Monday, August 13, 2018


BLOG 191


I have written about SDLT before but make no apologies for returning to this subject.  Three things crossed my desk recently.  The first was an article by Tim Worstall of the Adam Smith Institute entitled “An illiquid housing market is holding Britain back”.  This first discusses how housing relates to labour mobility but then goes on to say, “But there’s a much more important factor weighing on the British housing market – the huge hikes in stamp duty overseen first by Gordon Brown and then continued under George Osborne … in terms of portions of the market, owner-occupation is much the most important constituting well over 60% of the entire market.  And governments of both stripes have contrived to introduce a significant tax wedge into that liquidity”.  He concludes, “there is a strong case for reducing stamp duty back to what it ought to be, a fee for the State’s services in registering property.  By doing so the Government would go some way to making it easier for people to buy and sell”.

I was struck by that “reducing … back”.  You cannot go back to something that never existed.  SDLT was never intended as a charge for registering property.  It was always conceived as a tax.  Stephen Dowell’s History of Taxation and Taxes in England tells me that Stamp Duty Land Tax started life as a tax on deeds (including conveyances) in 1694 to help fund the war with France.  The tax was increased in the 1750s to help finance the Seven Years War and significantly increased in 1783 to help fund the American War of Independence.  The stamp taxes were consolidated in 1808 and this consolidation included a new ad valorem scale charge on conveyances.  At the time SDLT was introduced in 2003 the stamp duty rates were:
Up to £60,000                         nil
£60,001 - £250,000                 1%
£250,000 - £500,000               3%
Over £500,000                        4%.

The tax was based on a slab system, as was SDLT initially, at exactly the same rates!  SDLT on residential property was moved to a slice system in 2014.  A comparison of the change is as follows:

                                                                        cumulative                 old duty

            0 - £125,000                            NIL               -                            £650
            £125,000 - £250,000               2%       £2,500                         £2,500
            £250,000 - £500,000               5%       £17,500                       £15,000.

In other words where the consideration is small, the current rates are actually lower than they have been since March 2000.  It is only when the price of a house exceeds £375,000 that the move from slab to slice increased the tax.

The second thing I noticed was the Land Registry House Price statistics for England for May.  These tell me that in all regions, other than London, average house prices were below that £375,000 figure.  They also tell me that the average prices for types of residence throughout England were:

            Detached                     £370,143
            Semi-detached            £227,310
            Terraced                     £195,982
            Flat/maisonette          £225,465.

So Mr Average is still paying the same tax on his house purchase as was paid by his parents in 2000.  So much for SDLT (or stamp duty as everyone, including the government, tends to call it) weighing on the housing market.

Of course what Mr Worstall is really complaining about is that the SDLT surcharge on second homes and rental properties is making buy-to-let less attractive.  In other words, his concern is not about the 60%; it is about the 40% (and those in the 60% who can afford to buy well above average homes).  There is a dilemma here.  Labour mobility does require the availability of rental properties.  The question is whether 40% of total house stock is the right number for such properties.  There are actually still far greater tax incentives to acquire buy-to-let than to buy your own home.  I could understand Mr Worstall contending that taxation should not distort the property market – as it has done since 1999 when mortgage interest relief was scrapped for owner-occupiers but retained for landlords.  But he does not want to do this.  He wants to restore the situation under which owner-occupiers had to compete with landlords for houses with one hand tied firmly behind their back by the tax system.

The third thing that crossed my desk was an HMRC press release headed “121,500 households benefit from stamp duty cut saving £284million”.  This is the SDLT exemption for first-time buyers on houses costing up to £300,000 and the limitation of the duty to 5% for the next £200,000, a saving of £7,500 on a property costing over £500,000.

The Land Registry statistics say that the average price of a property bought by a first-time buyer in May was £204,140.  The SDLT on such a property before the first-time buyer relief was £3,957 (5% of £79,140).  The average relief for the 121,500 first-time buyers was £2,337.50.  But no relief at all was given to those buying a property for less than £125,000 as no SDLT was payable.  On a £200,000 property the relief was £1,500.  On a £250,000 one it was £2,500.

So is the relief going to those who need it?  That depends on how you define need.  A young couple buying a starter home outside London probably obtains little or no relief.  It is middle-class couples, with their house purchase largely funded by their parents, who are obtaining the benefit.  Why don’t HMRC trumpet the true statistic?  “A tiny number of middle-class couples share £284 million government handout”?


Thursday, July 19, 2018


BLOG 190


Pre Gordon Brown, HMRC press releases tended to be primarily factual and probably not of much interest to those with no interest in tax, Gordon, or rather his acolyte Dawn Primorola, spiced them up (some say politicised them).  From mixing with us common people they seem to have formed the impression that everyone is desparate to learn about tax.  Much of the impetus for digital tax is expressed as intended to feed this insatiable quest to build one’s life around one’s tax position.

I don’t know what pub the Treasury mandarins use.  Tax has never been a strong topic of conversation in the many that I have visited over the years.  I have rarely felt an urge to check my tax position and I doubt that many of the non-tax people that I know are eager for more tax knowledge.  No one at a party has ever begged me to tell them about tax.  So I think that government efforts to publicise tax are a complete waste of taxpayers’ money, but I would be happy to be proved wrong.

Tax gap figures are fun even without the spice (or politicisation).  They are fun because they are guesses dressed up as fact.  Of course HMRC will call them educated estimates but that simply means guesses informed by knowledge.  However that is not true in this case.  No one has sufficient knowledge to enable them to measure the tax gap.

HMRC tell us that “the tax gap measures the difference between tax due and tax paid to HMRC”.  But even that is not right.  They attribute 0.9% of the tax gap, or £5.3billion, to what they call “legal interpretation”.  This is “where the customer’s and HMRC’s interpretation of the law and how it applies to the facts in a particular case, result in a different tax outcome”.  This might occur for example because the Supreme Court upholds the taxpayer’s position.  In HMRC’s world, “legal interpretation” is a type of “customer behaviour”.  In other words, the government were deprived of £5.6billion of taxpayer money in 2016/17 because people challenged HMRC’s interpretations and the Supreme Court (and the lower Courts and Tribunals) decided that HMRC did not properly understand the law.  I am not a statistician but, in my naivety, I regard that as an HMRC error in measuring the “tax due”; not a result of the HMRC measure being correct and the Supreme Court undermining the tax system by letting people off tax that is legally due when such people engage in what HMRC no doubt regard as the socially unacceptable behaviour of challenging HMRC’s interpretation.

But there is a more fundamental problem with measuring the tax gap.

This is that it is impossible to measure.  All that one can do is what HMRC do; start with the estimated yield from a tax measure, deduct the tax that they have received, and allocate the shortfall by reference to the tax collected as a result of HMRC interventions (i.e. enquiries and investigations) and taxpayer’s post tax return disclosures.  I do not have time to read HMRC’s 94-page detailed explanation (although I have read one of the earlier ones), but estimating the yield itself has a number of variablers.  Firstly, it depends on profits (or in some cases turnover) for the year concerned, so any error in the estimate of undisclosed profits leads to the yield being wrong too.  Secondly, measurement depends on having the full information on compliant taxpayers.  Bearing in mind that it can take a good 10 years before the Supreme Court decides whether tax is due or is not due, such disputed amounts are bound to distort estimates that have to be made in year 2.  Thirdly, there are an awful lot of disputes over what tax is due in a particular case and many of these will not have been resolved by the time the estimate needs to be made (although, on reflection, on the HMRC basis that HMRC are always right and it is the Courts that get the interpretation wrong, whilst that makes measuring the actual tax gap difficult it does not impede measuring HMRC’s fantasy tax gap).

The HMRC detailed tables only start from 2011/12 (they show 2005/06, but not intermediate years).  It is interesting to look at what has happened.  They analyse the tax gap in several ways.  I will take two.

Types of taxpayer                  2005/06                      2011/12                      2016/17

Small businesses                     2.6%    11.2bn             2.4%    14.0bn             2.3%    13.7bn
Large businesses                     1.8%    7.7bn               1.2%    6.0bn               1.2%    7.0bn
Criminals                                 1.7%    7.4bn               0.9%    4.8bn               0.9%    5.4bn
Mid-sized businesses              0.8%    3.4bn               0.6%    3.7bn               0.7%    3.9bn
Individuals                               0.5%    2.2bn               0.5%    3.1bn               0.6%    3.4bn
                                                7.4%    31.9bn             5.6%    31.6bn             5.7%    34.3bn
Less criminals                         1.7%    7.4bn               0.9%    4.8bn               0.9%    5.4bn
                                                5.7%    24.5bn             4.7%    26.8bn             4.8%    28.9bn

I have taken out criminal (which in HMRC speech is organised crime and does not include tax evasion (can you have a criminal offence perpetrated by a non-criminal?)) because I think this distorts the figures.


Failure to take
  reasonable care                    1.0%    4.6bn               0.8%    4.0bn               1.0%    5.9bn
Criminal attacks                      1.7%    7.4bn               0.9%    4.6bn               0.9%    5.4bn
Evasion                                    0.9%    4.0bn               0.8%    3.9bn               0.9%    5.3bn
Legal interpretation                0.9%    4.1bn               0.7%    3.5bn               0.9%    5.3bn
Non-payment                          0.5%    2.1bn               0.9%    4.5bn               0.6%    3.4bn
Error                                        0.6%    2.8bn               0.5%    2.3bn               0.5%    3.2bn
Hidden economy                     0.5%    2.0bn               0.5%    2.5bn               0.5%    3.2bn  
Avoidance                               1.1%    4.9bn               0.5%    2.7bn               0.3%    1.7bn
                                                7.2%    31.9bn             5.6%    28.0bn             5.6%    33.4bn

I am fascinated at some of the HMRC explanations of their analysis.  Non-payment is tax debts that are written off by HMRC – mainly as a result of insolvency.  I would myself describe insolvency as misfortune – often as an unavoidable result of entrepreneurship – rather than a taxpayer behaviour.  Avoidance is exploiting the tax rules to gain a tax advantage that Parliament never intended, so HMRC  believe (I will resist the temptation to question how anyone knows what our 630 representatives intend when waving through, largely without debate, a 665-page Finance Bill).  However “it does not include international tax arrangements like base erosion and profit shifting”.  So it’s nice to have an official acknowledgement that, in HMRC’s view at least, Amazon and Google are not avoiding UK tax; they never owed any UK tax under current international tax rules.  There is also an odd distinction between the hidden economy “where an entire source of income is not declared”, and tax evasion “where a declared source of income is deliberately understated”.  I have specialised in tax for over 50 years and have always believed that not declaring income is as much tax evasion as under-declaring it.  Indeed I would myself regard under-declaring as less egregious than not declaring at all, as it at least gives HMRC a sporting chance to challenge the figure.  I am puzzled how under-declaring is apparently criminal, while hiding the existence of the income completely seems to be acceptable behaviour to HMRC.

There is also a potential problem with failure to take reasonable care and errors.  I would expect HMRC to investigate cases where something looks wrong, in which case those that they do not enquire into must be those where it is less likely that something is wrong.  If so, using the results from enquiries to predict the result what would have transpired if HMRC had investigated cases where nothing looks wrong, seems somewhat flawed.

HMRC tell me that “since 2010 the government has invested more than £2billion in HMRC to tackle evasion, avoidance and non-compliance”.  So has this been value for money?  You decide!

                                                                        2011/12                      2016/17
Evasion:  criminal attacks                   0.9%                            0.9%
            Evasion                                    0.8%                            0.9%
            Hidden economy                     0.5%    2.2%                0.5%    2.3%

Avoidance                                                       0.5%                            0.3%
Non-compliance: reasonable care     0.8%                            1.0%
                             errors                      0.5%    1.3%                0.5%    1.5%   
                                                                        4.0%                            4.1%

I have adopted my view that the hidden economy is evasion, rather than HMRC’s apparent view that it is OK.  I have excluded legal interpretation and non-payment as these do not seem to me to be attributable to taxpayer behaviour at all. They are certainly not affected by the extra money the government has given HMRC.

Whilst nothing to do with the tax gap, HMRC throw into their press release a section headed “Support and help for businesses”.  This tells me that “HMRC aims to ensure that the tax system is not a barrier to setting up, running and growing a business.  We are working hard to ensure that businesses, small or large, can access the information and support they need, at every stage of their lifecycle and whatever their ambition”.  Sadly clients, and my many friends who act for small businesses, are not endorsing this HMRC perception of how helpful they find HMRC to be!


Monday, July 02, 2018


BLOG 189


I was prompted to pose that question by a recent article in the Evening Standard.  It was not by George Osborne, it was by Russell Lynch but, on the assumption that as Editor of the Evening Standard, Mr Osborne would hardly include in the paper anything to which he was violently opposed, I think it a reasonable assumption that the article has Mr Osborne’s editorial blessing.  This also assumes of course that he is really the editor and not merely engaged as a figurehead with someone with greater journalistic experience actually editing the paper; or merely there to do Mr Lebadev’s bidding and it is really the Russian government that calls the editorial shots; or is kept well away from the City pages (in which the full-page article appeared) and allowed only to edit the gossipy bits of the paper.

I should also admit that Mr Lynch’s article does not actually say, “Hurrah for tax avoidance, long live tax avoiders everywhere”.  Indeed, it does not actually mention the dreaded phrase at all.  “It is headed “Suicide watch”; “the preventable tax timebomb” looming for freelancers”.

If this worries freelancers, I should say immediately that there is actually no tax timebomb for the vast majority of freelancers.  There are tax problems for some because HMRC seems suddenly to be looking at many personal service companies and contending that they fall within an anti-avoidance provision that applies where a person’s services are lent out by a company and the person would have been an employee of the end user had he contracted direct with that person.  These rules, known colloquially as IR35, were introduced in 1999 and until recently HMRC seems to have been almost unbelievably lax in policing them.  Their sudden interest is creating a lot of worry, as they do not simply attack the current year; they go back for fur years and present the worker with what is sometimes an enormous supplementary tax bill.  There is a growing scandal because it appears that the BBC and similar quasi-government bodies encouraged people to use companies so as to shift the liability to tax from themselves to the worker.  But that is not what is worrying Mr Lynch.  After all, the distinction between employed and self-employed is one of the great mysteries of life.  These freelancers genuinely believed themselves to be freelancers and are shocked that HMRC is suddenly seeking to treat them as employees of the BBC or the NHS or, indeed, HMRC who are one of the largest users of freelance IT people in the country.

No.  What concerns Mr Lynch is the “loan charge” that will become payable on 5 April 2019.  What concerns Mr Lynch most of all is users of a particularly nasty tax avoidance scheme that was promoted by a number of scheme merchants mainly based overseas out of the reach of HMRC.  I will call such people promoters.  The promoter would advertise on the web or on journals read by freelancers.  The adverts were along the lines of, “Don’t be a mug.  Why should you pay tax?  We have a way to let you get your earnings completely tax-free”.  They would probably then explain that for every £1,000 employees earn, £200 or £400 (depending on the employee’s level of income) goes in tax;, on the first £30,000 or so another 12% goes in National Insurance and above that, 2% goes in National Insurance.  That means that out of his £1,000, the employee is left with around £500-700.  Under the tax avoidance scheme, the promoter would make a charge of, say, 15% to run the scheme leaving the worker with £850.

I don’t always agree with HMRC – indeed sometimes I think I don’t often agree with HMRC – but I agree with their mantras on tax avoidance that if it sounds to good to be true it probably isn’t true, and that tax avoidance schemes rarely work and can cause the user a lot of aggravation as HMRC aim to pursue them right up to the Supreme Court.

And so to the loan.  Mr Lynch explains, “Employers could pay salaries into a trust, set up by the promoter, which then mostly paid the employee in the form of loans, which were tax-free as they were not deemed income or earnings at the time.  The “loans” were never intended to be paid back”.  I will come back to that in a minute, but first Mr Lynch’s explanation of why he thinks HMRC (or possibly the government) are acting unreasonably in seeking to collect the tax that people sought to avoid.  “In March 2016, the Government delivered a bombshell on what it deemed disguised remuneration.  HMRC would now levy a tax charge on the loans, which were now to be treated as taxable income”.  We have an odd system in this country of which Mr Lynch appears unaware.  Neither the Government or HMRC impose taxes; that is wholly down to Parliament.  The legislation that he complains about is in Schedule 11 of the Finance (No 2) Act 2017.  Debating the provision, Anelisise Dodds said “the Opposition wants to see changes in this area because abuses have been clearly documented”.  She later said, “However these measures come after a long period of relative inaction, at least in the areas where this legislation is focussed.  This has meant that many people believed the arrangements they entered into were legal and did not constitute tax avoidance.  The April 2019 charge in these circumstances could, some have opined to us, cause significant problems, for example, to individuals whose situation has changed such that they no longer have the funds to meet the tax charge.  How will the Minister ensure that this measure will not cause hardship or injustice to individuals who planned on the basis of previous arrangements, and how will that be balanced against the clear and pressing need to prevent the abuse, which the measure is targeted at?”  The Minister responded, “We will certainly be looking at individuals who may have entered into these kinds of arrangements as far back as 1999.  Critically, they have until 2019 to clean those arrangements up, if they wish to.  If the schemes are legitimate and above board, they have no reason to be concerned because those schemes will stand the tests we have met.  Let us be clear about what we are looking at; clear tax avoidance”.  He later says, “The Hon Lady asked how we will meet our objectives …  She gave the example of people struggling to pay after being clamped down on.  HMRC often confronts that circumstance in its lime of work.  People who are concerned about their ability to make a full payment of tax on time should contact HMRC at the earliest opportunity.  It considers all requests for time to pay individually, based on the customer’s financial circumstances”. 

I assume that this explanation satisfied Ms Dodds, albeit that it now appears not to satisfy Mr Lynch and, presumably, his editor, Mr Osborne, as neither she nor anyone else called for a vote and the legislation was simply approved by the relevant parliamentary Committee.

Let me get technical for a bit.  The avoidance scheme never worked.  The law says that salaries are taxable as income.  Indeed if Mr Lynch is right when he says that the “loans” [his parenthesis] were never intended to be paid back, they were never loans at all; they were pretend loans, as a fundamental attribute of a loan is that it has to be repaid.  Pretending something is a loan in order to mislead HMRC is not tax avoidance; it is fraud! In which case Mr Lynch and, I assume Mr Osborne, are not championing tax avoiders; they are championing tax evasion!

There is no doubt that the loan charge is retrospective.  Parliament does not like retrospective legislation, but the previous Labour government made clear in 2004 that future legislation to combat PAYE and National Insurance avoidance schemes would be applied retrospectively to 2004.

Mr Lynch does not want these tax avoiders to be made bankrupt.  Nor do I.  Nor actually does HMRC; it wants the tax that has been avoided and interest for the period that the country has been deprived of use of the money.  The loan charge is in fact fairly generous as it effectively allows tax relief for the fees paid to the promoter, which would not have attracted tax relief at all had HMRC attacked the scheme when it was entered into.  Furthermore, HMRC have been pleading for people to come forward and settle the tax before next April, because they can then agree a time to pay arrangement.  Curiously Mr Lynch mentions none of this.

What he seems to want is for those tax avoiders to be let off the amount they owe because they have spent the money.  Most people would find that an extraordinary proposition.  It was not their money to spend; it was our money, us the compliant taxpaying public.  I do not recollect the Evening Standard ever having asked for tax to be excused in relation to celebrities who were faced with heavy tax bills because they entered into other tax avoidance schemes that did not work.

Mr Lynch does not explain why he believes that those who do not try to avoid their tax (or more accurately in many cases, are not able to try to avoid their tax) should contribute to the running of the country but those who seek to avoid their responsibility to do so should be absolved from having to pay.  It is hard to see how such a proposition equates with fairness – if indeed Mr Lynch thinks that fairness ought to apply in tax matters.  Perhaps Mr Osborne will allow him a little more space to explain this to the compliant taxpayers amongst his readership.

Of course, if “freelancers” have used tax avoidance to obtain a higher standard of living than they were entitled to, they are going to have to tighten their belts to find the money to pay the back-tax.  But why should we be sympathetic to that?  There are millions of people who would like a better standard of living, but most do not seek to achieve that by avoiding their responsibility to contribute to the running of the country.


Monday, May 21, 2018


BLOG 188


I have been reading the FTT decision in Elliott Knight Ltd v HMRC (TC 6338).  It is an odd case but seems to me to have wider implications.  HMRC issued a penalty notice to the company on the basis that it had breached Regulations 7, 8, 14 and 20 of the Money Laundering Regulations.

At the Tribunal hearing, Counsel for the company cross-examined the HMRC Officer who had imposed the penalty.  She accepted that there was no requirement for the company’s risk assessment policies either to be in writing or to be in English, so there was no breach of Regulation 7.  She also accepted that there was no fixed time after which the due diligence records should be re-examined if it was up to the trader’s judgement.  There was accordingly no breach of Regulation 8.  She also accepted that her report on which the penalty was based did not demonstrate any breach of Regulations 14 or 20.  When Counsel specifically asked at the end of his cross-examination whether she considered there were any breaches of any of the four Regulations, she replied “No”.  HMRC then asked for an adjournment and, on resuming, said that HMRC were withdrawing from the case.

Elliott Knight then sought an order for HMRC to pay its costs.  The Tribunal could make such an order only if it considered that HMRC “has acted unreasonably in bringing, defending or conducting the proceedings” (Tribunal Rules, para 10).  To paraphrase, did HMRC act unreasonably in defending a penalty assessment that they had raised when, had they carried out a detailed analysis of the penalties both as to the facts and the law, they would not have identified anything to justify raising the assessment?

HMRC referred the Tribunal to an Upper Tribunal case.  In Tarafdar v HMRC (2014 UKUT 362 (TCC)) the Tribunal has said that in considering an application for costs, a Tribunal should ask itself three questions:

1.      What was the reason for the withdrawal?
2.      Having regard to that reason, could that party have withdrawn at an earlier stage?, and
3.      Was it unreasonable for that party not have withdrawn at an earlier stage?

Based on an earlier Court of Appeal decision, the Tribunal said that ““Unreasonable” conduct includes conduct which is vexatious and designed to harass the other side rather than advance the resolution of the case.  It is not enough that the conduct leads in the event to an unsuccessful outcome.  The test may be expressed in different ways.  Would a reasonable person in the position of the party have conducted themselves in the manner complained of? …  Is there a reasonable explanation for the conduct complained of?”.

HMRC also pointed out that even if conduct is found to be unreasonable, the Tribunal is entitled to exercise its discretion and is not compelled to award costs.

So far, so good.  An award of costs is intended to be exceptional.  Losing a case does not imply it should never have been pursued.  If the law was always clear, there would be no need for a Tribunal system at all.

But Elliott Knight is a case where a penalty was imposed for a breach of the statute and the Tribunal did not even have to decide if the statute had been breached, because when the HMRC Officer was taken through the law by Elliott Knight’s barrister, she agreed that the law had not been breached and HMRC’s barrister (presumably after taking instructions from her client) promptly withdrew from the appeal.  That certainly suggests that had HMRC’s solicitor or barrister themselves considered the facts and the law earlier, they would have settled the appeal without the need for a hearing.

So, what was the reason for the withdrawal?  Because, said HMRC, the decision-making Officer was persuaded to agree with Elliott Knight’s barrister that her decision was flawed and should not stand.  Yes, said the Tribunal, “But we do not think we could say that every Officer of HMRC faced with this line of questioning would do as Ms Dunsmore did.  We do not think it could be said that the withdrawal would inevitably have happened as a result of the lack of analysis of the type Mr Jones suggest was the proximate cause”.  But all that Ms Dunsmore did was give honest answers to the questions posed by Mr Jones.  So what differently could a different Officer have done?  And the fact that Ms Dunsmore accepted that there had been no breach of the Regulations did not mean that HMRC had to concede the case.  They could have said that Ms Dunsmore is not a lawyer and her understanding of the law does not actually reflect the law and their barrister could have herself explained how Elliott Knight had breached the law.  Withdrawal from the case as a result of the cross-examination certainly suggests that once the law had been explained to Ms Dunsford and she accepted that she had not grounds to raise the penalties, HMRC accepted that in fact there were no such grounds.  It is hard to see that they would not have reached the same decision had they discussed the law with Ms Dunsmore prior to the hearing.

Could HMRC have withdrawn at an earlier stage? No, said the Tribunal, the taxpayer should have made clearer why they were opposing the penalties instead of leaving it to HMRC to work out for themselves that it was because the taxpayer had not in fact breached the law.  “Faced with such limited and unspecific grounds of appeal, they cannot be blamed for pursuing the case”.

I find that astounding.  It seems to be saying that if HMRC assess a penalty, they have no obligation to ensure that the law entitles them to do so, but it is up to the taxpayer to tell them that they have no legal basis for the assessment and if the taxpayer is ignorant of the law (as most are), it is fair game for HMRC to extract cash from the taxpayer under false pretences.

Of course this case relates to a claim for costs before the FTT, a fairly rare occurrence.  But it is based on what is “reasonable”, which is an ordinary English word.  In 2008, it is a word that the then government agreed to sprinkle throughout Schedule 36 as a “safeguard” for taxpayers.  But if the Tribunals do not think it unreasonable for HMRC not to at least try to satisfy themselves that there is a legal basis behind an assessment before taking it to the FTT, it is hard to understand what sort of “safeguard” the insertion of “reasonable” in fact provides to taxpayers.


Monday, April 23, 2018


BLOG 187


I hope that both the ICAEW and the CIOT are going to strongly oppose the proposals in the government recent issued “Employment Status Consultation”.  This has ostensibly been issued to work out how to give effect to the proposals made by the Taylor Review of Modern Working Practices.  The government have said that they accept all of the Review’s recommendations except in relation to tax.  Tax was actually specifically excluded from Mr Taylor’s terms of reference but he considered it just the same.  The consultation document was issued by the Department for Business etc, but is jointly badged by them with H M Treasury and HMRC.

It says very little about tax – two pages on Alignment between tax and rights – but that is why it is so dangerous.  The likelihood is that HMRC will piggy-back onto its conclusions.

The real problem is that it starts from the wrong place, so its conclusions are bound to be flawed.  It suggests giving statutory effect to the principle laid down by the Courts.  While acknowledging that will result in a loss of flexibility, it suggests that is a fair trade off against clarity and certainty.  That may be right, but it should not be overlooked that inflexibility can, and often does, result in unfairness, so it is not reasonable to ignore (as the consultation does) that certainty and fairness rarely make good bedfellows.  Certainty caters for the norm.  The unfairnesses arise from abnormal cases.  Furthermore, Courts do not “lay down principles”.  They interpret the law in the context of the specific facts before them.  The Courts are accordingly fundamentally flexible in the sense that a different set of facts may well produce a different nuance on the principles discerned by the Court.

But that is not my real concern.  It starts, as any test of employment status must do, with the statement by MacKenna J in the 1968 Ready Mixed Concrete Social Security case.  “The servant agrees that, in consideration of a wage or other remuneration, he will provide his own work and skill in the performance of some service for his master.  He agrees, expressly or impliedly, that in the performance of that service he will be subject to the other’s control in a sufficient degree to make that other master.  The other provisions of the contract are consistent with its being a contract of service”.  (The underlining is from the consultation document; note particularly that nothing in the third sentence is underlined).

It there infers “This has developed into the following main characteristics –

·         Mutuality of obligation …
·         Control …
·         Personal service …

If these three characteristics are present, the Courts will then consider other criteria relevant to the case that are consistent with a contract of employment or service”.

Tax specialists will know that this is indeed how HMRC like to interpret the cases.  Can we find control and personal service (mutuality of obligation means no more than there is consideration so as to make the arrangement a contract)?  If we can, it is an employment unless you can show a good reason why it is not.  But MacKenna J’s test is not “control”; it is “control in a sufficient degree to make that other master”.  In other words it is looking for a master/servant relationship.

The way the two Courts seem nowadays to be interpreting MacKenna J is that there is a two-part test.  Is there mutuality of obligation, a master/servant relationship and an obligation to personally perform the service?  If so, the arrangement is capable of being an employment; if not, it cannot be an employment.  If the arrangement passes test 1, test 2 is to look at the facts, untramelled by test 1, and ask whether or not the facts are consistent with employment.

This is not hair-splitting.  It is fundamental.  The consultation document test does not clarify Court decisions; it usurps them.  Before looking more closely at why control per se is the wrong test, it is helpful to pose the question as to why does the distinction between employment and self-employment matter.  The answer is that it doesn’t for most of us.  I do not care whether my dentist’s receptionist is employed or self-employed; I only care that she makes my appointments.  I do not care whether my gardener is employed or self-employed; I only care that he keeps my garden trim.  I do not care if my electrician is employed or self-employed; I only care that he procures that my electricity supply functions.

The only reason it matters is that the State has created a distinction – or rather, a number of different distinctions.  The question therefore ought to be whether those distinctions, most of them created the best part of a century or more ago, are either still necessary or the right distinctions in modern society.  To look at how to define the distinction is treating the symptoms, not the disease.

The State has drawn a distinction in three distinct areas, employment rights, welfare rights and tax.  But in all three it has drawn the dividing line in a different place, so it is unsurprising that the categories of people who are not self-employed should differ between the three.  Introducing a common test of employment cannot therefore work unless the line is drawn in the same place for all three, which requires the State to revisit the reason why the line is where it is.

I am not an historian (albeit that I know a fair amount about the history of tax) but I think it is fairly clear why the lines were drawn as they are.  In the 19th and early 20th century some employers exploited their workers mercilessly.  The State cannot let people starve on the street.  Accordingly if a worker can be dismissed peremptorily or is not paid or paid a pittance, the State has to pick up the slack.  Workers’ rights ensure that workers are treated fairly and that the costs of doing so are borne by the employer, not the State.  Social Security in the Beveridge era was insurance based.  Everyone would pay into a common fund and be paid out of that fund when in need.  The problem with that is that the self-employed do not have regular income so cannot be expected to make regular contributions.  Accordingly for an insurance-based system to work, they could insure for long-term benefits (pensions and health) but had to be excluded from short-term benefits (unemployment, maternity, etc) where Beveridge based entitlement to benefit on short-term insurance contributions.  Tax started from capacity.  Initially employees were not taxed.  Only the self-employed and, later, office holders paid tax.  It was only when an effective way could be found to tax employees that they were brought into the tax net.

It is therefore unsurprising that the tax line was drawn between the employed and the self-employed but when it came to welfare, it was accepted that was the wrong place to draw the line.  The Employment Rights Act 1996 confers rights not only on employees but also on workers, which it defines as “the individual undertakes to do or perform personally any work or services for another party to the contract whose status is not by virtue of the contract that of a client or customer of any profession or undertaking carried on by the individual”.  This recognises that a person can perform personal services for another and yet be neither an employee nor a business owner.  It assimilates the worker with an employee whereas the tax law assimilates the worker with the self-employed.  Again, unsurprising, as the employment laws wants to pass responsibilities to others so as to prevent workers having to be supported by the State.

The impetus for both the consultation document and the Taylor review is of course the growth of the “gig economy”.  This creates self-employed workers whose business is limited by reference to the needs of their major (or generally only) customer.  This generally means that the worker/businessman does not need a business organisation as his customer carries out his business for him.  Even that is not new.  The aspiring pop singer of the 1960s or 1980s who signed a record contract was in a similar position.

What is new is that people are today telling self-employed people that they are being exploited by not being offered employment.  But being treated differently is not exploitation.  No one is forced to be self-employed.  Of course if one wants to cycle around London all Summer the chances of getting employed to do so are very limited.  Self-employment as a courier is the only real option.  But no-one is forced to be a courier either.  A person who does not want to be self-employed can find employment in the retail food industry fairly readily.  Why should a person who chooses an occupation that entails self-employment expect to be treated differently to any other self-employed person?

Even that is perhaps the wrong question.  A better one is probably that if the State wishes to provide benefits to a large number of self-employed persons who work mainly for a single customer, why should that prompt a change in the definition of employment?  It is far more sensible to create a category of quasi-self-employed people and to decide what rights that category should be entitled to and legislate to provide such rights.  This has never been a problem in the past.  For example, at one stage the then government decided that actors ought to have the National Insurance benefit applicable to employees.  They did so by deeming actors to be employees for NIC purposes; they did not change the definition of employment but left actors accepting the remaining disadvantages of self-employment.

Of course every status has both advantages and disadvantages.  The Taylor Committee looked almost wholly at the disadvantages of the gig economy.  But for many workers in it the advantages – in particular flexibility – are far more important than Mr Taylor’s perceived disadvantages.  Re-drawing the line to turn such people into either employees or workers could well result in a loss of those disadvantages, as the administrative costs of calculating employment or workers’ rights for flexible workers may well make the use of such people uneconomic.