that there are so many offers from tax avoidance specialists which claim to reduce tax on business profits to very little in the hands of the business owners extracting it as income. The appeal is both to the greedy and to those who resent paying so much of their hard-earned cash in tax when they are making such a contribution to the economy by employing people. I have some sympathy with the second category.

When I was in the tax avoidance “industry” I saw both categories. I guess that in these moralistic times post-banking crisis it is hard to sympathise with the greedy but maybe it always was. I had a certain distaste for some of the clients I saw way back; those who wanted the yacht in Gibraltar and the house in Barbados mostly paid for by the Treasury. Those others who were less selfish but wanted more control over their money were easier do deal with. Yet both groups had to be apprised of the risks.

The world has changed. The climate has changed. Legal tax avoidance is second only to illegal tax evasion on HMRC's hit list. It is a hard thing to do with a scheme these days.

I am all for helping people save money by paying less tax. It is a significant part of my business. Sometimes though I get frustrated both by the clients' unreasonable expectations and the double standards on behalf of Government, by which I mean the machinery of the Civil Service and the environment which came about under the previous administration where there was (is) one rule for some working with Government organisations and another for others who don't.

We have seen a recent row about the head of the Student Loans quango working through his service company. We in the tax profession all know that the arrangement has nothing to do with saving him tax, but it is related to the Government avoiding its responsibilities as an employer re periods of notice, pension contributions and the like. And that is what happens throughout the Civil Service and the NHS where the “employer”, i.e. Government, prefers to pay contractors generally through an agency rather than having them as employees.

So all these contractors can save a load of tax either working through their company or using an “umbrella scheme” which for some reason HMRC often looks on benevolently.

I had a prospect come to me recently who wanted to have a service company to save him tax. He worked for one company, has done for eight years, and expects to do for a few more. I had to tell him that with the degree of control the firm and his agency had over him, he was a quasi employee and would be liable to the IR35 legislation which effectively would tax him as an employee. It wasn't on in his particular case. However, if he had been working ultimately for a Government or local Authority department my advice would probably have been different.

So we have overaggressive tax avoidance schemes which may not work. We have sensible tax mitigation which is the sort of work I do. In between, we have incredible hypocrisy in the Civil Service in how they engage many of their workers, and ignorance amongst Government Ministers who do not understand the culture of hypocrisy which has grown up over employment responsibilities and tax. That can't be right, can it?

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• Business tax and snake oil schemes (jonstow.com)

Money Laundering checks and the criminal element

As a business defined as an “Accountancy Service Provider (ASP)” we are expected to check the IDs of new clients with regard to the Anti-Money Laundering Regulations (MLR), which we do diligently. We now have means of doing on-line checks, but I worry that there is such a racket in forged papers that even these on-line facilities might not be sufficiently rigorous, as an established ID of any longevity might pass even more sophisticated tests. 

Recently I received the following as a spam comment on one of my WordPress blogs:

 “Our team is a unique producer of quality fake documents. We offer only original high-quality fake passports, driver’s licenses, ID cards, stamps and other products for a number of countries like: USA, Australia, Belgium, Brazil, Canada, Italia, Finland, France, Germany, Israel, Mexico, Netherlands, South Africa, Spain, United Kingdom. This list is not full...”

There is a lot more but I have not quoted further because although I doubt they will sue me for breach of copyright, you already have the picture.

Nearly four years ago I met someone who said he was a national of a country bordering the Black Sea. He produced a passport which looked OK to me, and a utility bill in the same name with the address of the flat he was staying in and said that he rented. This guy wanted to register as self-employed, so I completed a 64-8 with the National Insurance number he provided. HMRC then registered a lady I had never heard of as a client of mine, because apparently this National Insurance number was hers.

I tried to check with my new client in case the number he provided was wrong, but I never heard from him again. I assume he had “done a runner”. I was quite relieved actually.

Of course as a good ASP I reported this incident to the relevant authorities and never heard a thing from them, and I told HMRC who apparently couldn’t have cared less.

I am all for using the MLR ID procedures with new clients because it is some sort of deterrent for dodgy characters, but as regards our being unpaid police, how are we to know just through document-checking just who some people are? I certainly did not spot what was probably a false passport. In reality I wouldn't know one if it slapped me round the face.

Experience might lead us to do further checks if we have doubts, but our role as unpaid police or UK Border Agency staff cannot be particularly effective, especially if our reports continue to be treated with such indifference.