Wednesday, 24 July 2013

Margaret Hodge and the British Inquisition

I had not intended to write about the House of Commons Public Accounts Committee’s (PAC) “investigation” into tax avoidance etc. as many more august tax writers than I have already had their shot. However, I have been asking myself how they could have got it all so badly wrong, and why.

We know that there are political tax lobbyists out there who have received funding from unions. There have been various stories in the newspapers about individuals who have been involved in aggressive tax avoidance schemes, such as Jimmy Carr. Somehow with the campaigners driving the politicians there has been a shift towards questioning why multi-national famous-name companies such as Starbucks and Amazon do not pay much corporation tax in the UK and assuming there is some evil plot.

The PAC has had representatives of multi-nationals and of the Big Four accountants before them to ask questions on this issue, but sadly they have not come to sensible conclusions because they start from the premise that the international businesses are dishonestly avoiding paying their dues to HMRC. Many witnesses have tried to explain that firstly, the general premise is not provable and in almost all cases not even likely, and secondly that corporation tax paid is not a measure of a business's contribution to the economy.

All the witnesses have been interrupted constantly when answering questions. The Committee members, and in particular the Chair, Margaret Hodge, have tried to insist on their own view being accepted by arguing with the witnesses rather than allowing them to reply fully. The whole attitude brings to my mind the treatment of Galileo by the Inquisition in Rome in 1633, when he tried to explain that the Earth went round (orbited as we would say) the Sun, and not the other way round. Because the Vatican doctrine said this could not be true, no one was prepared to look at the evidence presented. So it is with the PAC and their attitude to supposed tax avoidance by large companies.

If in any investigation we assume the result before we investigate, we will inevitably bias our conclusion, and probably come up with the wrong one. That is true in tax, in economic matters, and in science.

Please bear with me, but Robert Millikan, one hundred years ago, biased his results in measuring the charge of an electron because he had a wrong value for the viscosity of air. Actually he was not far wrong, but he tended to discard results which did not support his figures. The shame is that no doubt for psychological reasons other scientists following afterwards and getting different results tended to do the same, discarding results which were “off” rather than properly challenging Millikan's conclusions and measurement.

Proper scientific research should involve reproducing any experiment on which you intend to build under the same conditions, and then developing your own experiments and investigations from there to make sure there is a consistency. That is intellectual rigour, something to which the PAC does not adhere.

We understand that the PAC members are not briefed. They do not have people to help them with their questions. Yet it is apparent that they do not do much research themselves. That was very obvious with the recent questioning of witnesses about the nature of Duchy of Cornwall, its income and tax status. There is quite a lot one can find out about the Duchy in two minutes with Google (I put that to the test), yet it seemed the PAC members had not got that far. They asked their questions apparently from a starting point of total ignorance, but at the same time their interrogation had that implicit bias that someone must be dodging tax.

I am not going to get into the complexities of international taxation beyond saying that Starbucks can pay royalties to their Netherlands business and claim a tax deduction in the UK. There is international cooperation on transfer pricing, and no one had been doing anything wrong. It is perverse that Starbucks have now “volunteered” to pay corporation tax by deferring claims for allowances to which they are fully entitled.

What the PAC does not understand is that fast-growing businesses tend not to pay much corporation tax. That is true of small businesses which might be my clients, or very large ones. The American giants such as Starbucks and Amazon have been familiar for a while and seemed to be everywhere, but they are now more everywhere than they were even a couple of years ago.

Why have they not been paying much corporation tax? Because they have had little or no taxable profit; because they have been investing all their “spare” money in opening new premises, buying plant and paying new employees – yes, new employees. All that investment is tax-deductible, as it should be.

Large corporates who have no taxable profit liable to corporation tax still generate substantial amounts to the Exchequer. They pay VAT on their sales less inputs, they pay business rates, they pay the payroll taxes for their employees, and they pay import duties.

They boost employment by taking on workers and by driving income to their logistics suppliers, the ones who deliver to them and the ones who deliver their stuff to you and me. The suppliers need to employ more people too.

So the small area upon which the PAC concentrates concerning tax on accounts profits has nothing to do with the real contribution of large companies employing people not only paying their taxes, but saving the State from having to pay them benefits if they were instead unemployed.

Taxation is according to the law, and should not be based on moral blackmail or Aunt Sally games run by people who should know better.

Of course it is not good explaining any of that to Margaret Hodge. She has made up her mind, and the actual reality does not suit the grandstanding she is trying to make at the end of her political career.

Footnote: In the Wikipedia page about Millikan there is a reference to the physicist Richard Feynman's book of anecdotes, Surely You are Joking, Mr. Feynman!. Affilate link at the bottom. I thoroughly recommend this book, which is great fun. It is a glimpse of the life of this amazing man. If you do not wish to use an affiliate link in purchasing, here is a non-affiliate one.

Wednesday, 17 July 2013

HMRC cannot do joined-up writing

As anyone who reads this blog will appreciate, I correspond regularly with HMRC. If I am dealing with an issue other than an enquiry into a taxpayer's affairs, when normally one officer will run the case, HMRC's correspondence is literally all over the place.

Not all issues can be dealt with over the telephone, because HMRC's Self Assessment call centre agents are limited in their power to help with anything beyond a PAYE Coding or a payment allocation etc.. If I have to make a complaint on behalf of a client or simply highlight some issue which HMRC are clearly getting wrong, I have to write. The trouble is that each time I write a letter on a particular issue, I get a reply from a different person in HMRC.

I believe that part of the difficulty must be a drive for “efficiency” in this new digital age. Most initial correspondence has to go to a PO box in Cardiff (you might get to write to a couple of other PO boxes when you get a reply) and I believe they scan and email my letter to some anonymous office who knows where. If I am lucky I get a reply within anything from a couple of weeks to three months. If I then respond my next letter might be scanned and sent to someone else to reply, perhaps someone in another part of the country.

Because HMRC officers are not trusted to think for themselves, or are not qualified to, many of the replies are obvious “paste jobs” from standard text. They do not consider the thrust or particular nuance of the letter to which they are replying, and of course the second and third people to respond in correspondence will not know what their predecessors were thinking when they wrote their letters.

It is no good trying to send a follow-up letter before I have had a reply to the previous one, because that will be emailed somewhere else, even if I attach a copy of the earlier letter.

Sometimes I have had two replies to the same letter within a few weeks. On a recent occasion, a more favourable decision was made in the second than in the first, which is fine and they have committed themselves.

There is no continuity in the system. No one sees correspondence through, and if they did it would be dealt with more quickly and efficiently. As I have mentioned before, one letter to me was typed and never sent to me by HMRC. Often, letters I receive from HMRC are unsigned, and I wonder whether the officer who drafted the letter has checked it, or if anyone has read it through in their absence, given that sometimes mistakes are only noticed in hard copy.

I suppose the problems are that there are insufficient technical staff of a decent standard within HMRC, and that digital technology had led to misguided senior managers believing that any of their officers can deal with correspondence without a case file, even a virtual one.

The current system wastes my time and your time if you are a tax professional, and it wastes HMRC's time and resources in not getting matters dealt with more quickly and efficiently.

It is another exasperating example proving Hutber's Law: “Improvement means deterioration”. What do you think?

Monday, 15 July 2013

HMRC and credit where credit's due – eventually

I am very pleased to report that HMRC have allowed my longest standing claim under ESC A19 after five letters, eighteen months, and just before going to the Adjudicator. My previous report on the case was here and I do think it only right to thank Keith Gordon for his campaign and in particular his article in Taxation in October 2012 which provided more ammunition for the fight.

Of course it should not have been a fight. Not all cases have the same merit, but given that my client visited HMRC after her husband's death specifically to make sure that her pensions would be taxed at source correctly, it should have been a simple matter for HMRC to agree to the claim. Of course they did not, but let us be fair and say that they saw the light at last, and be grateful.

In some ways the pleasure I get from this win is more than a case I had a while back when HMRC backed off in an enquiry from unreasonably demanding £250K plus from a client I had just taken on. It is a great feeling to see off an injustice.

Wednesday, 19 June 2013

HMRC, the stick and the carrot

Can HMRC's aggressive stance towards individual taxpayers be counterproductive?

Frustrated of Essex

It is no secret, especially not on this blog, that I have been frustrated by HMRC's attitude towards those who found out at a late stage that tax had been under-recovered from their pensions etc. and they had a significant tax bill. Even though HMRC has had the power under ESC A19 to “forgive” the tax paid, in the last couple of years they have steadfastly refused claims and appeal which would have been accepted prior to 2011.

We know that HMRC is under extreme pressure to collect as much as possible. I understand that, and let me be clear, I think everyone should pay their fair share according to the law. I wrote last July:

“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.”

It is just that in some areas, HMRC, and maybe Government, have lost track of what might be fair with regard to honest taxpayers, those who out themselves from the black economy, and others whose tax affairs are in arrears and they seek to get themselves up to date.

My own patch

In my own practice, there are areas of taxation I do not enjoy, do not regard as my strengths, and which I pass to others. No one can gain the experience to be strong in all areas of tax because there just isn't time, whether one is a practitioner in private practice like me, or an employee.

I have two or three favourite areas or niches of tax that I do specialise in. One of those is in helping”delinquent” taxpayers, which usually means those who have not paid tax recently, to get themselves up to date and to negotiate a decent settlement with HMRC.

Those who have been “caught” by HMRC are in worse position from the point of view of the penalty regime than those who come forward voluntarily. That is understandable, but I can still help them in agreeing their back-tax, interest and penalties and getting a settlement with HMRC.

A puzzle

Those making voluntary disclosures should be entitled to better treatment with lower penalties. What has worried me recently is that in one case, where the individual simply did not have the means to pay all his tax (of course his fault) HMRC preferred to make him bankrupt with a lower tax recovery than if they had agreed his offer of payment of a quite significantly greater amount over three years. HMRC preferred less jam today than the more jam they might have had tomorrow, and by making anyone bankrupt they have to join the queue with the other creditors. I thought this was pretty silly.

Late return penalties

Another issue is the new daily penalties regime introduced by HMRC from 2010-11, and I quote them;

“Following a review of HM Revenue and Customs powers new legislation was introduced. Under Schedule 55 Finance Act 2009 the way in which HMRC applies its late filing penalties saw major changes particularly in respect of raising Daily Penalties. This change only applied to Tax returns for 2010-11 onwards with the previous legislation and guidance remaining for 2009-10 and earlier.
Where a customer has not filed a Tax return 3 months from the return due date Daily penalties will start to accrue for a period up to 90 days at a rate of £10.00 per day, the rate is fixed and can not be changed (except by legislation) and in the majority of cases this will be an automatic process. There is no longer a requirement to apply to the Tribunal to charge a Daily Penalty or for a “fixed £100 penalty” to have been charged before applying it. A Revenue Determination can be considered at any time during the period of which a Tax return remains outstanding but it is not a requirement before a Daily Penalty is applied.”

Note the irony of calling someone a customer and then in the same sentence imposing daily penalties.


My concern is that the daily penalties may be a disincentive to comply in some circumstances. Someone more itinerant “self-employed” might, if the penalty notice catches up with them, be less inclined to let HMRC know where they are. Also, not everyone who works in the UK was born here or even has strong ties to the UK. Many, in the face of threats, will melt away whence they came, or to some other jurisdiction. Of course the individual amounts of tax lost each time might be small, but in a fluid situation of cross-border working, I think the penalty regime may be a disincentive to comply, especially if the first a worker knows of her or his obligations is the penalty notice rather than the original notice to complete a tax return.

Particularly with the taxation of individuals I believe HMRC should take a more pragmatic approach to collecting tax, by which I mean adopting methods to collect more through negotiation, rather than less tax through preferring the stick over the carrot.

Of course everyone should meet their tax obligations under the law. Punishing especially those who have come clean or have just got behind with their tax affairs, at the expense of lowering the overall tax take, seems rather foolish.

Common sense?

I believe there is a case for removing most of the penalties imposed for late submission of Returns once they are submitted, with perhaps HMRC raising their interest rate charge for late-paid tax. I also think more common sense should be applied where an individual simply cannot meet their tax obligations. I would not want to encourage anyone to dodge their responsibilities; rather I would hope they should face up to them with more encouragement.

How do you feel about HMRC's aggressive stance? Do you believe it is counterproductive?
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Friday, 1 March 2013

Disingenuous HMRC

Last June I mentioned a lady on whose behalf I had made a claim under ESC A19. She had visited the local office of HMRC, back when they had one, to ensure that her tax would be dealt with correctly following the recent death of her husband. Her claim for relief from a quite considerable amount of back tax owing as a result of HMRC's failure to act following her visit was turned down.

On behalf of my client at the end of May 2012 I appealed against the decision. At this stage it was by making a formal complaint given that the relief requested is actually discretionary as far as HMRC is concerned.

I had heard nothing from HMRC by September so I telephoned and was advised that the matter had been “brought forward” which is Civil Service speak for not actually having done anything but not yet lost the file or record. I called subsequently without getting news of further progress, and again after the January tax return rush was over. I was then told by the call centre that I would get a call back from the relevant office within five working days.

I did get a call back within two days from a Complaints Officer. The conversation went something like this:

Complaints Officer (CO) “We replied to your letter of 30th May last July. Did you not receive it?”
Me: “No.”
CO: I think it was probably never sent. I will fax you a copy. You won't be surprised to learn that your request for relief (under ESC A19) has been turned down again”.
Me: “Why was I told in September that the record had been brought forward if a letter had been sent?”
CO: “Because your client has complained to her MP so we kept it open.”

So I received the faxed letter with the date “July 2012” but no actual day typed or written in, so it is fair to assume that the letter was indeed never sent and that Royal Mail are not to blame.

The reasons the further request for relief have been turned down include that the end-of-year pension providers' PAYE Returns submitted in May each year do not count as information HMRC could reasonably have used although they “appreciate how tempting it is to assume these immediately become available for ESC A19's purposes.” Well, blow me, if someone send me an email, letter or fax that I actually receive (unlike HMRC's letter) I have the information and it is my fault if I neglect to do anything with it.

The seven-month-old letter goes on to stress that the information they receive allows them up to four years to review the tax position. Well, we know that. It's the law. It has nothing to do with whether HMRC acted properly and whether they should give up the tax they did not collect in accordance with a long-established concession and precedent.

They at least concede that my client is not a liar and accept she did visit the tax office after her husband died. However according to HMRC she could not apparently have “reasonably believed” her tax affairs were in order following the issue of an incorrect coding. That assumes she would have had some knowledge of tax (something HMRC unreasonably wishes to impute on all taxpayers in a recent consultation on the concession) and that her understanding was not skewed in the trauma of bereavement.

My client and I are not leaving it there and we will return to the fray. We have further grounds for complaint in their not sending the letter and not mentioning it over the telephone two months after it had been typed and left on file, unsigned. Of course the whole letter is complete and utter nonsense arguing in the face of what would have been a simple case of allowing the relief if a request had been made in 2010 or earlier.

There is no doubt that HMRC has sent round a memo instructing that all claims be turned down on whatever grounds. Their correspondence is disingenuous and frankly, they might as well abolish the concession altogether rather than just change it, if they are intending to turn down all future claims.

HMRC need not be afraid of one bad write-up in the Daily Mail if they even get one. After all, the politicians and the public have too much fun bashing the multi-nationals for sensible tax planning, and for whatever reason this tax abuse of small taxpayers who are mostly pensioners is being largely ignored by the media. It seems that politicians who count in this matter are not going to help.

Isn't it all a disgrace?