Monday, 23 July 2012

Sympathy for tax dodgers?

English: J Sainsbury PLC Sainsburys old logo.
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?
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Wednesday, 18 July 2012

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.


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.

Tuesday, 17 July 2012

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.

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Monday, 2 July 2012

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

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.

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.
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