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.

Disincentive

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?

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.

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.

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.