Monday, December 18, 2017


BLOG 185


Do you think we have a fair tax system?  Government Ministers and HMRC officials keep telling us we do, but I’m not so sure myself.  As it’s near Christmas, I thought I’d tell you a story.

Are you sitting comfortably?  Then let us begin.  Once upon a time in a far away country called Ghana a kind teacher called Freda decided to set up a nursery school.  It was very successful and in 2008 she decided to expand the nursery school.  She mentioned this to her daughter (who lived in England) when the daughter came on a visit to Ghana.  Returning home to England the daughter told her husband Edwin, who had also come from Ghana.  Edwin had bigger ideas.  He volunteered to help Freda create a private school to take pupils right up to Junior school level.  He saw the project as his chance to give something back to the country of his birth.  Edwin entered into a partnership with three other people to create the school.  He put in £21,000 of capital and collected money from others to support the school.  By September 2009, it was clear that the school needed much more money than had been raised but Freda and other family members had become unhappy with Edwin’s “hands on approach” to the school and were losing interest.  When it opened, it attracted only nine pupils, had difficulty hiring teachers and quickly collapsed.  Edwin and everyone else lost their investments.

Some of you are probably thinking that Christmas stories ought to have happy endings.  Others may think what’s that got to do with fairness and tax?  So I’ll tell you Edwin’s story too.  Edwin had a job in IT.  Indeed, he had two jobs.  When he started the school project, he was employed by a large IT company, TPI Eurosourcing.  However, he had previously worked for a smaller one, Mphasis, and continued to do a bit of freelance consultancy work for Mphasis because he hoped that as they grew, they would want him to work for them again.  Edwin wanted to keep his Mphasis fees separate from his TPI salary so decided to open a second bank account.  Sadly, he had a poor credit rating but his brother agreed to open an account at Barclays in his own name and let Edwin run the account.  Edwin did not look at that account very often as he did not do a lot of consultancy work, but when he started to collect money for the school, he put it through the Barclays account.  Edwin’s self-employed earnings for 2009/10 were fairly low.  This prompted HMRC to open an enquiry into his tax affairs.  That’s obviously fair.  If someone is self-employed and he cannot live on the income he declares, he is obviously understating his tax.  It would clearly not be reasonable for HMRC to look at the rest of his return and see that he had a full-time job elsewhere so his consultancy income was unlikely to be significant. (Sorry, as its almost Christmas I must try harder not to be so sarcastic).

Well HMRC looked at the Barclays Bank account.  They discovered 7 round sum bankings of cash totalling £6,740, 5 items that Barclays described as “Ezeoke OM Purchase” totalling £8,670 plus two marked “OM Ezeoke Bill” totalling £2,120, one marked “CN Martins Barclays” of £2,120 also and 2 items marked “S Rojer Mark”, totalling £1,250, a total of £20,900.

“Ah ha”, thought Mrs Scrooge, the HMRC Officer (not her real name). “If I add £20,900 to the declared income, the total comes to a much more reasonable figure for someone to live on”.  So Mrs Scrooge invited Edwin and his accountant to a meeting to explain why they thought the £20,900 should not bear tax.  Edwin produced a letter from his father in Ghana saying he had lent Edwin £14,169.  He produced a letter from Mr Eze Oke in Nigeria saying that he had lent Edwin £14,160 towards a school in Ghana.  He produced a letter from Freda saying that she had received 117,000 Ghana Cedis from Edwin towards the building of the school.  He produced a letter from a firm of solicitors in Ghana saying that they had been instructed to draw up the partnership agreement for the school.  Unfortunately the figures in the letters did not reconcile with the amounts in the bank account though.

“Not sufficient”, said Mrs Scrooge.  “Where are the loan agreements”.  Sadly there were none.  Perhaps in Ghana people trust their friends and relatives whereas in England of course no one would dream of lending money to their son without instructing a solicitor to draw up a loan agreement first.  (That doesn’t sound right.  I’m English and over the years I’ve lent money to lots of people, never thought of asking for a loan agreement and have always been repaid.  So perhaps HMRC families operate differently, as had I been Mrs Scrooge, I certainly would not have expected there to be loan agreements).

In any event, Mrs Scrooge then, I assume, explained how the fair English tax system works.

1.      She decides that £20,900 paid into a bank account set up to bank freelance earnings is likely to be income in the absence of any proof to satisfy her otherwise.

2.      It is then for Edwin to prove it is not income.

3.      HMRC use a principle called the “assumption of continuity”.  This enables Mrs Scrooge to assume that if Edwin had undisclosed earnings of £20,900 in 2009/10, he would have similar undisclosed earnings in 2008/09, 2010/11 and 2011/12, a total of £83,600 undisclosed income.

4.      Edwin has deliberately omitted the £20,900 from his tax return as he did not regard it as income.  Deliberately omitting income is very serious.  Accordingly in addition to the tax on the £83,600, Mrs Scrooge wanted a penalty equal to 54.25% of that tax.

Assuming income tax at 40%, that meant that Mrs Scrooge wanted Edwin to pay £51,582, because he had not proved to her that the £20,900 was not income.  Does that sound fair to you?

Edwin appealed to the tax Tribunal.  HMRC told the Tribunal that the law says that if there remains any uncertainty in the judge’s mind, then Edwin will not have discharged the burden of proof, so must find against Edwin and give HMRC their £51,582 of flesh.  “Wrong”, said the wise judge.  “Edwin has only to show that it is more likely than not that the £20,900 was to build the school”.  “He struck us as a straightforward and reliable witness”, they said.  “We take account of the discrepancies in the figures.  But we also take into account that the type of IT work he does is not compatible with offering services to individuals on an ad hoc basis.  We also do not think that the fact that someone opens a separate bank account for his consultancy income creates a presumption that everything in that account is income.  We think that Edwin has demonstrated to our satisfaction on the balance of probabilities that the £20,900 was not undeclared taxable earnings”.

So there’s the Christmassy happy ending.  They all lived happily ever after (probably) – well, possibly except for Mrs Scrooge who might have got a bonus for creating £51,852 for HMRC out of £20,900 of non-taxable receipts, but I suspect she feels there are plenty of other taxpayers to be fleeced so what’s one defeat.  If so, she is probably right.  Many people are scared of going to the Tax Tribunals, so I suspect most people in Edwin’s position pay up. 

Oh, and while the assumption of continuity is a concept that has been endorsed by the Appeal Tribunals, it is one that applies only where the omissions are of a type that is likely to recur, which was not the case with Edwin’s receipts (even if they had been income).

So congratulations to Edwin (for the technically minded, he is Edwin Bekoe (Case TC 6181)) and to his accountant for this well-deserved victory.  And a happy Christmas to all my readers.


Monday, December 11, 2017


BLOG 184


One of the documents the government published on Budget day was a Treasury Position Paper on “Corporate tax and the digital economy”.  I have just finished reading it.  To be honest, I did not find it at all convincing or, indeed, very logical.  However I think it important because it sets out the Treasury’s justification for the Chancellor’s new withholding tax on royalty payments and its thinking on taxation in the digital world.

It starts with a statement of principles.  “The important question when applying corporation tax to a multinational group is what amount of profits should be taxed in the UK compared with the other countries in which the group operates.  The answer to that question is currently determined by an international tax framework which was developed in the early 20th century …  The overall principle underlying that framework is to tax a multinational group’s profits in the countries in which it undertakes its value-generating activities.  That is a principle that the government continues to support.  It does not, for example, believe that another country should have a general right to tax profits that a UK business generates from a product that is designed in the UK, manufactured in the UK, marketed in the UK and then sold remotely to that country’s customers …  Instead countries should have the right to tax business profits derived from productive activities, enterprise and human innovation in their jurisdiction, irrespective of where shareholders and customers are located”.

So far, so uncontroversial – or, at least, nearly so!  The international tax framework actually is that a country can tax the profits generated worldwide by its own companies (but in doing so should give credit for tax paid on those profits elsewhere) and can also tax profits made in its country by foreign entities that have some form of business organisation in its country (such as a branch).  Even then it should only tax the profits derived from that branch.  In determining what profits are derived from a branch, the host country will take account of productive activities, enterprise and human innovation of that branch.  So, nearly right, but that is not what worries me.

The Treasury goes on to assert that “while the government continues to support the principle of aligning profits with value creation, there is a clear need to consider the situations in which that principle is not being delivered by the existing international tax framework.  In particular, it is important to consider how the international tax framework is being stressed by digitalisation and whether it is flexible enough to take account of the differences in how certain digital business models operate and generate value”.

“Why”, you may ask.  It is certainly not clear to me how the international tax framework is being stressed.  Take, for example, Amazon.  As far as I am aware, Amazon does not have a branch in the UK.  It has warehouses here but the international tax rules exclude warehouse from being a branch – sensibly, because a warehouse does not create value or by itself generate profits.  It simply fulfils international contracts created in another country.  How does digitalisation make Amazon any different from, say, Marks & Spencer?  I do not know if Marks & Spencer has warehouses in the USA, but if it does, I suspect that the Treasury would be pretty upset if the USA were to want to seek to attribute a US profit-earning element to sales made by Marks & Spencer in the USA.

Indeed, the Treasury emphasises that “the mere consumption of a good or service in a country should not, by itself, entitle that country to tax the profits of the business providing that good or service”.  But the bottom line is that, while conceptually it believes that the US, not the UK, should have the right to tax profits on sales made in the UK by Amazon and Google and Facebook and other large US corporations, it recognises “the growing public dissatisfaction that the corporation tax payments of digital businesses are not commensurate with the value that they derive from the UK markets”.

I am a bit puzzled by this.  I have never heard anyone say that they believe Google or Facebook or whatever “derive value” from the UK market.  I read quite a lot but have never read an article suggesting that such companies “derive value” from the UK market.  There is certainly an irrational public dissatisfaction that they appear to pay very little tax anywhere.  Irrational, because under the international tax framework they ought to pay their tax in the USA, so the US public have the right to be dissatisfied but it should be no business of the British public how the USA wishes to tax American corporations.  Indeed, the creation of the USA derives from the fact that its citizenry in 1776 felt strongly that the UK had no right to charge its corporations to UK tax unless it integrated the US colonies more firmly into the UK.

The US policy is based on the premise that the US wishes US corporations to reinvest overseas profits overseas in order to expand US influence throughout the world.  Accordingly it does not seek to tax such profits until they are brought into the USA.  That is not an unreasonable system; indeed it is the system that the UK itself decided to adopt a few years ago (with an exception, like the USA, for passive income such as interest and dividends).  Different countries adopt different tax policies.  It is no more unreasonable for the USA to decide not to tax profits of US groups which are retained overseas than for the UK to have adopted “one of the most competitive tax systems in the world” by imposing corporation tax at 19% in the hope that, say, a US company wishing to establish a branch in Europe would prefer to pay UK tax at 19% in preference to basing its branch in France and paying French tax at 33.3% instead.  No one would suggest that a US company that is enticed to establish its branch in the UK should have to pay extra taxes on sales in France because it is “avoiding” French taxes by having its branch in the UK.  Yet that is the logic of the UK public’s – and I suspect the UK Treasury’s – gripe that the USA chooses not to tax Google or Facebook.

The Treasury has however come up with an ingenious argument to justify its desire to tax Google and Facebook.  It says that in reality you and I work for Google and Facebook, so it is our activities in the UK that enable Google to make money from UK sales, so the UK should tax that money.

So how do we work for Google?  I’ll give you an example.  I follow baseball.  I am a fan of the Chicago Cubs.  For a modest annual subscription I can watch all of the Cub’s games live on my computer by signing in to the website of MLB (Major League Baseball) who run baseball in the US.  I access the Chicago Cubs website via Bing (which is part of Microsoft) because Lenovo (a Chinese company) installed it on my computer before I bought it.  (I do not actually use Bing to go to the MLB website because Microsoft Edge refuses to let me watch baseball, so I use Firefox to do this and Firefox uses Yahoo.  However they are all US companies so it does not affect the principle).  When I access the Cub’s website, it includes a number of adverts, some from US companies and some from UK ones.  Why should Fortnum & Mason (on the website today) advertise on the Cub’s website?  I doubt they can sell much in Chicago.  The answer is that they don’t.  They advertise on the version of the website that Microsoft puts in front of me.  They advertise to me because I bought something on line from them a couple of months ago.  Microsoft has incorporated software in Bing that records what websites I browse.  This software was probably devised in Seattle and I imagine is operated by Bing from Seattle.

You probably know that already.  So how do I work for Microsoft?  The UK Treasury’s argument is that Microsoft’s software enables them to tell Fortnum & Mason that I view the Chicago Cubs website every day during the baseball season and for a fee that they will put Fortnum’s advert in front of me every time I do so.  Of course Fortnum’s are not interested in me.  But if Microsoft tells them that 100,000 UK people go on baseball websites every day during the baseball season and they will put Fortnum’s advert in front of them all, Fortnum’s may decide to advertise these.  So, say the Treasury, every click I make on my browser earns Microsoft the ability to generate advertising revenue.  Because it is my work clicking that does this, the UK ought to be able to tax the profit Microsoft makes from Fortnum’s through putting Fortnum’s advert in front of me (using their US developed software monitored from the USA).

Personally I find this wholly unconvincing.  It is a bit like saying that Sainsbury’s know what I like to buy because they track this through my Nectar card.  Accordingly if Sainsbury’s were to open a shop in Chicago, the UK would be entitled to tax part of the profits that they would make when I shop in Chicago because they have the ability to target special offers at me when I shop in Chicago in the same way as they do when I shop in the UK.

The other obvious fallacy is that when I visit Chicago (as I do every year) I access the Cubs’ website as much as I do here.  Why should the UK be entitled to tax Microsoft based on clicks that I make in Chicago?  I very much doubt that Microsoft differentiates my Chicago clicks from my London ones when both are made on my i-Pad.  I also doubt that either Microsoft or Fortnum’s care where I click, so my clicking cannot provide a rational basis of taxation.

The Treasury also have another odd concept.  Again starting “from the position that profits are taxed in the countries in which a business has genuine economic activities” it concludes that “to maintain confidence in the international tax framework and avoid competitive distortion in local markets, it is crucial that multinational groups are prevented from being able to realise profits in low-tax entities that are not justified by local economic substance.  That is partly about ensuring a robust international transfer pricing framework and pursuing multinational reforms to address the limitations of that framework in aligning taxable profits with value created”.  Let’s examine that conclusion.  Let’s take Starbucks.  Starbucks does not make much profit in the UK.  The head of Costa complained a few years ago that Starbucks overpays for its sites, which probably explains why it makes little profit here.  What is profit?  It is the difference between sales and costs.  What are Starbucks main costs?  The purchase of coffee, rent and rates, staff costs, and a payment to use the Starbucks brand and marketing concepts that were created in Seattle.  Any reasonable definition of profits requires the deduction of all of those costs.  Starbucks purchases its coffee from an overseas related company.  HMRC need to be vigilant to ensure that it does not overpay for that coffee.  HMRC also needs to be vigilant to ensure that the price Starbucks in the UK pays to access the Starbucks intellectual property created in Seattle is not excessive.  Its transfer pricing specialists are adept at meeting both of those challenges.  If Starbucks UK makes a payment to Starbucks US and HMRC are satisfied that the payment is at the right level, are the UK entitled to nevertheless tax those payments to the US because, say, the payment is based on the number of coffees you and I buy in the UK?  Most people, including the Treasury, would say, “Of course not”. So, why should the UK suddenly be entitled to tax that profit simply because Starbucks USA decides to sell its intellectual property to Starbucks BVI or whoever?  Provided that the UK company is paying the right price, it is surely irrelevant to UK tax who that price is paid to.  How can what Seattle chooses to do internally damage confidence in the international tax system?  It surely can’t!

Of course it is not easy for HMRC to check whether the price paid for use of the intellectual property is a market price.  But it is no more difficult to do so if that price is paid to Starbucks BVI than if it is paid to Starbucks USA.  It may be that the Treasury questions the competence of HMRC.  But, if so, it is HMRC’s paymaster.  If the management of Marks & Spencer was felt by its shareholders to be incompetent, they wouldn’t say, “We must find a different way to sell our socks and undies that by-passes the Marks & Spencer stores”.  They would tell the Board to replace the CEO with someone with greater competence to sort out the problem.

I am a bit surprised that the Treasury do not equate my purchases of coffee from Starbucks with my clicks on Bing.  They look very similar to me.  I can only conclude that the Treasury feels that my coffee purchases are a ridiculous basis for a system of international taxation.  If so, great, but surely my clicks form an equally ridiculous one?


Monday, December 04, 2017

THE 2,000 Euro BTW Scam?

BLOG 183

THE 2,000 Euro BTW Scam?

I tend to watch Panorama each week.  Sometimes they have interesting programmes but I am not sure why I continue to watch their tax output because it is invariably misleading and always strongly biased towards the view that everyone (other than BBC journalists, I assume) is a crook and that privacy (again, other than for BBC journalists, I assume) is such a wicked concept that anyone who wishes to keep their private affairs private must be doing so to avoid tax.  The producers and journalists also seem to believe that everything that happens in the UK ought to be taxed here and the UK’s international treaties that cede to other countries the right to tax their own citizens and corporate vehicles on some receipts from the UK make the UK complicit in tax avoidance.

I think it a shame if the government fix the licence fee at a level which means that the BBC cannot afford to take tax advice in order to ensure that programmes that they make about tax actually reflect the tax system.  I suspect however that it is not budget constraints but a culture within the BBC that integrity is an out-model concept and if a journalist wishes to mislead viewers in order to propagate a personal biased view, that is OK with them – and presumably with the BBC Trust too.

Which brings me to “The Billion Pound VAT Scam” as it was titled.  It is not about a billion pound VAT scam at all.  It is about a few thousand euro BTW scam (the Netherlands equivalent of VAT).

If you didn’t watch the programme, the facts are simple.

a)      The journalist went to China to try to find a smuggler prepared to smuggle Chinese goods into the UK.

b)      He didn’t find one, but did find someone willing to smuggle the goods into the Netherlands.

c)      He purchased a small quantity of goods in China and had them smuggled into the Netherlands.

d)      The goods were then transported from the Netherlands to an Amazon warehouse in the UK.  The journalist (or his editor) did not think it worth mentioning that the EU fundamental concept of freedom of movement of goods means that goods can freely be moved from the Netherlands to the UK without any VAT becoming due anywhere – but that fact would have completely undermined the message that the BBC wished to convey, so it is fortunate that in a half-hour programme, there was not time to mention that.

e)      The journalist registered a UK business with Amazon and sold some of the goods on Amazon.

f)       Amazon did not ask the business for its VAT number.  There is of course no obvious reason why they should do so.  There is no obligation to provide one’s VAT number on a sale to a non-business person and most sales on Amazon are such sales.  In the Budget, the Chancellor proposed to require Amazon to obtain VAT numbers from everyone who uses their platform, so that perceived shortcoming should not be a problem after that has been legislated.  Whether that is “a good thing” is a matter of opinion.  It obviously seriously damages the chances of small UK businesses whose turnover is below the VAT threshold being able to grow.  But the Chancellor clearly believes (not simply in this regard) that killing off small businesses is a reasonable price to pay to raise a bit of extra tax.

g)      The journalist then created another account with Amazon in the name of a Chinese company and it sold something on Amazon for £5 without charging VAT.

h)      Amazon then blocked the Chinese company from selling anything further for 30 days while it investigated it.

i)        The journalist spoke to the new Chair of the Public Accounts Committee, Labour MP Meg Hillier, who was predictably outraged at this so-called VAT avoidance – presumably because she does not know enough about VAT to know that the VAT “avoided” was 0.83p (the VAT on £5) as the supplies by the UK company were well under the VAT registration threshold but there is a nil threshold where a non-established trader sells goods in the UK.  Of course she probably should have been outraged that the UK’s membership of the EU prevents HMRC from taxing movements of goods from EU countries which may exercise laxer control over imports than HMRC does, but she did not express such outrage.

j)        The journalist then spoke to a somewhat bemused HMRC official, Jim Harra, who has a very deep understanding of VAT, told him that he had evaded VAT of a bit over £500 and handed him a cheque.  Jim jovially said for the camera that perhaps he should speak to the journalist off camera.  I hope he did and explained that he had not evaded anything and owed HMRC less than a quid, but thanks for the cheque because HMRC always welcomes people wanting to volunteer money to reduce the national debt.

Of course if the journalist had gone to his editor and said he wanted to do a programme about how to avoid 0.83p VAT and please could the BBC send him to China as part of it, the programme probably would never have got made.  If he had said he wanted to do a programme about how efficient the UK Border Agency is compared with their Netherlands counterparts, that programme probably would not have been made either.

But as it is only licence payers’ money being wasted on misleading propaganda, who cares?


Monday, November 27, 2017


BLOG 182


HMRC commission a fair amount of research from research companies and in the interests of transparency tend to publish the reports.  Some of these reports make interesting reading but some don’t.  I have been reading one on “Understanding evasion by Small and Mid-Sized Businesses” and am wondering what, if anything, HMRC get for their money.  The report is qualitative research which apparently is designed to reveal a target audience’s range of behaviour and the perceptions which drive it with reference to specific types or issues.  It uses in-depth studies of small groups of people to guide and support the construction of hypothesis (per the Qualitative Research Consultants Association).

The report makes fascinating reading.  Unfortunately I have two problems with it.  The first is that I am sceptical to what extent a tax evader (which I assume to be someone who has been caught out in having lied to HMRC) is likely to give honest answers to a researcher probing the reasons for his past dishonesty.  The second is that the key findings do not reconcile with my own experience.  The report identifies four core types of evader:

a)      unthinking evaders, for whom low level evasion is habitual, and often adopted without thought,

b)      invested evaders, for whom evasion is seen as an unfortunate financial necessity in order to stay in business,

c)      lifestyle evaders, for whom evasion enables a life-style otherwise out of reach, which they feel is justified by the taxes they do pay,

d)      systematic evaders, where evasion is actively considered and integral to the business model.

I have a fair amount of experience of tax evasion – from the perspective of helping evaders to come clean I hasten to explain – and I find it hard to fit my typical evader into any of those categories.  This is because under all of those types of behaviours the cash is either spent or invested in the business, yet my experience is that while some of the cash may well be spent, most of it is diverted away from the business and put into some form of savings.  If that were not the norm, I doubt that many tax evaders would come forward and confess their crimes.  If a person has not created the wherewithal to make a financial settlement, it is hard to see how he can make his peace with HMRC.  It is equally hard to see why anyone should want to tell HMRC that he owes them a large amount of money if he can see no way in which he can settle that debt.

I am also concerned about what the report says regarding agents, bearing in mind that the researchers did not actually talk to any agents and there is an obvious risk that a tax evader may seek to shift the blame by saying, for example, “my accountant must have known that I was not declaring everything”.  Thus the report says … “Agents may be unaware of the full extent of evasion taking place …  However where agents are used primarily to reduce taxes due, a minority may be complicit in evasion to some extent”.   The report later says, “A minority appeared to engage in evasion on the advice of an agent (who might for example point out personal expenses that could be put against the business) …  Businesses typically chose not to inform agents of any activities which were known to be high-risk evasion, since it is understood that agents would not be comfortable with the level of risk involved.  Ultimately how the agents was used (and the extent to which that advice was followed) was determined by the business attitudes and perceptions in relation to tax”.  Under a heading of “perceived risk”, it later says, “Evasion behaviours were believed to be safe on the basis that… agent involvement may also have provided a sense of security (on the basis that the agent would not allow anything to appear on record which could cause problems later)”; and under “Opportunity” it says, “In some cases, agents may have played a role (whether knowingly or not) in raising awareness of opportunities or flagging risky behaviours”.

So the report is saying that some of us actively encourage evasion, others turn a blind eye to it knowing the client is evading tax, others are comfortable with evasion provided that it is not documented, and some of us advise clients to change their ways but are indifferent as to whether or not they accept that advice.  Of course the report does stress that it is a minority and does not speculate on how large that minority may be.  Nevertheless it is frightening if the authors are right in any of these respects.  No wonder HMRC seem to have so low a view of the tax profession if that is what their outside advisors are telling them.

So what can be done to prevent evasion?  The authors say that “Actions intended to tackle evasion and improved compliance… could be more visible and [HMRC should] work harder to cut through the dominant media noise, social norms and market pressures in order to meaningfully impact on evasion behaviour and “promote compliance”.  They suggest that HMRC should “increase the perceived likelihood of getting caught”.  This could be done by promoting awareness of HMRC’s capabilities/tools available to catch those who evade.  Yes of course HMRC should do this but, as much evasion takes the form of not declaring cash income or claiming business-type expenses where the motive is a personal, not a business one, it is not readily apparent what capabilities and tools HMRC have available to detect such things. HMRC’s database program, “Connect” is a very powerful tool for collating information, but it cannot identify either non-information or motive – other than to the extent that it can highlight differences between businesses of the same type which can point to large scale evasion but not to a lot of the fairly petty evasion that the report highlights.  For example, it gives as an example taking home toilet rolls purchased by the business.  I suspect no accountant has ever sought to compare toilet roll purchases with likely business usage to try to detect pilfering.  But I also suspect that Connect cannot do this either!

Their second recommendation is to “improve understanding of potential consequences”.  Apart from the risk of getting caught, which seems minimal in relation to low-level evasion, I doubt that many taxpayers (or rather non-taxpayers) are likely to be unduly concerned about either late payment fines or media coverage, which are the only examples the report identifies.

Finally, they tell HMRC to “tap into what matters, beyond the consequence itself”.  They accept that “there is no silver bullet for tackling evasion” and tell HMRC, “In order to be compelling, interventions must be personally motivating, going beyond the immediate impact of the consequence itself, to get under the skin of what this would actually mean to the business”.  They suggest HMRC might play on an individual’s position in, or perceived responsibility toward the State, the consequences of the publication of evaders name through localised channels, the possible impact on employees who may be innocent bystanders to the evasion taking place but would share in the consequences non-the-less; and most effective of all, leverage personal ramifications and broader consequences for the individual and their family.  Leaving aside the fact that HMRC do not have (and probably never will have) the resources to address every taxpayer individually, it is not clear how HMRC are expected to identify who is evading tax so as to decide on the right personal motivation to use.  If HMRC could identify evaders they would not have a need to commission research reports on understanding evasion.

I hope that HMRC feel that this report represents value for money.  As a taxpayer, I do not!


Monday, November 06, 2017


BLOG 181


One of the things for which I will also remember Gordon Brown and his henchwoman, Dawn Primarolo was the politicisation of HMRC.  Prior to that you could, by and large, rely on HMRC press releases and other official publications to explain tax in a factual and honest manner.  Now HMRC seem to see one of their roles as being to preach the political messages of the government of the day.  If that makes what they say misleading or even inaccurate, the truth is subjugated to the message.

Since returning from my annual visit to Chicago at the beginning of September (happy, as the Cubs were doing well and in fact won the National Baseball League Central for the second year running, albeit they did not manage to win the National League Pennant this time round) I have been busy with books, so have rather neglected by blog.  The new edition of my Taxpayer Rights book has now hit the bookshelves and I have nearly finished the updating of my Property Tax book, so I have had a chance to catch up a bit on my technical reading.  Perhaps it is having to read several weeks of HMRC press releases together that has concentrated my mind on just how unhelpful (technically) these have become.

One example is making tax digital (MTD).  Both HMRC and the Chancellor announced that only businesses with a turnover above the VAT threshold will have to keep digital records and only for VAT purposes, and only from 2019.  They reassuringly say that the government will not wish to widen the scope of MTDFB (for business) beyond VAT before the system has been shown to work well and not before April 2020 at the earliest.  What is misleading about that?  Well, the main reason that HMRC want businesses and landlords to keep records digitally is that they believe it will improve record-keeping.  The quarterly reports they also want are likely to be fairly useless to HMRC, other than as evidence that the taxpayer is in fact maintaining digital records.  So what exactly is the difference between the digital records one needs for VAT and those one needs for income or corporation tax.  Nothing, other than that the VAT records also have to record VAT.  Accordingly not widening the scope until the system has been shown to work well is meaningless.  Everyone (except very small businesses) will be required to keep digital records from 2019, not only for VAT but for other tax purposes too, because all the records that are needed for income and corporation tax are also needed for VAT.  All that has been deferred is the final step of pushing the button to tell the computer program to send a report to HMRC.  But no-one would guess that from the HMRC PR.

Or what about employee benefit trusts (EBT).  HMRC say in a blog post of 17 August in relation to the Supreme Court decision in the Glasgow Rangers Football Club case, “The decision stated any payment made through an EBT should be considered a taxable income as opposed to a loan”.  That is very clear isn’t it?  Except it is not what the Supreme Court said at all.  What it said is that earnings from an employment is income of the employee irrespective of whether it is paid to the employee or a third party.  That means that where an EBT makes a loan, one needs to consider as a question of fact whether the payment is earnings or something else, such as a loan.  In the Rangers case, the evidence was that the money was already earnings before it went into the EBT.  But it by no means follows that any payment from an EBT is earnings.  And even where it is earnings, fascinating questions arise as to who is liable for the tax and whether HMRC may be out of time to collect it.

Then there is the “HMRC guide to tax on payments for image rights”.  This states, “Employers must ensure that all payments made to their employees comply with published guidance for the type of payment made”.  Surely not!  It must comply with the law.  We have not yet reached the stage where the law is irrelevant and we must do whatever HMRC tell us to do.  Admittedly, a lot of HMRC employees do seem to believe that we have reached that HMRC nirvana, as they keep quoting HMRC guidance to us instead of the law.  Fortunately, the Courts still believe in the rule of law.  It is also questionable whether HMRC’s assertion that a payment for the use of an individual’s image rights is taxable as professional income.  That may well be what they would like the law to be, but it is hard to see how, if CBW were to pay me to put my photo on their website (which they are obviously unlikely to do), that is not income from my asset, image rights, whereas if they pay my company to allow them to use my photo, that then magically becomes income from exploiting the image right.  I appreciate that HMRC would like the law to be different, but that cannot justify issuing guidance to ignore it.

My latest gripe is HMRC Guidance on “self-reporting” tax evasion facilitation offences”.  This is for companies to report on their own behaviour where they’ve failed to prevent the facilitation of a tax evasion offence.  Facilitating a tax evasion offence is now a crime for a company or partnership.  To commit the crime, (a) someone must have actually committed the criminal offence of evading tax, (b) that someone must work for the company (not necessarily as an employee), and (c) the company must be unable to show that it had systems in place that would have prevented the crime occurring.  As the only defence is to show you have systems in place, self-reporting seems wishful thinking.  All you can report is that you didn’t install adequate systems, i.e. you can plead guilty to the offence and hope the Courts show mercy.  Of course what HMRC really want you to tell them about is the evasion offence.  They warn you that it can be a criminal offence to volunteer incorrect information and suggest you seek legal advice before saying anything to them.  They say “only provide the information that you already have.  For your own safety, don’t try to find out more information so you can send an e-mail”.  What on earth does that mean?  Unless a person has been convicted or has admitted tax evasion, I have no way of knowing whether he has evaded tax, because one element of the crime is his thought process.  So how can I ever self-report unless I first confront the individual with my concerns?  The money laundering rules allow me to question the individual to decide whether I am suspicious that he has evaded tax, before I need to report that suspicion (albeit, once I or someone has reported it, I can no longer risk tipping him off that a report has been made).  And what does “for my own safety” mean.  I am hardly going to seek further information from someone I think is going to get violent and, although over the years I have met many people who have evaded tax (because part of what I do is to help them to confess to HMRC), I have never had a situation where I feared for my safety.  And whatever prompted HMRC to decide to allocate resources to issue non-statutory guidance on something that well-informed companies are unlikely to do and to word that guidance in such a way as to deter people from actually coming forward?  It’s good to know they have the resources to waste!


Wednesday, October 25, 2017


BLOG 180


Is stamp duty (as the popular Press like to call HMRC) really the problem that prevents young people from getting on the property ladder?

The effect on the average home of the SDLT increases on 3 December 2014 is:

                                                                  Old SDLT                       New SDLT

            £250,000 house                                  1%                               1%
            £500,000 house                                  3%                               3%
            £750,000 house                                  4%                               3.66%

According to the Nationwide House Prices Index, house prices over the period since December 2014 have increased as follows:

                                                            UK                   London           London Metropolitan

Average price in Sept 2017                 210,982           471,761           365,554
Average price in Dec 3014                  189,002           406,730           301,612
Increase                                                21,980             65,031             63,942

Percentage increase                           11.63%                        15.99%                        17.49%

So what is preventing young people getting a foot on the ladder?  The retail price index stood at 257.5 in December 2014 and is 275.1 now, an increase of 6.8%.  I would say it is inflated house prices rather than SDLT!

Perhaps a more intriguing statistic is that the Land Registry say that 30-40% of all housing transactions in September were for cash (25% in London).  Not pound coin cash of course, but purchases without a mortgage.  It is improbable that young people anxious to get on the housing ladder will have saved 100% of the prospective purchase price before trying to climb on.  It is equally unlikely that the Bank of Mum & Dad will have done so.  That suggests that 30-40% of purchases are either purchases by investors or possibly people who have sold their house, moved temporarily into rental accommodation and are now ready to buy again.  As there seems to be a consensus that house prices have largely levelled off and are as likely to fall as the rise much further, this would be an odd time to re-enter the market though.

This suggests that the real problem for young people is that the government are not prepared to reduce the attraction of UK residential property to investors.

The three percentage points SDLT surcharge is not much of a deterrent, i.e.

                                                SDLT by first time buyer        SDLT with surcharge

£250,000 house                                     1%                                         2.5%
£500,000 house                                     3%                                         5.25%
£750,000 house                                     3.66%                                    6.17%

The restriction of loan interest relief to the basic rate is unlikely to have much effect.  It clearly has no effect to those who buy without needing to borrow – probably mainly foreign investors – and the indications to date is that landlords are not rushing to sell up.  Either their rents are sufficient to absorb the extra tax costs or they are looking to incorporate (often unwisely) because the restriction does not apply to investment by companies, only that by individuals and trusts.

It is an odd state of affairs where the government (the Cameron/Osborne government that is, not the May/Hammond one) seems to have decided that UK resident individuals looking for somewhere to live need to be deterred from competing with corporate landlords, many of which are controlled by rich overseas residents.

It is hard to see what the government can do to help the young.  The tiny bits of extra finance that have been made available through Help to Buy ISAS and through the Help to Buy house Purchase Scheme is a drop in the ocean.  There seems to be no political appetite to curb investors, which is clearly the only real solution to young people’s problem.


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!