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?

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?

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.

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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