HAVE A VERY FAIR CHRISTMAS?




The Chancellor and the Paymaster-General, Dawn Primarolo, are constantly telling us that the tax system needs to be fair. Admittedly they normally do this in the context that when a taxpayer reads the law, thinks “that looks a bit odd”, but resolve to comply with it as a good citizen is obliged to do, they believe such conduct to be outrageous. The Brown/Primarolo approach to law seems to be, “It doesn’t matter what the law says; you should ignore that and instead comply with what we meant to say. After all we are bulldozing so much tax legislation through Parliament so rapidly that, even if MP’s wanted to think about it, - and, come on, it’s tax we’re talking about so most don’t – it is impossible for them to do so. Of course such a procedure is bound to result in us getting things wrong. Taxpayers need to realise that if we don’t allow MP’s time to make corrections it is up to taxpayers to themselves think what corrections MP’s would have made, given more time, and apply to themselves the law that would have resulted from such corrections”.

So do HMRC wish you a very fair Christmas? I don’t have a clue! I thought however it might be useful to look at some recent tax cases to try to discern what the Dawn Primarolo/HMRC definition of fairness might be.

Thompson v C & E Commrs

VAT on a car is recoverable if it is not available for private use. It is impossible to insure a car for business use without the insurer throwing in private use for free. Suppose you buy a car solely for business purposes and use it solely for business purposes. Can you recover the VAT? “Of course not”, say HMRC, “you cannot conclusively prove that it is not “available” for business use – don’t expect us to accept that proposition simply because you tell us so and can demonstrate it has never been used for anything other than business”. The High Court agreed – but in an earlier case HMRC had cross-examined the proprietor along the lines of “If your daughter was taken seriously ill and needed to be rushed to hospital are you seriously saying that if the business car was sitting outside and you had the keys to it you wouldn’t use the car but would waste 10 minutes getting your own car out of the garage”.

Answer. “Of course not”. Result is then its available for private use.

Fair? You decide!

Haven Healthcare v York

Haven lost before the appeal Commissioners at a hearing on 30 July. It had 30 days in which to appeal to the High Court. It thought the 30 days started from when it got a formal written decision from the Commissioners, which was on 2 August. It appealed on 30 August, one day late if the time limit was 30 days after 30 July and 2 days within the limit if it ran from 2 August. The Commissioners thought the relevant date was 30 July but were willing to turn a blind eye to the one day late.

Fair? Commonsense? No, say HMRC. They applied to the High Court (successfully) to have the appeal struck out because it was one day late.

Fair? You decide!

P M v UK

“A hearing took place on 11 July 2002. The applicant was unrepresented. On the morning of the hearing, counsel for the Revenue presented him with a large file of the authorities on which the Revenue sought to rely”.

That sounds to me like, “Oh, you don’t have a lawyer. Great! We can win by pretending to be helpful and overwhelming you with masses of paper that you obviously will have no time to read, but the Commissioners will regard us as having been reasonable in giving you the papers in advance”.

Fair? You decide!

Personally I don’t regard any of the above as being fair. But then I don’t regard expecting taxpayers to guess what the law meant to say, instead of following what it actually says, as fair either. So my definition of fairness must be very different to HMRC’s. Indeed, I think that when it comes to tax certainly is much more important than fairness. I believe that when a person enters into a transaction he should be entitled to do so in the knowledge of what the tax consequences should be. I accept that I am being a little naïve in the sense that I think that, having spent getting on for 40 years specialising in tax, as it is hard for me to apply some of the legislation, a taxpayer on his own probably has virtually no chance of understanding the tax law. Nevertheless, with appropriate advice, he should be entitled to know where he stands, not have to enter into a transaction in the hope that his guess of what Ministers intended the legislation to say is right.

What is your concept of fairness?

While you are thinking about it, I hope you have a Happy Christmas. I obviously can’t wish you a fair one as I don’t know what you believe fairness to mean.

JOURNAL 5

THE FAIRTAX - 1

Last time I was in America I bought a book, The FairTax Book by Neal Boortz and Congressman John Linder.

The fairtax is a fascinating concept although I am sceptical about much of what the book says. I hope to return to this tax in a later posting.

For the moment it is the concept I want to mention. The fairtax is a turnover tax but chargeable only by retailers. The idea is that it would replace all other Federal taxes including income tax, social security, estate and gift tax and corporate tax. A retailer would simply add a fairtax charge to his prices in the same way that we add VAT in the UK.

The concept is that it would be a universal tax. There will be no exemptions – other than apparently a special exemption for AOL and other internet service providers. The reason why internet access should be exempt but food, children’s clothing, medical services and other necessities of life should attract the tax is not readily apparent. It may be that AOL lobbyists have been far more successful at lobbying Congressman Linder than anyone else!

The fascinating thing about the fairtax is that the authors believe (and say that they have had their figures checked by leading economists) that the rate of fairtax need only be 23%. If find that fascinating. US income tax rates are not significantly different to those in the UK. Joe Average in America pays 25% income tax plus 7.65% social security, a total of 32.65%. In the UK the average Joe pays 25% income tax plus 11% National Insurance.

At least that’s what the average Joe thinks he pays. The effect of allowances reduces the effective tax rate. Nevertheless that is also proposed for the fairtax. The suggestion is that the US could raise exactly the same amount of revenue if they charged a fairtax at 23% but paid each head of household what the authors call a prebate. This is a monthly repayment in advance of the fairtax that the authors believe would be payable on the basic necessities of life.

If the authors are right with their 23% (and I do not myself think that they are right) this suggests two huge lessons which are equally applicable to the UK as to the US namely:

1 The current tax system is very inefficient in raising government revenue, and

2 Hardly anybody understands how much tax they actually pay – or bear, in the context that the price of everything you buy has to reflect the underlying taxes paid by the vendor.

For anybody who is interested in looking further at the fairtax I imagine that they can buy the book from Amazon. The publisher is Regan Books. There is also a fairtax website www.fairtax.org . I have not yet had a look at this, but hope to do so over Christmas and come back to the fairtax in the New Year.

Robert W Maas

JOURNAL 4 SCORE DRAW?


The European Court of Justice has at last handed down its decision in the Marks & Spencer case. The result seems to be that Marks & Spencer probably win (at least partly) but most of the other international groups that were hoping to cling onto their coat tails will fail to do so.

As is well known, Marks & Spencer’s got its fingers badly burned in its attempt to expand into Europe. It closed down its subsidiaries in Belgium and Germany and sold its French subsidiary. It then sought to re-open its UK tax affairs to offset the losses it had incurred in those three subsidiaries in the four years to 31 March 2001 against its UK taxable income for those years.

Under UK law a loss incurred by a UK subsidiary can be set against profits of another UK group company. However, as we do not tax profits of overseas subsidiaries we do not allow relief for their losses either. M & S claimed that this policy breaches the EU fundamental concept of freedom of establishment as it discourages UK companies from having subsidiaries in other European countries.

The ECJ has held that it does indeed do so. However it also held that the UK is able to justify the restriction on offsetting losses to UK companies as a general principle, but that where the UK parent company can demonstrate that there is no probability of the EU subsidiary obtaining tax relief, either currently or in the future, for the losses, or of a third party such as a purchaser of the subsidiary being able to do so, then the UK must grant relief for the losses.

It is for the UK courts to decide to what extent M&S have really won. It seems probable that they have wholly won in relation to the German and Belgian companies. They may well have lost in relation to the French company (unless it has subsequently been closed down by the purchaser) as French companies can normally carry forward losses indefinitely, so while the company remains in existence it is difficult to see how M&S can prove that the subsidiary will never be able to obtain relief in France.

The interesting point is what, if anything, Gordon Brown does now. Most VAT experts (other, one assumes, than those in the Treasury and HMRC) expected M&S to win completely. The limitations that the ECJ has placed on its victory probably means that the Armageddon scenario under which multinationals savagely undermine the UK tax base has been largely avoided. However the claims that can meet the ECJ’s tough conditions are still likely to be in the millions or not billions of pounds. There is nothing Gordon can do about the past. But what about the future? He could scrap corporation tax group relief entirely. That would be very unfair on hundreds of thousand of small businesses with no EU operations at all. He could perhaps restrict group relief to small businesses on the basis that the EU claims which such a rule would let through would be relatively tiny. However in today’s worldwide economy it would take a very brave Chancellor to discriminate against the big multinationals in such a major way. He could put a limit on the amount of group relief that could be claimed by any group. A limit of £100,000pa would probably grant full relief for small companies – particularly if the unrelieved amount could be carried forward to future years – and would put a predictable annual figure on the overall cost of group relief. It seems unlikely that he will do nothing.

On the other hand as M&S first put forward its claim in 2002, so far the Chancellor has done nothing for over three years to staunch the massive flood of tax refund claims that would be generated should M&S ultimately win. Was he that confident that they would not do so? Or is it a case of fiddling while Rome burns? Certainly the published figures on the economy do not suggest that there is sufficient cushion to absorb the tax cost that most thought likely to arise – and it is doubtful that there is even enough to absorb those which will now in fact arise.

Robert W Maas

JOURNAL 3



DON’T BLAME THE TAX AUTHORITIES

I noticed in The Times of Tuesday 13 December an article headed “Universities and hospitals face massive tax bill,” which basically says that where research doctors are hired by a research university and loaned out to a hospital the university is not providing a medical service to the hospital but is simply supplying it with staff.

I do not find the Glasgow VAT Tribunal decision at all surprising. What caught my eye is the journalist’s conclusion that it means that the future of academics in medicine is threatened “after a decision by Revenue & Customs to levy VAT on all shared use of staff” The article also quotes the finance director of University College London as having said “the Treasury appeared not to have realised the full significance of the Glasgow ruling…This does not help two organisations trying to deliver the same service. It is really unfair. When it comes down to it, it all ends up in the pocket of the Treasury. It is an enormous bureaucratic nightmare outside our control. It needs somebody to wake up and have a bit of commonsense.”

I am not normally a staunch defender of HMRC. However these remarks seem to misunderstand the role both of that organisation and of the Treasury in tax matters. The role of HMRC is to collect the taxes that Parliament lays down. I suspect that most of us would be fairly horrified if, in performing that role, HMRC were to take it upon itself to decide what is and is not fair. That surely should be a role of Parliament? For HMRC to say to itself “everyone likes the NHS so, in spite of what Parliament has enacted, we will let them off having to pay the tax that Parliament said is due” would be outrageous.

It would be equally outrageous for the Treasury to start telling HMRC which laws the Treasury thought it ought to enforce and which laws the Treasury feels are unfair and it wants HMRC to ignore. This is not a matter of someone needing to wake up and have a bit of commonsense. It is surely a matter of the citizenry expecting laws to be made by their elected representatives in Parliament and the Civil Service, including the Treasury and HMRC, to which the enforcement of Parliament’s laws is entrusted, to enforce the laws as Parliament has laid them down.

It would be perfectly legitimate for both The Times and the financial director of UCL to criticise Parliament for having enacted what they consider to be unreasonable and unfair laws, but to my mind they are themselves being unreasonable and unfair in blaming the messengers rather than the legislature that enacted the laws.

There is also of course a question as to where the unfairness lies. If Blackstone Franks LLP were to lend out staff to a client, which we occasionally do, would the fact that we have to charge VAT on the fee that the client paid us be equally unreasonable and unfair, or do they think there should be one tax system for universities and hospitals and a completely different tax system for everyone else?

In the case of sharing staff there is actually a route to achieve this which is well known by VAT practitioners, namely that the staff should be jointly employed by the university and hospital and they should have an agreement between them to share the cost of hiring the staff in proportion to the time for which each uses a person. Indeed the article goes on to state that Lord Warner has told the House of Lords “that a contract was being devised that would place clinical academic posts outside the scope of VAT”, so it is clear that the government fully accepts that such joint contracts are a legitimate way of dealing with the issue. Is it unreasonable and unfair that people who choose not to follow a well trodden path that avoids the imposition of VAT should find themselves in a different VAT position to those that choose to follow that path? I think not. Of course joint contracts have downsides. In particular, in this case, what would happen if a jointly employed surgeon were to botch an operation? Both would be liable to pay damages. However it is very normal in commercial contracts where a liability could fall on both parties for one to indemnify the other, so it is difficult to envisage why joint employment contracts with the NHS indemnifying the university for claims arising whilst the employee is working for the hospital might be impracticable.

There is a further issue with VAT. This is that VAT is a European tax, not a UK one. When we joined the EU we agreed to adopt the VAT law laid down in the EU Sixth Directive. This does not give even the UK parliament power to override the rules laid down in the Directive – although it does of course enable the EU institutions, which are mostly either democratically elected or made up of members nominated by democratically elected members, such as our Parliament, to change the law. One of the reasons why changes to VAT need the agreement of the EU is that the EU is largely financed by being paid a proportion of the VAT collected by each country. Accordingly, even if the UK parliament were to take the view that a supply of staff by Blackstone Franks LLP should be treated differently from a supply of staff by UCL, Parliament would itself be in breach of the Treaty obligations that it has entered into. Their would also be a very substantial risk that the EU Commission will take action against the UK in the European Court of Justice to force it to comply with EC law. Accordingly, even if The Times and UCL think that fairness requires the UK to be treated differently from anyone else who shares staff and opts not to use joint contracts, Parliament does not in reality have the power to gift such a privileged treatment to them.

The concept of VAT is that it is intended to be a universal tax within the EU and, although there are some exceptions, these are very narrowly defined. Accordingly to look for special treatment in relation to VAT is akin to crying for the moon. Whilst one might have sympathy for hard cases it is clearly impractical for a law that is intended to operate in exactly the same manner throughout the entire EU to be able to cater for such hard cases. Personally, I find it very hard to generate any sympathy at all in circumstances where there is a well trodden route to avoid the imposition of VAT and people choose not to follow it.

Robert W Maas

JOURNAL 2


SHOULD HYPOCRISY BE A FEATURE IN THE TAX SYSTEM?

I have no strong views on tax avoidance. I neither approve nor disapprove of it. To me it is fact of life. However I do have strong views on hypocrisy. I think it ought to be unacceptable.

Gordon Brown and Dawn Primarolo (the Paymaster General), who are together responsible for Her Majesty's Revenue & Customs, do have strong views about tax avoidance. They think it is unreasonable and anti-social. They believe that everyone should pay their "fair amount of tax at the right time". This does beg a question as to what is a fair amount of tax. I suspect most people would think that it is the amount that Parliament has decided - at the instigation of Mr Brown and Ms Primarolo - that a taxpayer is due to pay. However this is not actually the Brown/Primarolo view. They have together spent the last nine years rushing masses of legislation through Parliament with very little time for debtate. Their view of what is fair is what they believe Parliament would have decided had they given Parliament sufficient time to look at what they were proposing, so that Parliament could have pointed out to them that the law that it was being asked to enact was not actually the law that they had in mind. I think this view, is at the least, open to challenge.

I do not have a clue what the Brown/Primarolo view on hypocrisy might be. However I just finished reading a tax case, Barnes (Inspector of Taxes) v Hilton Main Construction. Assuming that the responsibility for HMRC actually means the ability to some degree to control what they do, I would suggest that this case indicates that Gordon and Dawn are very much in favour of hypocrisy.

The HMRC view is that they have a statutory obligation to apply the law. Fairness does not come into it. I find this impossible to square with a concept that taxpayers ought to pay tax not on what the law says, however unfair that may be to the government, but on some abstract perception of fairness, but that the government should ignore fairness and simply apply the law. In fact HMRC have been entrusted by Parliament with the "control and management" of the tax system. Most people (including me) think that this actually gives them a power to decide not to enforce the full might of the law where to do so would clearly be unfair. Although not everybody in the country pays the tax that they are legally obliged to by and large most of us tend to do so. Indeed far many of us tend to do so than in many other countries. I think that this high lvel of tax compliances is because most of us think that by and large the UK tax system is fair. I also think that if HMRC seek to apply it in circumstances where it is patently unfair, sooner or later people start asking themselves why they should act fairly in their relations with the government when the government does not do so in its relations with its customers.

Hilton Main Construction is (or possibly by now was), as the name suggests, in the construction industry. There is a tax scheme, the construction industry scheme, that basically says that where a contractor engages a subcontractor it must deduct tax from the payment it makes to the subcontractor and hand it over to the Revenue unless the Revenue believe that the subcontractor can be trusted to pay over the tax that it owes if it is not forced to do so by having it deducted at source. The question was whether Hilton Main Construction could be trusted to pay the tax that it would owe in the future. The facts were very simple.
(a) It had paid its tax late in the past.
(b) The Managing Director had kept HMRC in touch with why it was late in paying its tax, and had had a lot of meetings with them.
(c) At no time during those meetings did HMRC say that paying its tax late risked the Revenue refusing permision in the future for the business to be paid without deduction of tax.
(d) The reason the business was late in paying its tax (as the proprietor had explained to HMRC) was that the proprietor's wife had left him and taken £18,000 from the business account without his knowledge, which obviously created massive financial problems for the business.
(e) If customers have to deduct tax the business would have to close putting 51 employees out of work.
Make your mind up in those circumstances. Is it fair or unfair to put those 51 employees out of work by refusing to allow customers to pay the business gross? The High Court held that the letter of the law says that HMRC is entitled to insist on tax being deducted and the court is not entitled to override HMRC's view.

I am sure that you will all wish the 51 former employees of the business a happy Christmas on the dole. However that is not my point. My point is that if Gordon and Dawn believe that putting them on the dole is the right thing to do, because that is what the law says - and tough luck that the business had a reasonable excuse for its cash flow problems - can they legitimately complain about tax avoidance, which frankly is doing no more than complying precisely with what the law requires a taxpayer has to do?

It does seem to me that fairness ought to work both ways. I cannot believe that Parliament would have intended to put the 51 employees of Hilton Main Construction on the dole in the particular circumstances of the case. If Gordon and Dawn think it wrong for taxpayers to act on the basis of what the law says rather than what they intended it to say, shouldn't that principle work both ways? Shouldn't Hilton Main Construction be taxed on the basis of what Parliament would have intended the law to say had it envisaged those circumstances rather than on the basis of what the law actually does say?

Robert W Maas

JOURNAL 1

TWO CHEERS FOR THE CHANCELLOR

Welcome to Robert Maas's blog. I should start with who I am. I am a Chartered Accountant specialising in tax. I am Head of Tax of Blackstone Franks LLP. Have a look at our website www.blackstonefranks.com. I am an avid fan of West Ham United FC and a less avid fan of the Chicago Cubs. My other main interests are jazz, real ale and malt whisky. Accordingly my blog might touch on any of these matters - or indeed on anything else - but will mainly be about tax.

Gordon Brown delivered his Pre Budget Report on Monday 5 December. I am intrigued at the degree of dismay that has been caused by his annoucement that pension schemes ought to be set up to provide pensions, not to enable assets to be passed on free of inheritance tax or to subsidise second homes and other lifestyle type assets.

Of course this is typical Gordon Brown. The word babies and bathwater come to mind. A pension fund, like an individual, ought to aspire to a balanced portfolio of investments and it is an odd investment strategy that excludes property. It is also obviously an unfair strategy that allows pension funds for the reich to own commercial properties but those of the less well off, who cannot afford to buy a commercial property but could afford a residential one, to be excluded completely from the property market. Nevertheless I find it hard to feel any sympathy for a person, such as I noticed reported in the Times of 7 December, who has bought a residential property with the intention that next year he will sell half of it to his pension fund and the year after that he will sell the second half to his pension fund. That suggests to me that the property is intended to be the sole asset of the pension fund. If so, that seems to me to be a ridiculous invetment policy for a pension fund, and the individual concerned should be grateful that the Chancellor wishes to dissuade him from such an odd investment strategy.

I find it amazing that at a time when there are real fears about whether people will have money in their retirement that anyone is even contemplating putting into their pension fund their holiday home or their wine cellar. The whole point of giving tax incentives to pension schemes should surely be to grow the fund so as to provide a pension when the individual eventually retires. A fund that produces no income seems to me to miss the point. It certainly does not take advantage of the tax exemption within the fund or income received by the fund.

It seems equally sensible for a government that is seeking to extend home ownership not to at the same time offer incentives to the more well off to buy starter homes at a 40% discount to the price that potential owner occupiers have to pay.

What does not make sense is to ban residential investment completely. We of course await the legislation, but it wil be very sad if we are back to the current position where a small self administered pension scheme cannot buy a shop with flats above or cannot even buy a commercial property if the building incorporates a flat for a caretaker.