Wednesday, February 22, 2017


BLOG 179


Some years ago, I was on the Consultative Committee for the reform of the tax tribunal system.  I was the lone representative of the accountancy profession.  I remember sitting around a table with about 14 lawyers and a couple of other non-lawyers and bemoaning the impending demise of the General Commissioners.  For younger readers I should explain that these were volunteers who gave up their time to settle tax appeals locally.  When asked by Stephen Olive (later Sir Stephen) who chaired the Committee what was good about the Commissioners, I said that they applied commonsense.  He retorted, was I suggesting that lawyers could not apply commonsense!

The recent decision of Judge Christoper McNall, a barrister, whose website tells me that he aims “to bring a robust and practical approach to all my clients’ cases”, in the First-tier Tribunal case of Coomber v HMRC, seems to me to prove my point.

Mr Coomber owed income tax for 2015/16.  He sent a cheque to HMRC on 2 February 2016, which was received by them on 4 February 2016.  They banked the cheque and it bounced.  No one knows why it bounced.  Mr Coomber had sufficient funds in the account to meet it.

Mr Coomber’s accountant spoke to HMRC on 1 March 2016 and were told that his tax payments were up to date; he owed nothing.  In early March Mr Coomber received his bank statements and noticed that the cheque had not gone through.  It is not clear what happened next.  I assume the accountants spoke to HMRC again and this time were told that they had not received payment.  Apparently when they spoke to HMRC on 1 March, HMRC had not got around to updating their records.  Mr Coomber eventually sent HMRC a replacement cheque on which HMRC banked on 17 March.

Where tax due on 31 January is not paid before the end of February a 5% surcharge applies unless the taxpayer has a reasonable excuse for the late payment.  The issue for Judge McNall to determine was whether Mr Coomber had a reasonable excuse for not having paid his tax by the end of February in circumstances where he had sent HMRC a cheque at the beginning of February, knew that he had sufficient funds in the account to meet it, had not been told by HMRC that the cheque had not been honoured, indeed, had in fact been told by HMRC that he had duly paid what he owed, and had no knowledge that what HMRC had told him (through his accountants) was incorrect until it was too late to avoid a surcharge by sending a fresh cheque.

Do you think that in that combination of circumstances Mr Coomber had a reasonable excuse for paying his tax late?  I certainly do.  But reasonableness is a subjective concept and what matters is what Judge McNall thinks and he thinks that Mr Coomber acted unreasonably.

So what would a reasonable person have done in Mr Coomber’s circumstances?  Should he have called his bank every day to check that it had cleared?  Personally I think that would be an odd thing to do.  If everyone did it, I would expect the banking system to collapse.  But that is precisely what Mr McNall believes that a reasonable person would have done.  “Santander offers telephone banking, and his bank statement gives a Freephone (0800) number at which the bank could be contacted.  No reason is put forward why Mr Coomber, having made this payment by cheque, could not have checked with his bank to see if it had been cleared.  I do not see any reason why he should not have done so”. 

Personally I think it would have been a very odd thing to do.  If I send someone a cheque and it bounces, I would expect the recipient to contact me very quickly to demand an explanation.  Isn’t that what normally happens?  Well, apparently not in Mr McNall’s commonsense world.  “Mr Coomber advanced the proposition that it is “normal practice” if a cheque is dishonoured for some reason for the creditor (here HMRC) to contact the payer to inform them of the same.  But there is no evidence or other material before me as to this alleged practice and, if it exists, whether it is indeed “normal” as alleged and, if, even if it is normal in other contexts, whether it applies to HMRC”.

I find that incredible.  It needs evidence to indicate that if a cheque bounces it is normal for a creditor to contact the debtor and demand his money?  What sort of a world does Mr McNall live in?  I must admit though, that I like the suggestion that even if that were to be normal, it is not reasonable to assume that HMRC will act like any normal person; one can rely on what normally happens only if you can show that HMRC is staffed by normal people!

But probably Mr McNall had to except HMRC from normality because it had told him that when a bank bounces a taxpayer’s cheque, it simply throws it away!  Nowadays I do not have any day to day dealings on behalf of clients with HMRC, but back in the days when I did my recollection is that if a client’s cheque bounced, HMRC were on the phone demanding an explanation straight away.  Has the ability to impose penalties for late payment resulted in HMRC no longer bothering to seek to collect unpaid tax, except tardily?  I talk to a lot of accountants and while many believe that HMRC use penalties to increase the headline amount of what they collect, none has ever told me that they don’t try to collect at all.

Mr McNall clearly thought Mr Coomber should not have paid by cheque.  “Whilst he was entitled to do so, he was nonetheless, in doing so, taking a risk that, if anything went wrong with the cheque, or (for example) if it went astray in the post, payment would not be made in time”.  He said that Mr Coomber should have used “some other means (for instance BACS, Faster Payment or Direct Debit) which would have given him the immediate knowledge and assurance that the payment had been safely received”.  Would it?  I pay my tax electronically.  I get immediate knowledge that it has left my account, but I have no knowledge that it has reached HMRC’s account or even that it has left my bank.  I still take the risk that the bank might make an error.

Mr McNall was also clearly upset that no-one could tell him the full facts.  In particular he was annoyed that he did not have a copy of the cheque itself.  Not annoyed with HMRC for destroying it, of course.  Annoyed that Mr Coomber had not said whether or not he had asked his bank whether, as part of its ordinary cheque-clearing processes, it scanned and kept a copy of the cheque which it was dishonouring.

This appeal was dealt with as a default paper case, i.e. Mr McNall decided the case without a hearing but by simply reading the taxpayer’s notice of appeal, HMRC’s statement of case and the taxpayer’s comments on it.  That meant Mr Coomber and his accountants had to guess what Mr McNall would expect to be evidenced and what he would be likely to himself know from his own knowledge of life.  It also meant that Mr McNall had to make guesses to fill in gaps in what he had been told in order to write his decision. 

The idea of default paper cases was not simply to save Tribunal time.  It was felt that some taxpayers would forgo their appeal rights rather than have to appear before a Tribunal but would pursue an appeal if all they needed to do was write a letter setting out their case.  This case perhaps demonstrates the downside of the default paper procedure!


Monday, January 23, 2017


BLOG 178


I am reading a lot in the Press about business rates.  One effect of growing old is that one remembers why things happened in the days when most of today’s practitioners were at school or still to be born.  The current version of business rates – Uniform Business Rates or Non-domestic Rates as it is actually called – dates from 1 April 1990.  Its introduction was hailed by business at the time as preventing far left local authorities from being able to impose inordinately high imposts on local businesses.

The idea was very simple.  Value every non-domestic property in the country, add up the values, decide how much business as a whole should contribute to local government and divide one figure by the other to arrive at a rate per £ of value (or a multiplier as bureaucrats described it).

So rates are all about fairness between different businesses.  Of course the world has moved on since 1990 and in the internet age it is questionable whether a property tax is still a sensible way to raise local funds from business.  Nevertheless the government, after consultation, has decided that it is.  So today business rates are the way to divide business’ contribution to local expenditure fairly between users of business properties.

The multiplier was 34.8p in 1990/91 and it is 48.4p for small businesses in 2016/17.  £1 in 1990 was worth £2.25 in 2016.  Accordingly if the value of the property owned by a business has not moved, the increase over the period has been well below inflation.  The problem is that the value of almost all properties has moved.  In addition the national stock of commercial property has changed.  Nevertheless business overall has not done badly if the aggregate value of all commercial property in 2017 is 2.25 times or more of the aggregate value of commercial property in 1990 (or 1989 when the 1990 valuations were arrived at).

But of course nobody looks at things globally.  Most people’s perception is at individual property level.  Properties do not increase uniformally across the country.  If a shop in Camden High Street was worth 100 in 1990 it could well be worth 500 today, whereas the equivalent shop in Liverpool or Stockport may only have doubled in value over the period.  So is it fair for the shop in London to pay 2½ times the rates of the shop in Liverpool?  The value of a shop largely reflects its ability to generate income, in which case that seems fair to me.

And what about the shop in Watford High Street that was worth 100 in 1990 and is probably not worth much more now because the shops in Queen’s Road, a relatively quiet street behind the High Street, were demolished and replaced by the Harlequin Centre which has taken away a lot of the trade from the High Street and whose value today is far greater than in 1990.  Doesn’t fairness mean that today the Harlequin Centre ought to contribute more per square foot to Watford BC than the High Street?  That will be reflected in the values of the properties.

The real problem is that we do not have enough revaluations.  They ideally ought to take place every year but the work involved makes that impractical.  Parliament in 1988 (when the legislation was put in place) compromised at every five years.  Sadly when the time came for the 2013 revaluation the government put it off for a couple of years so the current rates are based on 2008 values and those for 2017/18 will be based on 2015 values.

This posting was prompted by some sad stories in The Times the Saturday before last.  For example, the crafts shop in Southwold High Street mainly run by volunteers whose only aim is to break even.  Their rates will go up from £152 p.a. to £7,500 p.a. (by the time the transitional relief runs out).  “How can that be fair” asked the shop manager, “It’s totally perplexing”.  I think it’s fair.  Why should any shop (other than one operated by a charity, which the crafts shop could probably become if it wished) pay less than £3 a week in rates?  Why should the crafts shop keep out of business the person who could run a shop selling something else that could justify £7,500 p.a. in rates?  As rateable values reflect rental values, what has happened to the crafts shop’s rent?  If it has increased since 2008, why shouldn’t the rates increase too?  If it has not, it is hard to see how the rates could have gone up so much unless the landlord is subsidising the crafts shop.  And if he is, why should other businesses in Southwold or elsewhere subsidise it too.

Similarly with the Two Magpies Bakery.  The owner does not understand why she should pay the same rates as Costa Coffee a few doors away whose rates are increasing by less.  Well why shouldn’t she if her shop is worth the same as Costa’s?  If her customers are not prepared to pay more to buy her freshly baked bread, so she cannot afford to pay the real cost of her shop being where it is in Southwold, why should Sainsbury’s and Tesco subsidise her?

Of course I feel sorry for all of these people and for Alex Pose-Gill whose family have run his Coffee Lounge near Buckingham Palace for three generations.  He has had to put an extra 60p on the price of his full English breakfast.  But surely that is what should happen.  The cost of his premises is the aggregate of his rent, rates and utilities.  His prices need to absorb those costs.  But it is not reasonable to blame the government if the rates element of that package goes up but to accept as a fact of life if the rent element increases.

It is certainly reasonable to moan at the government for continuing with rates rather than find a better way for businesses to contribute to local authorities so that internet businesses do not have an unfair advantage over those that trade from buildings.  But it is not reasonable to criticise the fairness of a system that seeks to allocate a tax on buildings between buildings according to their values.  It is hard to conceive a fairer way.

It is also unreasonable to have allowed new businesses to be created in a fool’s paradise where their economic model was based on paying an artificially low price to occupy their premises, so that the substitution of a more realistic price will destroy the business.  However that is not the fault of business rates.  It is due to either the lack of adequate advice to micro-businesses or the failure of such businesses to seek proper advice before starting up.


Wednesday, January 18, 2017


BLOG 177


I keep reading in the press that Mr Osborne’s increases in SDLT have killed the housing market.

The latest is Simon Heffer in last week’s Sunday Telegraph who tells me that “Among George Osborne’s disasters as Chancellor was his ramping up of stamp duty to a level – 12% on properties over £1.5million – that has killed the London housing market and caused revenues to plunge”.  He exhorts Philip Hammond “to cut the tax in order to increase revenues”.

I hope that Mr Hammond ignores this suggestion.  It seems to be based on a number of fallacies.  Leaving aside that stamp duty is not imposed on property transactions and that Mr Heffer cannot apparently tell the difference between stamp duty and SDLT (although of course he is a journalist and has to write half a page every week for the Sunday Telegraph so perhaps does not have time to check such details), prices are determined by markets, not by taxes.

Of course if a person is prepared to pay £1.6million to acquire a house, the imposition of a 12% SDLT may well mean that he is prepared to pay only £1,428,571 so that the £171,429 SDLT brings his total cost to his target figure of £1.6million.

Accordingly an increase in SDLT might well cause house prices to fall, although personally I think it more likely that they will still increase but at a lower rate than before.  That may however depend on the greed of vendors who may be reluctant to sell at a lowered market price in the hope that the slowdown is temporary.

The 12% rate is not something introduced recently.  It has applied since 4 December 2014, which is now over two years ago.  So how far have London house prices in fact fallen in that period?  The House Prices Index indicates that London house prices have risen, not fallen, by 7.6% over the 12 months to November 2016.  This roughly reflects the average rise in all UK cities and exceeds the UK residential growth figures overall of 6.7% fairly comfortably.  Hometrack predict a 4% increase in city level prices in 2017, again not a fall at all.

HMRC’s own statistics do show that the number of UK residential property transactions has fallen over the six months to the end of November 2016 from 683,340 to 625,280, a reduction of around 8.5%, but the 2015 figure was itself significantly higher than the 2014 one and a better comparison may be that the six months 2016 sales falls midway between the comparable figures for 2013 and 2014.  They also show that the SDLT yield from residential property did fall from £7.5million in 2014/15 to £7.310million in 2015/16 but the latter figure is still well above the £6.450million yield in 2013/14 and indeed above that for every year from 2006/07 onwards.  The total value of residential property sales actually rose from £304.155million in 2014/15 to £321.530million in 2015/16.

None of these figures support Mr Heffer’s claim that revenues from SDLT have “plunged” since the 12% rate was introduced in December 2014.  On the contrary, the indications are that receipts have in fact increased.

Another interesting point is that Mr Heffer’s 12% applies to owner-occupation acquisitions.  Since 1 April 2016, the rate on second homes and most buy-to-let investment has been 15%.  This 3% addition was announced in November 2015.  The number of residential property transactions has been running at around 100,000 a month.  Unsurprisingly, this leapt to 171,370 in March 2016 due to bringing forward purchases planned for April and May, but the figure returned to the 100,000 level in June and remained at around that level up to November 2016, which is the latest figure available.  Accordingly even that surcharge does not seem to have actually had a long-term effect on sales.  Of course there may have been a shift from buy-to-let purchases to owner-occupier purchases, which is what the surcharge was partly intended to achieve, but as most property purchases are largely financed by mortgage and the owner-occupier has to pay his mortgage interest out of net income, whereas in most cases the buy-to-let investor has the advantage of paying it out of gross rental income, so receiving a substantial subsidy from the exchequer, that seems unlikely.  Suppose the annual interest on a £1.5million purchase is £80,000 p.a.  The owner-occupier needs to earn £133,333 to pay this (after tax of 40% and ignoring national insurance).  The cost to a landlord is £80,000, a saving of £53,333.  Accordingly one year’s tax saving on the interest far outweighs the one off extra £45,000 of SDLT.

It’s a long time since I studied A level economics, but my recollection is that market prices are a reflection of supply and demand. If supply increases and demand remains constant, prices will fall.  If supply decreases and demand remains constant, prices will rise.  In a property context, demand is largely fuelled by the availability of mortgages and the purchaser’s ability to borrow enough to meet the shortfall between the purchase price (including SDLT and other buying costs) and the purchaser’s own available cash.  The sub-prime mortgage debacle illustrated that where there is a ready available supply of mortgages, demand will increase substantially.  The controls that have been imposed on mortgage lending are accordingly far more likely to account for the slowdown (not plunge) in residential property prices than any increase in the one-off SDLT cost of the acquisition.


Wednesday, November 23, 2016

HMRC's "hardline" decision to collect tax due nine years ago

BLOG 176

HMRC’s “hardline” decision to collect tax due nine years ago

Last Saturday’s Times contained what seems to me to be an extra-ordinary article by Alexi Mostrous, their Head of Investigations.  It began, “The hardline decision by HM Revenue & Customs to issue huge tax demands to hundreds of wealthy investors in the Eclipse film partnerships marks the culmination of a four-year campaign against such avoidance schemes”.

The complaint seems to be that those wealthy individuals are being asked to pay the tax and interest on their income but they have spent all the money on the assumption that their tax avoidance scheme would work.  Accordingly many are facing bankruptcy and some are considering suicide.  I am not clear what Mr Mostrous thinks HMRC should do.  HMRC are required to collect the tax that Parliament decrees.  Doing just that does not strike me as a hardline decision.

I have never made a secret of my views on tax avoidance.  I do not think that there is any morality in tax.  Tax is a creation of statute.  If the statute says that transaction A attracts £X of tax, the tax ought to be paid.  If the statute says that transaction B creates an expense that can be deducted in calculating the tax on transaction A, the taxpayer is entitled to make that deduction.  There are numerous cases where HMRC collects tax that is not morally due.  Regular readers of this blog will know that I highlight some of these from time to time.  HMRC’s rationale is that they have a duty to collect the tax parliament lays down, however unreasonable that impost may be.

I think that works both ways.  If a person seeks to avoid tax and his scheme fails, he should pay the tax that he sought to avoid.  He is not entitled to look for special treatment because he has spent the money.  Thousands of people who have never attempted to avoid tax do not set aside the tax money but spend it on other things and face financial hardship and bankruptcy when the time to pay the tax arrives and their coffers are bare.  I am not aware of Mr Mostrous having ever proclaimed it “hardline” for HMRC to seek to collect the tax from such people.

In practice HMRC do not like to bankrupt people.  That reduces the person’s earning capacity and therefore their ability to pay future tax.  HMRC are normally willing to enter into a time to pay arrangement.  But they do expect the taxpayer to do his best to pay the tax as quickly as is practicable.  They do expect a wealthy individual to realise assets, to re-mortgage his house, to downsize to release funds, or whatever else is needed to produce the cash.  If a person lives an expensive lifestyle and has accumulated assets, it would surely be an affront to the general body of taxpayers to allow the person to continue to live the high life using money that is due to the Exchequer.

What have these wealthy taxpayers who have gained Mr Mostrous’s sympathy done?  The Eclipse Film Partners No 35 tax avoidance scheme was won by HMRC in the Court of Appeal in February 2015.  The Supreme Court refused leave to appeal on 13 April 2016.  They normally refuse leave only where they believe that the decision of the Court of Appeal is so obviously correct that there is no public interest in its being challenged.

The scheme related to the tax year 2006/07.  The members of the partnership collectively put £50million of their own money into it and also put in an extra £790million that they borrowed from a subsidiary of Barclays Bank.  The partnership paid £44m to Future Films, the promoter of the scheme.  Accordingly virtually none of the members’ £50million went into films.  The scheme was nothing to do with the members helping the film industry; any such help came from Barclays Bank.  The partnership lent £293m of Barclays Bank’s money to the members as an advance against future profits and the members paid that money back to Barclays Bank as a prepayment of 10 years interest on their loans.

The scheme was a deferral scheme.  The idea was that Barclays’ money would be used to buy film rights from Disney Corporation which would then be licenced back to Disney for 20 years.  The licence fee would be income of the partnership and as such taxed on the partners.  However the partners would never see that money; it would be used to repay the Barclays Bank loan.  Accordingly the members thought (or if they did not understand the scheme, should have thought) that they would get tax relief in 2006/07 but would have taxable income in each of the next 20 years for which they would have to fund the tax out of their own resources (or, of course, enter into further tax avoidance schemes each year to seek to shelter that income from tax) as the income itself had to be paid to Barclays.

In general the UK tax system does not grant tax relief for interest on borrowings to make investments.  You do not get tax relief for interest on the mortgage to invest in your house; you do not get tax relief for interest on a borrowing to invest in shares in, say, BP even though you expect the investment to produce taxable dividends; and you do not get tax relief for interest on a borrowing to invest in film rights even though you expect those rights to produce taxable licence fees. (Curiously if you rent your house and borrow to invest in someone else’s house you do get tax relief on the interest by treating it as an expense of generating the rental income.  Personally that does not seem either rational or moral, but it is what parliament in its wisdom has decided and, as I said earlier, in my view we ought to/are entitled to take the tax system as we find it).

If I carry on a trade, I do get tax relief for interest on money that I borrow for the purpose of the trade.  It is a business expense.  If a partnership carries on a trade, a partner can claim tax relief on interest on money that he borrows to finance the trade (presumably parliament feels that such interest is in reality a trading expense of the trade).  The members of Eclipse 35 believed it was carrying on a trade so that they could set their advance loan interest payments against their overall income for 2006/07.  The Courts have held that the partnership’s activities were an investment in film rights, not a trade.  Accordingly they have no right to tax relief for the interest payment in the same way as no one else has a right to tax relief on money borrowed to make an investment.

The issue that seems to have attracted Mr Mostrous’s sympathy is that by now the investors owe tax not only on the £293m income of 2006/07 that they sought to shelter by the interest payment, but they have “received” getting on for half the leasing receipts on which they also owe the tax (as they always expected to do).  These investors have known since April that the tax was due - and because all of the First-tier Tribunal, the Upper Tribunal and the Court of Appeal have held that the partnership did not carry on a trade, they have at least known the tax might be due since the FTT decision in 2012 and so have had four years to find the money.  2006/07 tax was due for payment by 31 January 2008, which is almost 9 years ago.  How much longer does Mr Mostrous think that the Exchequer should wait for its money?  The tax on the licence fees would have been payable even if the activities had amounted to a trade so it is not clear why the partners should still owe the money.  They ought to have been declaring that income and paying the tax on it year by year.

A judge once commented in relation to tax avoidance that he who plays with fire cannot complain of burnt fingers.  That seems to me to be precisely what the investors in Eclipse 35 are now doing.  They want to say the whole thing was a ghastly mistake and HMRC ought to pretend nothing happened and simply collect tax on the £293m.  But that is an extra-ordinary concept.  They entered into real transactions and even convinced the Courts that they were real, not pretend transactions.  They may not like the tax consequences of those real transactions but it is not reasonable to criticise HMRC for enforcing those consequences.

HMRC are not being hardline.  They are simply enforcing the laws laid down by parliament.  That is what they are there to do.  Of course parliament could change the laws.  Mr Mostrous can write to his MP and suggest that parliament should retrospectively exempt from tax those wealthy investors who sought to avoid it and have spent the money because they felt that their fair contribution to society is somewhat less than parliament has decreed.  That would be a perfectly legitimate thing to do.  I somehow doubt that parliament would think such a suggestion reasonable though!


Monday, November 14, 2016


BLOG 175


HMRC recently issued a note about calculating the 2014/15 tax gap.  This tells us that the tax gap for 2014/15 was some 6.5% of the total tax and duties due to HMRC.  It also says that “the estimate announced for the previous year has been revised upwards from £34bn to an actual figure of £37bn”.

I am not sure that it is helpful for the government to lie to the citizenry.  But I suppose that when it ought to be obvious that it is a lie – as it is surely not possible to “estimate” an “actual figure” that may not matter too much.  One can replace an estimate by an actual figure and one can refine an estimate to produce a more accurate estimate – which is what HMRC have done – but there will always be a fundamental difference between an estimate (an educated guess) and an actual figure (a fact).

The briefing note is of course little more than an advertising puff for the full 86-page report, which is a lot more honest.  So what is the tax gap?  HMRC say it is the difference between the amount of tax due and the amount collected.  They point out that it is impossible to collect every penny theoretically due, “for example, we cannot legally collect taxes from companies that owe tax and are insolvent”.  I like that word “legally”.  If HMRC believe that there are illegal ways to collect tax from people who have no money, perhaps they should explain what they are.  In the real world if a person has spent all his money he cannot pay anything.  But I digress.  The full report breaks down the tax gap as follows.

Criminal attacks                                  £4.8bn                                     13%
Evasion                                                  5.2bn                                     14%
Hidden economy                                 £6.2bn                                     17%
                                                                                    £16.2bn           44%

Avoidance                                                                       2.2bn             6%
Non-payment                                                                  3.6bn           10%
Legal interpretation                            £5.2bn                                     15%
Failure to take reasonable care            5.5bn                                     19%
Error                                                    £3.2bn             £13.9bn             9%    
                                                                                    £35.9bn          103%   

I have totalled the first three items together because they are all different forms of theft.  I assume that HMRC have split them because they try to counter them in various ways.

This is an interesting table.  44% of the £6.5bn shortfall, or £2.86bn is lost due to theft.  That is obviously an estimate.  If HMRC knew how much had been stolen from taxpayers they would also know who stole it and would presumably recover it.  The reality is that they do not know, because nobody knows.  Many put the figure much higher.

Bearing in mind the vast amount of both government expenditure and new legislation designed to combat tax avoidance, it is interesting to learn that this actually cost taxpayers only £2.2bn in 2014/15 and represented a mere 0.39% of the tax shortfall.  Indeed the vast majority of this figure is not a shortfall at all.  It will be collected (with interest at a rate that exceeds a commercial rate) in later years because most attempted tax avoidance fails and the tax has to be paid (or will fall into HMRC’s non-payment category) in a later year.  Where avoidance is successful, it is not part of the tax gap either (under HMRC’s definition) as the tax will never have been “an amount of tax due”; it is an error in HMRC’s calculation of the tax due, arising from a misunderstanding by HMRC of the tax laws.

Non-payment is factual and there is not much to say about it; even HMRC cannot stop people becoming insolvent.

The three remaining items are all estimates.  How accurate they are is questionable.  HMRC enquire into a small number of cases.  Those enquiries throw up areas where the taxpayer has taken a different view from HMRC.  In most cases the two sides compromise.  HMRC then consider imposing a penalty for the extra tax that becomes collectible as a result of their challenge.  If the taxpayer accepts a penalty, that extra tax is labelled as arising from failure to take reasonable care; if he doesn’t, it is attributed to error.  If the dispute has not been resolved by the time HMRC prepare their statistics, the tax HMRC are claiming is labelled as lost due to legal interpretation.  The statistics are generally based on HMRC random enquiries.  They do a very tiny number of random enquiries.  I do not know how many but I would be surprised if it is more than 1,000.  They then assume that the extra tax they pick up from that small number is representative of the whole body of taxpayers.  So if they pick up extra tax on, say, 200 of their 1,000 random enquiries they assume that 20% of the 9 million tax returns they receive are similarly wrong.  That may or may not be a correct assumption.  I have no doubt that it is a statistically reasonable one. 

The legal interpretation category is a bit more controversial because most challenges of legal interpretations take years to resolve.  Some, or indeed all, of that £5.2bn may be tax that will ultimately be collected.  It may equally not be tax at all but an amount that HMRC thought was due because they misunderstood the law.  This means that projecting from the sample to the general body of taxpayers is fairly pointless.  It is improbably that other taxpayers will be interpreting or misinterpreting exactly the same bits of legislation.

The real breakdown of the tax gap is therefore as follows:

tax stolen (estimated)                                                                                    £16.2bn
tax lost because HMRC did not manage to collect it in time                3.6bn
tax lost because HMRC have not been given the resources
   to do more enquiries                                                                        £13.9bn

tax that will be paid late as a result of attempted
avoidance will never have actually been due as HMRC
misunderstood the law                                                                           2.2bn

This raises interesting questions about HMRC’s use of resources.


Wednesday, October 19, 2016


BLOG 174


“When I use a word”, Humpty Dumpty said, in a rather scornful tone” “it means just what I choose it to mean – neither more nor less”.  “The question is”, said Alice, “whether you can make words mean so many different things”.    “The question is”, said Humpty Dumpty, “which is to be master – that’s all”.

Im a fan of Lewis Carroll.  It appears that Jane Ellison, the new Minister responsible for HMRC must be too (or if she is not, someone within HMRC must have taken Humpty Dumpty to heart).

HMRC issued a guidance note on 29 September, “HMRC’s guide to getting out of a tax avoidance scheme”.  This tells me that “HM Revenue & Customs (HMRC) has dedicated teams who can help you in a clear and straightforward way to settle your affairs and won’t charge you for their advice, even if you’ve several avoidance schemes”.

It strikes me as Lewis Carroll-esque to define “HM Revenue and Customs” as HMRC the third time that HMRC is used in the notes instead of the first time, as other people would have done.  But that is not what interests me.  It is that concept of free advice, or indeed of HMRC giving advice at all.  Imagine the phone call:

Taxpayer:        I have entered into a tax scheme and understand that you give free advice.

HMRC:             Yes, indeed.

Taxpayer:        I assume this is impartial advice.

HMRC:             Yes indeed.  There are a lot of laws to protect consumers from biased advice and as part of the government we lean over backwards to be unbiased.

Taxpayer:        I have entered into a tax avoidance scheme and keep reading in the press that HMRC thinks that most such schemes don’t work so I am getting a bit worried.

HMRC:             Tell me about the scheme.

Taxpayer outlines the scheme.

HMRC:             I’ve not heard of that scheme before.  If the promoter thinks it works, it obviously might well do so.  You’d be a fool not to sit tight and wait for us to attack it.

Taxpayer:        That sounds good advice to me.  Will you write and confirm it like my accountant always does.

HMRC:             No, this is free advice, so we do not have the resources to do that but I’ll keep a note of the advice I gave you”.

Sadly I think that word “advice” is not intended to carry its ordinary meaning.  HMRC have always had a policy of not advising on what they perceive to be tax avoidance schemes, and I doubt that they have changed their stance.  I suspect that they regard “advice” as a Humpty Dumpty word and all that they intend to do is tell people how to pay the tax if the taxpayer has already decided to concede that his scheme will not work.  That is not advice; it is information.

The previous day, HMRC issued a consultation document, “Consultation on a new penalty for participating in VAT fraud”.  That is a Humpty Dumpty title though.  What Ms Ellison actually wants to do is to introduce a special penalty for people who do not themselves participate in VAT fraud but do not notice that their customers or suppliers are fraudsters.  This is a penalty aimed at those who HMRC think “ought to have known” about a fraud.

Do you know if your window cleaner accounts for VAT or if he is operating wholly or partly in the black economy?  And how about the chap who did a bit of electrical work for you?  It cost so much that he is probably over the VAT limit if he earns that much every day.  Well the idea is that you should be penalised if HMRC think that you ought to have known such people are evading VAT.

You will have done nothing wrong.  There is no obligation on you to tell HMRC if you suspect someone of fraud.  You might think, “Am I my brother’s keeper?” (That is not from Alice Through the Looking Glass.  It’s from the bible.  It was spoken by a criminal seeking to cover his tracks).  But it is not criminals that Ms Ellison ‘s new penalty is aimed at.  It is innocent bystanders.  (That’s a bit of an exaggeration because HMRC’s view appears to be that if you ought to have known about a fraud, you are probably involved in the fraud and have duped the tax appeals Tribunal into believing that you weren’t.  In other words, their starting point is that you shouldn’t be allowed to get away with fraud merely because they cannot produce sufficient evidence to show that you are a fraudster).

My father was German.  My mother used to tell the story that they visited my Dad’s mother at her home in Heilbronn (a small town in Southern Germany) in around 1937 and after she had been there a few days Granny received a knock on the door.  It was a couple of police who showed her a photo of Mum coming away from shopping in Woolworths.  They told Granny that she would be in deep trouble if she did not stop her daughter-in-law from shopping in Jewish stores.  That is the sort of society that a special penalty on those who ought to have known conveys to me.

That’s not the sort of society I want to be part of.  How about you?


Wednesday, May 18, 2016


BLOG 173


There is a well-known maxim that ignorance of the law is no excuse.  So if a person files his tax return, he should know that he owes tax and pay it.

But what if HMRC tell him that he doesn’t owe anything?  Apparently being misled by HMRC is no excuse either!

I should say immediately that I have little sympathy for Mr Halford.  However it is difficult enough for the average person to understand the tax system, so if HMRC deliberately mislead taxpayers, it does not seem reasonable for HMRC to say that he is liable for a penalty because he should have known the law and accordingly should have known that what HMRC told him was incorrect.  Mr Halford seems to have admitted that he knew he owed the money, which is why I am unsympathetic.

However his tax case (Halford v HMRC, TC 050 48) still worries me.

Mr Halford submitted his tax return online on 30 January 2015.  He received an acknowledgement that his return had been received.  He logged out.  He then logged back into his online account again.  This displayed a message that he “had no amount to pay”.  He did not log back on again on 31 January, the last day for timeous payment of the tax.  However it appears from the decision that, had he done so, he would have received the same message.

HMRC told the Tribunal that this message would have remained until they processed Mr Halford’s tax return, which they did on 9 February.  The inference is that if he had logged on to HMRC’s website every day, he would have learned on day 10 the amount that he owed HMRC.

I tend to submit my tax returns on 31 January.  HMRC provide me with a tax calculation and I pay the amount shown on this as due.  However that is not necessarily the amount that I owe HMRC.  They make odd charges, such as interest, to my account from time to time and do not tell me about them.  I do not normally worry unduly because the differences get sorted out when I make the July payment as by that time HMRC can tell me what I owe.  Furthermore, my January tax payment includes a payment on account for the current year which gives a cushion to ensure that I have paid all the tax due for the previous year by 31 January.  Mr Halford was not in this position though.

Mr Halford told the Tribunal that he knew that the message related only to 30 January.  But by 31 January the tax shown on his return would have become payable yet, apparently, his tax account would still have shown nothing as due because HMRC had still not processed his tax return.  That seems to me unreasonable.

Making Tax Digital enhances the importance of a person’s tax account.  Leaving aside whether or not the proposal is actually workable (we have now been told that the consultation on what the government actually want to do won’t arrive until July, so this is paying lip-service to proper consultation if they really want it up and running be next April), if the figures shown on the tax account cannot be real-time figures, chaos seems inevitable.

Not everything is weighted in HMRC’s favour though.  They have recently lost a Tribunal case, Mabbutt v HMRC because of a typing error!  On 17 July 2011, they purported to open an enquiry into Mr Mabbutt’s tax return for the year to 5 April 2009.  Unfortunately their letter accidentally referred to his return for “the year ended 6 April 2009” instead.  On 24 March 2011 (when it was too late for HMRC to open an enquiry), his accountant told HMRC that they had not received a notice of enquiry into the return for the year to 5 April 2009 and asked them to confirm that they were out of time to open an enquiry for that year.  They acknowledged receipt of the letter of 17 January, but pointed out that “this does not refer to the tax year ended 5 April 2009”.  HMRC responded, “I can confirm that my letter dated 17 January 2011 was a valid notice under s 9(a), TMA 1970”.

The Appeals Tribunal accepted that the reference to s 9(a) (i.e. subsection (a) of s 9) rather than to s 9A did not matter as it was obvious what HMRC meant.  However it held that it was a fundamental requirement of an enquiry notice that it should refer to the correct year and that, as there was no way that a reference to the year ended 6 April 2009 could be construed as relating to the tax year to 5 April 2009, this error was not capable of being ignored even if it was obvious what HMRC meant.  Accordingly the enquiry notice was invalid and, by the time of the Tribunal hearing on 26 January 2016, it was too late for HMRC to raise a discovery assessment for 2008/09.

Are you pleased to see HMRC get their come-uppance?  I am – or at least I was until I realised that HMRC’s arrogance has probably cost us taxpayers £653,000.  That is the tax that Mr Mabbutt would have owed had HMRC assessed it in time.

When his accountants challenged the validity of the enquiry notice on 24 March 2011, HMRC could have said, “We think our enquiry notice is valid but if it is not, we can still ask for the information that we need under FA 2008, Sch 36, para 21(6) because, although we can no longer enquire into the tax return, we have reason to suspect that it understates the tax due”.  They would then have had until 5 April 2013 to raise a discovery assessment.  Indeed, the probability is that they could have raised a discovery assessment at any time up to 5 April 2015, as all they would have needed to do is show that the information shown on the tax return was insufficient for them to know that no further tax was due – and asking for more information probably demonstrated that of itself.

Instead they seem to have been much more intent on trying to establish “We are right!” than in collecting the £653,000 of tax.  As whether or not they were right had been called into question, wouldn’t a reasonable person have stopped and thought about safeguarding the tax in the event, however unlikely they may have thought it to be, that they might turn out not to be right?