During his fateful meeting with undercover reporters from the Telegraph, the England national football team’s erstwhile manager, Sam Allardyce, made some trenchant criticisms of HMRC, accusing them of being the “most corrupt business in our country”. While I am not at all convinced that “corruption” is quite the mot juste to describe HMRC’s behaviour, does he have a point?

In his own words...

Mr Allardyce - who like many football managers, is not known for mincing his words - was quoted in the Daily Telegraph as saying:

“They [HMRC] fly out tax demands without any real knowledge whether they should or shouldn’t. They just put ‘em out willy-nilly and if you pay them, people s--- themselves and pay them. Then they go to their accountant and say, and if you’ve got a s--- accountant, the account (sic) s---- himself and says, well you must owe them, you had better pay it."

Accelerated Payment Notices

Reading between the lines of Sam Allardyce’s colourful if impassioned language, it seems fairly obvious that what he is referring to is HMRC’s powers to issue Accelerated Payment Notices and Partner Payment Notices - which I will hereafter refer to collectively as APNs. Not only do I recognise from Sam Allardyce’s description the methodology that HMRC employs; the tone of the language used is also familiar from numerous and often similarly expletive-laden conversations with clients on the receiving end of APNs. (Fortunately, I do not recognise the reference to "s--- accountants"...)

"The country's so skint..."

The APN legislation was introduced in the 2014 Finance Act. It would be an understatement to say that the new legislation was controversial. According to HMRC, its purpose was to “change the economics of tax avoidance”. Sam Allardyce’s description of the reasons behind the legislation is rather more blunt and prosaic:

“…because the country’s so skint, they come to government and say we’re skint, government says we’re skint how we gonna get the money. Let’s change the laws and let’s just fly out these demands. If you invested in this tax scheme, where they pay the tax back, for investing in new businesses, or in regeneration zones, do you know what I mean, in current poverty areas. But HMRC, you have to pay it back even if you don’t owe it.”

The fact is that Sam Allardyce’s description contains more than a grain of truth. Finance Act 2014 gave HMRC the right to demand disputed tax from taxpayers who have either participated in a scheme which was notifiable under the Disclosure of Tax Avoidance Schemes regulations (“DOTAS”), had received a Follower Notice (issued if there is a final judicial decision which HMRC thinks applies to the recipient’s tax arrangements) or have entered into arrangements where HMRC has issued a counteraction notice under the General Anti-Abuse Rule.

"Willy-nilly"

On the face of it, none of this justifies Sam Allardyce’s allegation that HMRC are sending out demands “willy-nilly”. However, the fact that an arrangement was disclosed under the DOTAS regulations does not of itself signify that it was “notifiable” as the APN legislation clearly requires. In several cases, arrangements were disclosed to HMRC, even though there was significant doubt that they were notifiable, for the simple reason that the penalty for failing to register a notifiable scheme was up to £1,000,000. This point seems to have been lost on HMRC’s Counter-Avoidance teams who have seemingly issued APNs on the assumption that schemes were “notifiable” simply because they were notified. This is not a mere technicality even if HMRC has characterised it as such; they have been obliged to withdraw APNs for precisely this reason. To that extent, the “willy-nilly” claim does have some validity.

Where now for APNs?

As matters stand, we still do not know whether the APN regime is in fact lawful. Various groups of affected taxpayers have taken the matter to judicial review on the basis that the legislation is technically defective, unreasonable, offends against the principles of natural justice, and infringes the recipients’ human rights, including the right to peaceful enjoyment of their possessions. Judges in the High Court have given these arguments short shrift although the leading case, R on the application of Rowe and others v HMRC, is expected to be heard by the Court of Appeal later this year. Given the evident strength of feeling and the sheer scale of the sums involved, a further trip to the Supreme Court seems almost inevitable. So while it's a very early bath for Sam Allardyce amd his career as England manager, the question of the legality of APNs is unlikely to be answered until we are well into extra time.

Settlements with HMRC: a warning

Although there has been a great deal of litigation regarding tax avoidance arrangements in recent years, many cases have not yet reached the courts. HMRC is keen to settle those cases, preferably without litigation and collect the tax. In last year’s Autumn Statement, the Government announced further 'settlement opportunities' for taxpayers and some settlements have already been reached. However, settling with HMRC could result in some paying far more tax than they may ultimately owe.

Settlements with HMRC frequently take the form of binding legal contracts. This means that, even if judicial interpretation of the relevant tax law changes after the contract is signed, the settlement’s terms remain in force, unless the parties agree to vary them or a Court orders otherwise – and there is no guarantee that either of those things would happen.

The De Silva Judicial Review

Next year, the Supreme Court will hear an appeal in a judicial review case, The Queen (on the application of De Silva and another) v Commissioners of Revenue and Customs [2016] EWCA Civ 40. This is one of three cases involving members of the Cotter Solutions Action Group, the others being The Queen (on the application of) Derry v Revenue and Custom [2015] UKUT 416 (TCC) and Dr Walapu v HMRC [2016] EWHC 658. Although the claimants in De Silva were users of the “Liberty” tax avoidance scheme marketed by Mercury Tax Group, the outcome of the case could mean that taxpayers who made carry-back claims would retain the benefit of those claims, even if the scheme or arrangement has been successfully challenged by HMRC. It is those taxpayers who are most likely to be contemplating settlements with HMRC now, possibly to their ultimate detriment.

The relevance of the Cotter case

The point at issue in De Silva is a technical one, namely whether HMRC has enquired correctly into stand-alone claims – i.e. claims not included in a return. HMRC argues in De Silva that an enquiry into a return under section 9A TMA 1970 extends to any claim included in that return, and where there is a claim for a partnership loss, any reduction to the partnership losses as a consequence of an enquiry at partnership level flows through to the individual partners’ returns. This is probably an interpretation that most advisers would have accepted until recently. However, the claimants rely on what they consider to be a clear statement of the law in another Supreme Court case, Cotter v HMRC [2013] STC 2480. The Supreme Court found that a stand-alone claim is not included in a return for a year just because its details are entered on the return form. The De Silva claimants argue that this means that an enquiry under section 9A TMA 1970 is not a valid enquiry into a stand-alone claim. In Cotter, HMRC’s power to enquire into a claim under Schedule 1A TMA 1970 worked to its advantage as it meant that they could collect the disputed tax immediately whereas if it was the subject of a section 9A enquiry, it could not be collected until that enquiry was concluded. However, the claimants in De Silva seek to use Cotter to argue that, as HMRC did not make timely enquiries under Schedule 1A TMA 1970, their stand-alone claims are final and conclusive, even though the Liberty losses were disallowed at partnership level. HMRC argues that the Cotter decision is relevant only to the particular facts of that case and that the scheme of partnership enquiries is such that any amendment to a partnership return must flow through to each partner’s return. The Supreme Court will decide the matter next year.

Proceed with caution...

HMRC does not seem to admit the possibility that they will lose in De Silva and they are certainly not bringing this important case to the attention of those taxpayers they are “inviting” to settle. Individuals whose tax affairs could be affected by the outcome of De Silva would be wise to resist any temptation to enter into settlements with HMRC unless and until HMRC accept that they can be revisited in the event that the claimants win in De Silva. Otherwise, they may find themselves tied into agreements that require them to pay more tax than may be legally due or having to take HMRC to court to have the agreement varied or set aside, with outcomes that are by no means certain.

This article appeared in the October 2016 issue of Accountancy Age magazine.

"Fair share of tax" - does this mean anything at all to HMRC?

If ever there was a topic nearly as hot as immigration in the minds of the general public, it is the question of who does and who does not pay their fair share of tax. What actually constitutes a fair share of tax is very difficult to define. However, the public does seem to think it knows who does not pay their fair share of tax: Google, Facebook, Amazon and Starbucks, for example, and maybe Sir Philip Green too?

In any tax system, fairness is a very difficult concept to pin down. Should partnerships be taxed more heavily than limited companies, for example? And if so, why? Should employees pay more than the self-employed? Should some industries and asset classes attract effective subsidy through the tax system while others do not? The fact is that Governments routinely exercise choices about how much tax should be exacted in various circumstances whether we agree with them or not, and in many cases, it appears that expediency is a bigger factor in the equation than fairness.

It is not my intention to attempt to answer such thorny questions in this article. Instead, I am going to focus on what HMRC seems to think is the fair share of tax it expects individuals and businesses to pay. In examining this issue, I will not dwell on HMRC’s words, framed as they all too frequently are in standard Civil Service doublespeak, but on two of their recent actions through the Courts and Tribunals involving real people, not theoretical circumstances. You may be surprised by what HMRC considers to be “fair”.

What HMRC apparently considers to be “fair”.

Take the recent case of Mr & Mrs De Merwe. Mr De Merwe and his wife entered into a trust arrangement in March 2006 at a time when Mr De Merwe was not domiciled in the UK but was aware that he would become deemed domiciled for Inheritance Tax (IHT) purposes in the following tax year and his share in the house would then be subject to IHT in the future if he took no action. Unfortunately, Mr De Merwe was unaware that the tax law regarding such arrangements had been changed just a few days earlier and as a consequence of the transfer, he became immediately liable to IHT at 20% of the value transferred and would be subject to a further 6% on each 10 year anniversary . He became aware of his mistake some time later and went to the High Court to seek to have the transfer set aside, as he was perfectly entitled to do.

However, HMRC got wind of this and decided to pursue the tax, mistake or not. They applied to be joined as a defendant in the proceedings, arguing on arcane technical grounds that they should have their pound of flesh, irrespective of how much it cost the De Merwes and despite the fact that no funds were realised in the transaction which would enable them to pay any of the tax charged.  Thankfully, good sense prevailed and the High Court granted the relief requested.

Another recent case involved a barrister, Mr Ignatius Fessal, who specialises in Criminal law. Mr Fessal has a particular interest in human rights issues and this case involved one of those rights recognised in the Human Rights Act 1998, namely the right to peaceful enjoyment of his possessions.  Like other barristers, Mr Fessal had accounted for his professional practice income on the cash basis until the law was changed and required him to have accounts prepared on a true and fair basis, subject to transitional provisions. After an HMRC enquiry, it was discovered that Mr Fessal had paid too little tax for 2006/7 and 2008/9 but had paid too much for 2005/6 and 2007/8. To cut a long story short, HMRC demanded the underpayments but refused to repay the overpayments. Mr Fessal argued that this meant that he was now paying tax on the same profits twice.  HMRC remained unmoved and even applied to have Mr Fessal’s appeal struck out on the grounds that it had no merit. However, the Tribunal judges refused HMRC’s application and went on to uphold Mr Fessal’s appeal.

Double standards?

It might be thought that these cases are somehow exceptional. Unfortunately, this is not the case, and they reveal double standards on HMRC’s part which are rather disturbing.

The first double standard concerns HMRC’s interpretation of the law which is anything but fair and even-handed. When HMRC deals with tax avoidance or, to put it another way, tax planning that achieves a result they do not like, they routinely argue before the Tribunals and the Courts that the law should be interpreted “purposively”; in other words if the plain meaning of the relevant legislation yield a result that is disappointing to HMRC, then that meaning should be set aside if it appears to defeat the “evident intention of Parliament”. Now nobody who actually reads Hansard (an unfortunate occupational hazard for tax advisers) or, even more disheartening, reports of the proceedings of the Public Accounts Committee, could possibly believe that MPs have much understanding at all of the tax legislation Parliament passes; far less do we get the impression that Parliament has any “evident intention”. The “evident intention of Parliament” is little more than a convenient fiction created by the judiciary to defeat tax planning which conforms to the letter of the law but produces a beneficial result for the taxpayer rather than for the Exchequer.

Now some might even say that “fairness” goes out of the window and rightly so where tax avoidance is concerned. Yet neither of the cases mentioned above concern tax avoidance as most people would understand it and in both, HMRC argued for a result that would have unfairly impacted on the taxpayers. And these cases are just the tip of a veritable iceberg of evidence that suggests that HMRC has an alarming tendency to abandon all thoughts of “fairness” when the letter of the law works in its favour, however unjustly it might impact on the unfortunate taxpayer.

The second double standard relates to the different ways it treats individuals and SMEs compared to its relationship with multinational companies. The whole culture of HMRC seems to have changed in recent years when it deals with ordinary taxpayers and the missionary zeal it now shows in attacking marketed tax avoidance appears to be leaking into areas where it does not properly belong. This does not seem to affect relationships with the multinationals, which are much cosier. Those taxpayers that HMRC leaves waiting endlessly on the phone will have their own thoughts on the subject of fairness when they learn that HMRC’s customer relationship managers are on first name terms with their counterparts in big business. Compare and contrast, for example, the treatment of café owner, Icilda Newell who almost faced bankruptcy after being asked to pay £500,000 of tax she didn’t owe with that of HSBC, Goldman Sachs, Vodafone and Glaxo Smithkline by former HMRC Permanent Secretary, Dave Hartnett. While the public sees multinational groups paying their fair share of tax as the preferred method of shoring up the country’s finances in times of austerity, it seems that HMRC has other ideas.

The future?

Can we expect this to change in the future? It seems not. In its latestDepartmental Plan, HMRC states that its three main priorities for 2015-2020 are to:

Maximise revenues due and bear down on avoidance and evasion
Transform tax and payments for our customers
Design and deliver a professional, efficient and engaged organisation

Maximising revenues due (not merely being more efficient in collecting tax but getting people to accept higher tax liabilities without any change in the law) is not only a very different objective to ensuring that individuals and businesses pay their fair share of tax, but is arguably diametrically opposed to it. This is an extremely worrying development for any taxpayer facing an enquiry or investigation into their affairs. HMRC is no longer seeking a fair result but the one that secures them the most tax. Clearly, and disappointingly, fairness is not one of HMRC’s priorities, however much the tax-paying public might want it to be.

It will therefore be more important than ever that HMRC enquiries and investigations are handled robustly and tenaciously, by tax advisers who fully understand not just the technical issues but HMRC’s new focus on collecting as much tax as possible from individuals and SMEs. Otherwise, you or your business could end up paying considerably more than your fair share of tax.

Follower notice penalty assessment? What can be done?

One of the most invidious aspects of the follower notice regime is the way that a follower notice penalty of up to 50% of the denied tax advantage is charged if the recipient of a follower notice fails to take “corrective action” by the specified deadline. Taxpayers who have received a follower notice in the past but have not taken the “corrective action” required by the follower notice (or have taken it after the deadline has passed) will receive from HMRC a notice headed: Follower Notice Penalty Assessment: Penalty for not taking corrective action in response to a follower notice.

The follower notice legislation gives no right of appeal against the follower notice itself. It is possible to make representations to HMRC within 90 days of the issue of the follower notice, and if those representations are accepted, HMRC will withdraw the notice. If it transpires that the notice was defective in detail but correct in principle, HMRC will almost certainly issue another notice. If HMRC refuses to withdraw the notice, that decision can only be challenged by judicial review within strict time limits.
However, Section 214 Finance Act 2014 does provide a right of appeal against a follower notice penalty assessment and I recommend that this should be exercised in nearly all cases.

The particular grounds of appeal against a follower notice penalty assessment are set out in section 214(3) Finance Act 2014 and include the following:
   (a)     that Condition A (open enquiry, appeal etc), B (a particular tax advantage results from particular arrangements)  or D (no follower notice has previously been issued in relation to the same tax advantage for the same period) in section 204 was not met in relation to the follower notice,
   (b)     that the judicial ruling specified in the notice is not one which is relevant to the chosen arrangements,
   (c)     that the notice was not given within the period specified in subsection (6) of that section, or
   (d)     that it was reasonable in all the circumstances for [the taxpayer] not to have taken the necessary corrective action in respect of the denied advantage.

The calculation of follower notice penalties is complex so it is entirely possible that a follower notice penalty assessment may contain errors or be capable of being disputed for other reasons.
There may be circumstances which could support the argument that section 214(3)(d) applies so that it was “reasonable in all the circumstances for the taxpayer not to have taken the corrective action”. Taking corrective action involves giving up the right to pursue the claim, which might have been one which had a more than negligible prospect of success at the Tribunal. The judicial decision upon which the follower notice was based might not be directly relevant in the recipient’s circumstances, or other factors might have come into play: for example, there might have been carry-back claims which were arguably final (and therefore not capable of being withdrawn as the corrective action requires) on the authority of the Supreme Court’s decision in Cotter because HMRC had not enquired correctly into the claim (this is the subject of the De Silva case which is still making its way through the Courts). In any event, it seems that what was “reasonable in all the circumstances” must be determined by reference to the circumstances at the time corrective action had been required by the follower notice, and not with the benefit of hindsight.

While the recipient of an accelerated payment notice which has accompanied a follower notice is not entitled to defer payment of any associated Accelerated Payment Notice, the exercise of the right of appeal against the follower notice penalty assessment will allow payment of the penalty to be deferred until the charge is confirmed by a Tribunal or conceded by the recipient.

Appeals should be made promptly as there is a 30 day time limit, although late appeals can be made if a reasonable excuse for lateness can be demonstrated. If you need urgent advice regarding a follower notice penalty assessment you might have received, please contact me and I will be pleased to assist.

Starbucks S****ucks – or does it?

Another storm has erupted – this time in a coffee cup rather than the traditional teacup – around the subject of tax avoidance. It has been reported in the Press that Starbucks has paid no tax in the last 3 years and only £8.6 million on some £3 billion of turnover over a 14 year period. Those who are both caffeine-addicted and easily influenced by what they read in the papers are now getting their lattes and cappuccinos elsewhere.

It should not come as a surprise to hear that Starbucks is not a UK company but a US-based multinational with a UK operation. Isn’t it strange that UK plc would like UK multinationals to pay tax on all of their worldwide profits but seem genuinely shocked when a multinational based outside the UK also seems to be paying the lion’s share of its tax outside the UK? It is reported in the Guardian that Starbucks pays 31% tax on its worldwide profits so if it is playing the tax avoidance game, it is spectacularly bad at it.

The issue is not one of avoidance but of transfer pricing - the values at which cross-border transfers of intra-group services take place. Companies are required to document and justify their transfer pricing policies. Where HMRC suspects that transfer pricing is being used to siphon profits out of the UK and into low tax jurisdictions – an understandable temptation – they can counteract this, although this will usually be subject to agreement with the tax authorities  of the other countries concerned.

Wherever there is controversy on the subject of so-called tax avoidance in the UK, a certain Richard Murphy and his company Tax Research, pop up like  proverbial bad pennies. A Pooterish figure, whose deep insights into the taxation of multinational corporations presumably derive from his many years of completing tax returns for little old ladies and local businesses while a partner in a small firm of Chartered Accountants, he has somehow managed to convince lobby organisations and journalists that he really knows his stuff, while slinging mud at those who actually do. Like the journalists, he is always keen on a fat, juicy headline, no matter how thin the underlying story happens to be.

Writing in the Guardian’s “Comment Is Free” section (which is just as well as it’s certainly not worth paying for), he complains that multinationals and local businesses do not compete on a level playing field. The top rate of corporation tax in the UK is 23%, not the 31% that Starbucks pays worldwide so one wonders what exactly Starbucks’ tax advantage is. Perhaps the real competitive disadvantage that the owners of UK businesses tend to suffer is that they have accountants like Richard Murphy who presume to act as their moral guardians and not as creative tax advisers.

A comedy of errors?

The subject of tax avoidance has been in the news a great deal of late as the tax affairs of a whole slew of celebrities have come under the journalistic spotlight. What used to be almost solely a subject for so-called investigative reporting and pompous editorials now reaches even to the depths of celebrity tittle-tattle in the red-tops.

If the journalists on the broadsheets could rarely be expected to generate light rather than heat in their “examination” of this topic, the gutter press’s performance is even more lamentable. The Daily Mail’s “exposé” of the comedian Frankie Boyle’s daring raid on the treasury coffers by informally liquidating his company and distributing retained profits as capital gains rather than as income would be merely laughable were it not for the fact that what it really exposes is journalists’ quite incomprehensible ignorance and inability to conduct even the most basic of research. The fact that Frankie Boyle could not have used this “scheme” without his advisers first making a formal request in writing to his tax office might have been seen as relevant. One might reasonably suppose that the realisation that there is an extra-statutory concession which specifically permits such a series of transactions and, in effect, a clearance procedure which ensures that the tax office must be satisfied that the concession is not being used for tax avoidance purposes, might have scuppered the story. But maybe not – establishing the truth seems no longer to be a priority to journalists pandering to a celebrity-obsessed readership.

The story to which the Frankie Boyle episode was a mere sequel – David Cameron’s naming and shaming of Boyle’s fellow comedian Jimmy Carr and his tax arrangements and the latter’s admission of an “error of judgement” (in breaking the 11th commandment, one suspects) is itself instructive. The fact that a sitting Prime Minister thinks it appropriate to discuss an individual’s tax affairs in this way when by rights they should be a private matter between Carr and his tax inspector shows the depths to which Governments everywhere have sunk in spreading their propaganda. We would be very surprised if Cameron or his colleagues have not themselves been at some time in their privileged lives the beneficiaries of rather similar arrangements. So who are the hypocrites?

The UK's ne General Anti-Abuse Rule

The UK’s new General Anti-Abuse Rule

We now have a draft of the legislation which will enact the new so-called “general anti-abuse rule” following on from the Aaronson report and its recent acceptance by the Government.

What’s in a name?

A new concept has emerged. Generations of tax professionals have learned the difference between straightforward tax mitigation and planning, more complex yet still legal tax avoidance and blatant tax evasion – but the word abuse has not hitherto been used. It is, of course, a word with unpleasant and nasty connotations – one needs only to think of other contexts in which it is routinely employed – and there is no doubt that its application in this context is quite deliberate. Tax avoidance is now to be bracketed, linguistically at least, with cruelty to animals, wife-beating and paedophilia.

However, in the courts and in discussions with HMRC, the import of this word is not likely to be significant. We discover that there are two types of action taken which might result in a reduction in one’s tax bill; those which are reasonable and those which are unreasonable. Unreasonable = abusive. So why not just say unreasonable in the first place?

So what’s unreasonable?

At the moment, nobody really knows. One can expect there to be guidance on the kinds of activity that HMRC will attack as unreasonable (although there is currently nothing of the sort). But even that will not necessarily provide certainty. It is well known that there are tax avoidance schemes that HMRC do not like which have succeeded when examined by the Courts. Essentially, the GAAR is to HMRC as the .44 Magnum was to “Dirty” Harry Callahan. And it appears that the question being asked of those who are unsure whether the GAAR applies to them is also “do you feel lucky, punk?”

Surely I can ask for a clearance?

No, you can’t. Too expensive, apparently. You can instead go to a tax adviser and ask them whether it will work. They may offer an opinion but in the end they are likely to say they don’t know – which is unfortunately the truth. Oh, and you can expect the fact that you sought tax advice and ever expressed any doubts about whether your proposed course of action was caught by the GAAR to be used as evidence that indeed it was. Joseph Heller could have written a book about it.

So where does that leave us?

In a world of uncertainty, at least for the time being. Clarity will be achieved in ten or fifteen years when disputes on the applicability of the GAAR will finally be settled in the highest courts. But in the meantime, the GAAR will have achieved its real purpose by discouraging, without explicitly making illegal, all kinds of activity which might or might not have been caught by it anyway.

The future of offshore

The future of “offshore”

Each of the governments of developed (and many of the developing) countries propagandises on the subject of tax havens and decries their existence – nasty, seedy places, they say, where shady money is stashed away out of their reach.

But is this really so? Might part of the problem be the overarching greed of tax authorities throughout the world?

Some of the earliest tax advice is to be found in the Bible. The gospel of Saint Matthew extols us to render unto Caesar that which is Caesar’s, and what was being rendered to Caesar at that time was taxes charged by the invading Roman Empire.

As they grow in power and reach, states have a habit of taking on the worst characteristics of empires. The United States is the most obvious example today. Its citizens are taxed on their worldwide income; it imposes rather than agrees tax treaties with other nations (while the rest of the world uses the OECD model for their treaties, the United States uses its own model which it “offers” on a “take it or leave it” basis).

The United Kingdom is not much better in this respect. It routinely enacts legislation which is in contravention to its agreed double tax treaty obligations and the laws of the EU.

But offshore financial centres are not merely tax havens. They remain some of the safest and most secure places for banking in a global economy fractured and poisoned by dodgy lending and financial mismanagement in those markets which are at the heart of these greedy countries and whose citizens are now being asked to pay heavily for the mistakes and wrongdoings of others. They provide flexible and transparent trading and asset ownership structures. They enable cross-jurisdictional co-operation in trading and investment which would not be possible in those many countries which take a heavy-handed and inflexible approach to these matters, adding attritional transaction and withholding taxes, bureaucracy and red tape to the cost of doing business and holding assets.

For all of these reasons, we can probably conclude that the future of offshore is certainly secure for now.

Legal Professional Privilege - a loophole exploited by HMRC?

The recent decision in the case of R (on the application of Prudential Plc and another) v Special Commissioner of Income Tax and another shows that the issue of legal professional privilege ("LPP") in relation to documents regarding advice given to a client on tax matters underlines the unsatisfactory and anomalous current state of the law.

As matters stand, documents are protected from disclosure to HMRC where they are created in relation to tax advice given by a solicitor or barrister but not where the advice is given by a tax adviser or accountant. It is surely absurd that a client can ensure that he obtains the benefit of LPP where he instructs his solicitor to obtain advice from a non-solicitor tax adviser on his behalf but not if he goes to the tax adviser directly. Big Brother HMRC is exploiting this particular loophole rather regularly now - even though we all know how much they are against exploiting loopholes when the boot is on the other foot.

Neither am I terribly impressed that the accountancy bodies seem to be looking to have LPP extended just to them so that they can compete with the lawyers. Surely it is the nature of the advice, not the status of the adviser, which should determine whether documents are protected? A client's right to privacy and confidentiality of communication should be an inalienable right, not one which depends on an irrelevancy such as the professional status of the adviser with whom he is communicating.

It's official - HMRC really are bad sports.

The England team are unlikely to get the best of receptions when they come onto the pitch at Wembley tonight but there is another team which is proving just as unpopular - HMRC!

HMRC approaches each game it is involved in as if it is not just the strongest team in the league but is also the referee - and one who changes the rules to suit himself whenever he sees play that he considers "unfair". However, unlike Sepp Blatter's FIFA, who deliberately cover their eyes like the proverbial wise monkey so they see no evil, this particular game does have an off-pitch official in the form of the Courts.

HMRC's opposition this time was Portsmouth FC, or rather their administrators. HMRC complained that the proposed Corporate Voluntary Arrangement ("CVA") to deal with the Club's debts was unfair to them, partly because it failed to take into account £13 million of tax it claimed it was owed in relation to payments for image rights. However, this was a rather dubious appeal for a penalty on HMRC's part as it had previously lost a case before the Tax Tribunal which ruled that no tax was due on such payments. Fortunately, even though HMRC hoped they could pull the wool over the referee's eyes on this occasion, the Court saw through this dirty tackle & awarded a free kick to Portsmouth. The CVA will now go ahead as originally planned.

This news came on the same day that it was reported that HMRC was also being blamed by Professional Golf Association Tour officials for the increasing difficulties they face in encouraging foreign players to compete in European Tour events. This is a consequence of HMRC's success in a case it brought against the tennis player André Agassi in 2006, following which it is now able to impose UK tax not just on prize money but on sponsorship & endorsements connected with UK sporting events. PGA officials are reported to be particularly worried about the effects this may have on the forthcoming Ryder Cup which is being held in Wales this year.

We already have a tax system which encourages the UK's most successful sportsmen to base themselves abroad and if it also discourages big name foreign sportsmen from coming here to xompete, maybe it is time for a major rethink. Many of our sporting heroes may be selfish, spoiled prima donnas but there is no doubt that their activities in this country generate wealth, jobs and international prestige for the UK. It would be a shame if the shortsightedness of our greedy taxmen spoiled that.

A masochist's delight

Today's Budget was expected to be a painful affair and indeed it was a masochist's delight. There was precious little carrot but lots and lots of stick.

As expected, VAT is to rise to 20% from 4 January 2011 - as mentioned in my last Budget blog, this should actually stimulate spending on luxury items in the short term.

For large companies, the reductions in corporation tax, although welcome, will undoubtedly be partly offset by the reduced rates of capital allowances. The tax rate may decrease but the taxable base will increase. I wonder whether and how the relatively certain knowledge of lower rates of corporation tax in the future will affect actual investment on the one hand and accounting on the other. Making a provision in one year even if one only has to release it in the next could be worth significant sums of tax for larger companies.

Many smaller companies may be more concerned with how they are going to stay in business and make profits rather than how those profits will be taxed when made. Those investing in plant and machinery for future production will be "incentivised" to do so early in order to avoid the effects of the reduction in the Annual Investment Allowance in 2012, again stimulating spending on fixed assets in the short term by making it more expensive to do so in the long term.

Buried in the Press Releases are announcements of the legislation amending the Enterprise Management Initiative and Venture Capital Trusts scheme to ensure that they qualify as approved State Aid under EU rules. There are some similarly-motivated changes to Consortium Relief. The fact is that it is no longer possible for the UK to single out UK companies for support of this kind. In times like this, one wonders whether that can be considered a good thing.

The increase in the CGT rate from 18% to 28% is swingeing. The fact is that most taxable capital gains are made by higher-rate taxpayers and trustees - or by basic rate taxpayers who for one year only are turned into higher-rate taxpayers by the receipt of a capital gain - so the tax take will be increased substantially. There will be issues arising for deceased estates because the higher rate applies to personal representatives as well - there may be some traps for the unwary here. Since there is no longer any indexation allowance for individuals and trustees and inflationary gains are therefore taxable once more, the effective rate of tax is extraordinarily high. What fairness there once was in the CGT system now seems to have flown out of the window. Note, however, the Government's contrasting generosity in increasing the entrepreneur's relief lifetime limit to £5 million.

There is an interesting Press Release, the contents of which are, in effect, that if MP's were subject to the same rules as everybody else regarding their subsistence and travelling expenses, they might have to pay some tax and this will never do. Therefore the said payments will be tax-exempt. Unlike many of the other Budget proposals, I would suggest that this is unlikely to meet with much opposition in Committee or in the Finance Bill debates.

Polling day at last

Polling day is finally here and from the tax adviser's and taxpayer's perspective, today is not so much the end as the beginning. It looks likely that the results of the poll will not directly decide who goes on to govern us; that will be a matter of feverish negotiation behind the scenes.

Whoever forms a government, there is no doubt that taxes will have to rise substantially in due course; the 1% NIC rise and the 50% top rate of income tax will barely make a dent in the deficit. VAT seems the most likely area to be targeted and the announcement of a significant increase in the standard rate at some future specified date would probably have the perverse effect of stimulating the economy temporarily. I do not think that forecasts of a UK standard rate of 20% in the next couple of years are at all unrealistic or alarmist. We can expect evasion and large scale avoidance to be targeted by all parties, although one wonders how this would be done if there are civil service cut-backs, as appears likely, especially if the Conservatives are in power. Pension fund exemptions and reliefs are also likely to to be whittled away even further. Council tax may rise as central funding diminishes and local authorities resist making cuts. There may be additions to the range of "green" taxes and rises in duty on alcohol, tobacco and hydrocarbon fuel seem inevitable.

In the end, the taxpayer is set to suffer a considerable amount of pain, whichever party is in power. My forecast for the eventual outcome is a Conservative minority government. In my view, the Liberal Democrats will only support one of the other parties if they agree to proportional representation and that will almost certainly mean that we will never have a majority Government again and I doubt that that is something that either Labour or the Conservatives can tolerate.

Some thoughts on the Budget

Rarely has the task of delivering a Budget been such an inconvenience to a Chancellor. Mr Darling had precious little to crow about and very little room for manoeuvre. This was a political Budget, with all the major fiscal and economic decisions made or incapable of being made so close to the looming Election. The Chancellor's speech was pedestrian and dull until mention was made of a new tax information exchange agreement with Belize. Laughter and cheering ensued at this point; I wonder why? Mr Cameron's reply was impressive. Most telling was his criticism of Labour for introducing measures which his party had initially proposed and which ministers had derided. If the Government still has any fresh ideas about how to lift the country out of recession, they were by no means obvious from this Budget.

Most of the tax changes mentioned in the Press Releases are either unsurprising or largely insignificant. The following caught my eye:

SDLT

For first time buyers, there is a temporary incentive to buy; incentives have not been common in recent budgets. However, there is a return to usual form for the buyer of £1 million+ properties - a disincentive to delay their purchases in the face of a swingeing increase in SDLT from 2011 onwards.

Offshore penalties

The keys to sophisticated offshore tax evasion are secrecy and non-disclosure. The fact that HMRC has been prepared to pay for information which has been obtained criminally is a strong indication of its determination to tackle this issue. The introduction of a higher tariff of penalties for offshore evasion structures which use tax havens with which the UK does not have tax information exchange agreements is clearly part of the overall effort to stamp out this kind of evasion but what will it actually achieve? Offshore structures are used frequently for investment and trading by non-UK residents and for legitimate tax avoidance. This fact often serves to give a veneer of legitimacy to structures which are frankly nothing more than heavily disguised evasion. Will the tax havens which have information exchange agreements be more or less likely to be used by legitimate avoiders or illegitimate evaders? A recurring problem with HMRC is their frequent inability to differentiate between the two groups.

Disclosure of avoidance schemes

HMRC are clearly still not happy with the scope of the DOTAS regulations and will be increasing penalties for non-compliance as well as revising and extending the “hallmarks” that identify the type of scheme covered by them. What constitutes avoidance is often a nebulous concept; HMRC moves the goalposts but is frustrated when the imaginative avoider still manages to put the ball in the net. HMRC's view of what constitutes unacceptable avoidance is much wider than the tax profession's. At the risk of torturing an analogy to death, one could say that they have recently begun to ask the referees, in the shape of the Courts, to disallow past goals on the basis that the goalposts were not actually where everybody thought HMRC had said they had put them. Thankfully, the Courts are there to provide a measure of sanity, but not before HMRC have rattled sabres, run up huge costs and cowed the vast majority into silent compliance.

Overall, this was a dull and uneventful Budget. But without doubt, it marked the beginning of an election campaign which promises to be neither dull nor uneventful.

What do we expect from the Pre-Budget Report?

The Pre-Budget report will be announced within the next few weeks. It may be too early to expect any radical upheaval of the UK tax system but it must surely be coming given the hugely altered economic and fiscal landscape.

With the UK taxpayer being obliged to bail out the banks, there is likely to be increased emphasis in the UK on tackling perceived tax avoidance. It seems to me that the obvious steps to ameliorate the effects of a deepening recession are to encourage investment in business and capital projects, while perhaps beginning to increase rates of personal income tax for those with higher incomes.

High levels of stamp duty are doing nothing to help the liquidity of the UK property market and where there are no transactions, there are no tax receipts. Economics suggests that we start to shift the emphasis from taxing transactions and incomes to taxing private wealth, but politics and the lobbyists may be saying something else.

More tax avoidance nonsense

An article in The Independent reports criticism of United Business Media for its decision to move its base to the Republic of Ireland. Vincent Cable, the Liberal Democrats' spokesman on economic affairs, referred to this move as "blatant tax avoidance".

Has he not heard of the right to freedom of movement of capital? The reason for the move is immaterial, while the fact that the group earns between 75 and 85% of its profits (depending on whose analysis you accept) from overseas is very relevant. Why should a genuinely multi-national business put the interests of the treasury ahead of its shareholders' interests? There is no earthly reason I can think of.

Even Richard Murphy thinks this story is "a storm in a tea cup", and where tax planning is concerned, he is usually the one making mountains out of molehills - not that he can resist his usual mud-slinging, calling the company "an aggressive and litigious tax avoider". The litigation he refers to is a continuing dispute over the interpretation of the capital gains de=grouping provisions - hardly especially aggressive tax planning, but given the sloppy drafting of the legislation in question, well worth arguing if success will lead to an additional £80 million of value to shareholders.

John Kavanagh in pugnacious form

Dennis Howlett blogged the following on 13 April 2008:

"John Kavanagh is in pugnacious form over the Tesco/Guardian libel match:

(Then quoting my earlier blog:)

"It seems that we have reached a stage where the rhetoric of journalists, fuelled by their constant pursuit of scandal and inspired by the tendentious writings of self-appointed experts like Richard Murphy, Prem Sikka and their like, has been so successful in persuading the public that tax avoidance is immoral and unethical that merely to state that someone is a tax avoider is seen as libellous if untrue."

The fact of the matter is that Richard is an expert in his field - he doesn’t need to be self appointed. Check the organizations that support and sponsor his research. Strike 1.

If John read what Richard and others say, he would find it isn’t about avoidance per se but the use of what Tesco already admits is a highly complex structure that has allowed it to provisionally avoid (at the very least) stamp duty. Ostensibly, that goes against HMRC’s general position of substance over form in the creation of tax planning arrangements. Strike 2.

John goes on to say:

"I rather like Tesco’s approach to this case. If the Guardian argues successfully that their article is not defamatory, then Tesco loses their case but regains the moral high ground. If the article is defamatory if untrue, the Guardian will have to show that it got its facts right in order to win, and only Tesco can know whether they have.
John has got this the wrong way around. Anyone remember the MacDonald’s case? As Alex Hawkes correctly points out:

"Richard Northedge has a similar view: that Tesco could be entering into a MacLibel situation.

"This battle has the appearance of a Goliath versus David fight – and remember who won that. Tesco should look at the MacLibel case: after years of dispute, the hamburger giant won but it was the protestors that gained the sympathy and McDonalds is still regarded as a representative of big bad business.

Alex then goes on to argue that justice is blind and therefore the courts will not take the moral/ethical issue into consideration. I’d prefer that it does because if you think about the basis for common law, it is built on an unwritten but well understood code of ethics. Even if the courts rules in Tesco’s favour (assuming it ever gets that far), then Tesco is in a no-win position.

If, as I suspect, Tesco is forced to reveal what it has done, then the MacLibel issue takes on greater poignancy. I see a growing concern for issues that have an ethical flavour and which go to the heart of issues around sustainability, risk, compliance and social responsibility. It seems to me that you can hardly fly the flag of supporting issues around say Fair Trade while at the same time engaging in tax avoidance on the scale that Tesco already admits. That makes you a hypocrite. Strike 3.

Endnote: You wouldn’t expect John to agree with the position taken by Alex Hawkes, Richard Murphy, Prem Sikka and myself. His bio says: “I am Director of Private Clients in the London office of Shaws, Chartered Tax Advisers. I advise on all aspects of tax affecting private clients, with an emphasis on non-domiciliaries and offshore strategies.”

My response:

John Kavanagh on April 14th, 2008 4:37 pm

Unless you are much bigger than me, Dennis, I think I am going to have to ask you to step outside! Seriously, though, I will try to address your strikes and see if I can persuade anyone reading this that I have in fact hit a home run.

Strike 1

Richard Murphy is an expert in a field which he and journalists have created - analysing the tax charges in published accounts and comparing them with the headline rate. Not rocket science, and it hardly makes him an expert on tax avoidance any more than staring into the night sky makes one an expert in astronomy, but a chap’s got to make a living. Neither, as far as I am aware, is he an expert in ethics, and it is his (and seemingly your) blunt assertion that tax avoidance is immoral and unethical which seems to me to be unproven and which should be, and currently isn’t, the subject of considered debate. Whether the Guardian is in the wrong or Tesco is in the wrong in this little spat is not such an important question to me.

Strike 2

So now you’re telling me that if I don’t like being taught ethics by Richard Murphy, I should take lessons from HMRC instead? I fear we are not moving towards rapprochement, Dennis.

Strike 3

We would hate hypocrisy to come into this, wouldn’t we, Dennis? But then if one discovers that Guardian Media Group has entered into substantially similar transactions to those entered into by Tesco, that rather pulls the moral high ground from under their feet, doesn’t it?

Thanks for the headline, though.

Regards

John Kavanagh

PS Isn’t your reference to my bio a slightly low blow from someone who“specialised in providing…(inter alia) …offshore tax services” in a previous incarnation?!

Even more on The Guardian and Tesco

A story by Stephen Glover in The Independent suggests that not only did the Guardian get their story about Tesco wrong but Guardian Media Group has engaged in exactly the same kind of avoidance as Tesco - or is it tax planning or mitigation when carried out by the gentlemen of the press?

More on The Guardian and Tesco

In response to my comment on Alex Hawkes Tax Hack blog, John Adamson wrote:

"I'm not sure John Kavanagh is right on his first two points. The reality is that the whole issue of tax avoidance is now becoming one not just of public interest, but one of political interest too. I'm not sure people ARE tired of hearing about it, I actually think it's a more relevant issue than ever. So isn't it perfectly legitimate for a journalist to ask questions? And as one of Britain's largest private companies doesn't Tesco have a moral and social responsibility, let alone a legal responsibility, to be transparent about its activities? The disturbing issue here is what appears to be an over-reaction by a company under pressure, and implicit threats to any journalist that looks at the company, Surely in a democracy that is a very worrying development?"

I responded:

Despite their name, public limited companies do not owe a duty to the public in general. Their main duty is to two groups of people; shareholders and customers.

Tesco's duty to its shareholders is to maximise its profits by any legal and ethical means, including the legitimate avoidance of tax. I've no doubt that vast numbers of Tesco shares are owned by pension funds and charities. Is it ethical or moral to deny these groups the higher dividends and capital growth that result from proper management of the company's affairs?

As far as their duty to their customers is concerned, who is the Guardian to say that they would not prefer a penny off a tin of baked beans rather than to give it to Gordon Brown? I can imagine what pensioners, those on benefits and the low paid would say and I think it differs from the Guardian's view.

We need to remember that the tax companies pay is just an element in their profits; in one way or another it is always borne by the shareholder or the consumer, in reduced dividends or increased prices.

I therefore think it is for Tesco to decide, as a purely commercial matter, whether the advantages of a sensible tax minimisation policy are outweighed by the opprobrium heaped upon them by a politically-motivated corner of the press. If the press over-step the mark, as I think they have here, it is their right to seek redress in the Courts.

The major disadvantage of the form of democracy we have is that the opinion that gains most credence is often the one which is shouted longest and loudest, not necessarily the one which has been most carefully and impartially considered. I am tired of hearing just one side of a debate, especially when it is supported by claims of ethical or moral superiority which are subjective and unproven.

The Guardian & Tesco

I just posted the following comment on Alex Hawkes' Accountancy Age blog regarding Tesco's decision to sue The Guardian for libel over its accusations of tax avoidance.

"What an interesting situation.

The Guardian has effectively conflated two issues. The first is whether tax avoidance is immoral and unethical, and the second is whether Tesco has engaged in it. The first question has been in the public domain so long now that one is tired of hearing about it. The second was a confidential matter between Tesco and HMRC before the Guardian journalists stuck their big noses in it.

It seems that we have reached a stage where the rhetoric of journalists, fuelled by their constant pursuit of scandal and inspired by the tendentious writings of self-appointed experts like Richard Murphy, Prem Sikka and their like, has been so successful in persuading the public that tax avoidance is immoral and unethical that merely to state that someone is a tax avoider is seen as libellous if untrue.

I, for one, would love to see the Courts take a view on whether tax avoidance is immoral or unethical as journalists like Alex Hawkes so frequently opine. I would be utterly astonished if any Court found that it was, irrespective of what the journalists have to say.

I rather like Tesco's approach to this case. If the Guardian argues successfully that their article is not defamatory, then Tesco loses their case but regains the moral high ground. If the article is defamatory if untrue, the Guardian will have to show that it got its facts right in order to win, and only Tesco can know whether they have.

I am particularly looking forward to the day that the Guardian's legal advisers are forced to argue that what they have said about Tesco is not defamatory because there is in fact nothing at all unethical or immoral about tax avoidance!"

A waste of time and money

I spent much of this morning with a client advising him on the implications of the Budget on an offshore structure set up some time ago. I had already given him a great deal of advice about the implications of the Pre-Budget report and we were ready to make wholesale changes which in the event did not have to be made.

I can't help feeling sorry for clients who have paid for advice that turned out to be useless to them, because it related to a hypothetical situation which never existed. The amelioration of what would have been draconian changes is welcome, but how much better would it have been if the Government had not gone around flying kites in the first place? I would love to know the amounts of time and money wasted because of the Government's dithering and equivocation. It's a stupid way to run a country.