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?

Related articles

• 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.

Hartnett, HMRC and Hutber's Law

A non-resident's outlook

My sort of tax practice involves quite a lot of technical issues. It is not necessarily because I look for trouble, but because I specialise in certain more complicated areas of tax and people come to me because they are in trouble. That doesn't necessarily mean they are in trouble with HMRC (The Revenue), though they may be. It is quite often because they are having trouble dealing with HMRC because they cannot find anyone in HMRC who understands their problem, let alone is able to help them find a solution.

Recently I had an issue with a non-resident client whose pension suddenly started to be taxed because HMRC did not understand it was not taxable by reason of there being a Double Taxation Agreement in place. Some innocent in HMRC had issued a PAYE Code and decided that the client, who had no taxable income in UK should fill in a tax return. Persuading HMRC to leave the client alone took a lot of time, telephone calls and a tax return completed showing no taxable income. It really was the only way.

Last week, I had an issue with another client whom I believed to be non-resident by both past and current evolving standards. I wanted to telephone the HMRC Centre for Non-Residents as it is now called, which is in Liverpool. I could not find the number on HMRC's website. I called the general agent's number and was told that the only way for a non-resident or his or her agent to discuss that person's affairs was to call the public's HMRC call centre number.

Even then (this is hard to believe even for an old hack like me) apparently the Centre for Non-Residents does not take telephone calls. One has to ask to be referred to a technical officer who will call back and may be able to help.

Actually a technical officer did call me back, so this cost me only time (but time is money) as my telephone calls are all inclusive in the business package. However, to get through in the first place I had to go through an automated button pushing system, the first with three options and the second with six, so I had been on the line a while before I spoke to my first human. Suppose I has been a non-resident UK taxpayer by design or HMRC's default, calling from Tuvalu or Patagonia. How much would it have cost hanging on? Would a technical officer have phoned back anyway?

It is very difficult to pick up the telephone and be put through to anyone at HMRC who knows about tax rules. It would be almost impossible for a lay person to get through to the right tax official. Yet HMRC and Dave Hartnett like to call taxpayers “customers”.

Back in the Seventies, the late Patrick Hutber, City Editor of the Sunday Telegraph, stated his law “improvement means deterioration” referring to changes in services which large corporates said streamlined their services. One of those was not letting bank customers have back their cancelled cheques, still a source of irritation to me. Yet HMRC won't let their technical staff be contacted by the public. Indeed they now have only two addresses where one might write about a new issue which has cropped up and therefore there is no way of tracking where your letter might be until or unless you get a reply. That is no way to treat customers.

If Patrick Hutber were alive today he might, after re-stating his law, refer to an older one in the language of my aforementioned client who wrongly had tax deducted from her pension “Plus ça change (plus c'est la même chose)”. The more things change, the more they stay the same.

Fat cats and gutter rats

The other week my wife and I were in our front garden when a man probably in his fifties came up to us. He said that about three years ago he had washed and scrubbed the soffits and fascias on our house and cleaned out the gutters. I didn't remember him, but my wife did for it was she that had commissioned him to do this when he had visited previously.

This prospecting soffit cleaner (Let's call him Stan Soffit) offered to “do” our house again for £140 while pushing a business card into my hand. I pulled a face because that seemed an excessive hourly rate for the job. The conversation continued:

Stan “OK, mate, I'll do it for £90 cash”

Me (pulling another face) “Actually, I am a tax adviser”

Stan “OK mate, no offence.” (Snatches business card out of my hand) “You won't be needing that then”

Stan the scrubber then turned and trotted to his van, and drove to the next turning to turn round as we live in a cul-de-sac. Coming past again he slowed down and yelled “No offence mate, eh?” before disappearing without prospecting the other twenty odd houses in our road.

Actually I was rather offended. People like him give small businesses a bad name. They are also effectively taking money out of all our back pockets because if they don't pay tax on their earnings, everyone else has to pay more.

Dave Hartnett, Permanent Secretary for Tax (a post he invented himself really) and therefore head of HMRC believes that the small business population makes up a sizeable portion of the tax gap and he may well be right. He thinks that maybe the Chinese idea of a turnover tax would be an effective way of collecting revenue. Of course this would not catch characters who never declare their income anyway. Dave must think that everyone is fiddling their expenses. I think that is a very misguided idea. The big problem is not with businesses submitting fraudulent expense records with their accounts and tax returns. It is with those who don't declare some or all their earnings like our friend Stan (well, no friend of mine).

HMRC keeps coming up with plans for favourable treatment for dentists, plumbers and tutors who have undeclared income. What they need is some joined up thinking to catch those working in the black economy who are evading hundreds of millions of pounds of tax.

Of course it doesn’t make such good headlines as chasing billionaires and multi-millionaires with their tax schemes and tax havens. Campaigners such as Tax Research UK wouldn't get their media interviews out of drive tarmac cowboys or Stan Soffit. HMRC likes the fat cat headlines too because it makes them feel legitimate, but they are failing badly at catching the possibly million-plus small-time tax fiddlers very likely costing the Exchequer more in lost tax.

A turnover tax would be bonkers anyway. I guess it would just in effect be an extension of VAT for service providers maybe with a flat rate, but what about retailers who have high turnovers but lowish margins? It would all be unworkable, often unfair, and would miss the targets.

Having been in my business a long time I get a feeling about everyone I meet in business and indeed also in a private capacity. Darren, our window cleaner, says he will clean our soffits, fascias and gutters for £90, a figure he quoted without knowing what Stan had said. I like Darren too. He is happy to take a cheque; a good sign.

As part of my business I help tax defaulters, which means those who have not made tax returns or who have made incorrect tax returns, to come out and pay their dues. For all those who have either been caught or, as happens quite often, get a fit of conscience, there are so many below HMRC's radar.

Never mind the fat cats. Let's round up the rats robbing us in our gutters.