JOURNAL 45

THAT WILL BE AN ACHIEVEMENT!

I notice that Gordon Brown has said that he wants 100,000 homes in carbon neutral communities to be built on old industrial sites to help to create a home-owning, asset-owning, wealth-owning democracy. Each of the new homes in his five Eco towns would be built to zero-rated carbon standards and be exempt from stamp duty.

That will be an amazing achievement if he carries it off. Amazing because the exemption for stamp duty that he is introducing in the Finance Bill will expire on 30 September 2012. As, by definition, an old industrial site is probably contaminated land this means that he expects to be able to decontaminate the land, design five whole new towns, obtain the necessary planning consent, build the new homes and sell them, all within a five-year period.

I would have expected it to take five years for most property developers to get planning permission for such an ambitious project, let alone anything else. I assume that Gordon intends to introduce a special fast planning process and engage a massive team of designers in order to be able to achieve this amazing promise within the five-year timescale that his own Finance Bill requires him to meet.

Robert W Maas

JOURNAL 44

DO HMRC LEARN FROM THEIR MISTAKES?

We’ve done it! West Ham United’s win over Manchester United on Sunday to clinch their survival in the Premier League was the culmination of a magnificent run of seven wins out of their last nine matches. I can now breathe a huge sigh of relief, stop that niggling worrying (because of course like, I suspect, all Hammers fans I felt fairly confident that the team would do it after that fabulous result against Arsenal at The Emirates), and get on with tax.

Apart from having a celebratory drink or three, another thing I did over the weekend was look at HMRC’s last Annual Report to see what it said about penalties collected under the existing regime to compare them with what looks to me like a virtual doubling of effective penalties under the Finance Bill proposals. I couldn’t find what I was looking for, but did notice some figures for complaints considered by the Adjudicator that sidetracked me into visiting the Adjudicators website. There I pieced together the following information.

	% of Complaints upheld	Investigation closed	Assistance cases
1997/98	42%	582	?
1998/99	42%	603	2863
1999/00	32%	687	2928
2000/01	35%	673	2607
2001/02	39%	573	2948
2002/03	46%	503	2283
2003/04	35%	475	3955
2004/05	45%	561	4903
2005/06	43%	899	5641

Note: Assistance cases are where the Adjudicator did not open an investigation but helped the taxpayer to make a complaint to HMRC. The 2005/06 figure includes 27 cases where the Adjudicator investigated but referred the matter back to HMRC for an internal reconsideration.

A couple of points strike me from these figures. The first is that the percentage of complaints upheld remains fairly constant. The average over that nine-year period was 40% and most years fell within two or three percentage points of that figure. We are constantly told that HMRC take the Adjudicator’s criticisms very seriously and constantly make improvements to their systems to react to such criticisms. The figures do not seem to support this. I would have expected to see the percentage of complaints upheld gradually reducing as HMRC responded to lessons learnt.

I suspect that the reason why this seemed to be happening up to 2001/02 but no longer appears to be the case as that the savage cuts in staffing that the Chancellor has imposed – and continues to impose – on HMRC is coming through in terms of a reduced service as the pressures on the staff that are left force them to cut corners to the detriment of taxpayers.

HMRC’s annual report for 2005/06 contains a table showing that over the two and a half years from 1 April 2004 to September 2006 they cut staff from 97,755 full-time equivalent people to 90,040 and are targeted to reduce the level to 85,255 by 1 April 2008. This represents a reduction of almost 13%. Were HMRC really allowed by Ministers to have so much slack in the system, or does such a large reduction in staff, at a time when we have had some of the largest Finance Acts in history, represent a real squeeze in resources whose effect is being to show through in an increase in complaints? The Adjudicator certainly seems to have handled a lot more complaints in 2005/06 than in earlier years!

The other thing that struck my eye is the gap between investigations taken up by the Adjudicator and investigations completed. I do not have figures for all years as neither the Adjudicator or HMRC seem to list these consistently. A chart in the Adjudicator’s annual reports suggests that from 1993/94 to 1996/97 there were roughly 2,000 investigations started and 1,685 closed. The HMRC 2005 and 2006 reports indicate that from 2003/04 to 2005/06 the Adjudicator took up 2,047 cases and closed 1,818. These figures suggest that there are a growing number of open investigations. How long will it be before the Adjudicator herself has so many cases open that the time taken to carry out an investigation become unacceptable? The above figures suggest that open cases exceed the average of those closed every year, i.e. that there is a year’s backlog in dealing with cases!

Robert W Maas

JOURNAL 43

WHY DOES THE GOVERNMENT INCENTIVISE TAX AVOIDANCE?

Over the weekend I caught up a bit on my reading. One thing that caught my eye in reading the parliamentary debates on the Second Reading of the Finance Bill was a comment by the Financial Secretary to the Treasury, John Healey, on small businesses. He said:

“The UK has 4.3 million small businesses. Of those, more than three quarters are self-employed. They do not pay corporation tax and are not affected by the changes in the Budget. Of those that remain about a quarter do not pay any corporation tax because they do not declare profits. Of those that remain, we estimate that the majority have incorporated with the purpose of reducing their tax and national insurance liabilities.”

That seems an extraordinary statistic:

Unincorporated businesses 1,075,000

Small companies not generating

any profits or making losses 806,000

Small companies that have incorporated

solely for tax avoidance purposes 1,210,000*

Small companies that have incorporated

in order to obtain limited liability or for

some other commercial purpose 1,209,000*

Total UK small businesses 4,300,000

I have taken “the majority” to mean just over half, so the number of “genuine” incorporations of profit-making businesses may well be significantly lower than £1.2m – although some of the non-profit generating businesses may of course be profitable businesses that distribute the whole of their profits to their proprietors by way of salary.

For most government purposes a small business is one that has less than 50 employees and a turnover of less than £5.6 million.

The above figures suggest that if tax avoidance could be abolished (which it can’t be) only around a quarter of all small businesses would choose to operate as limited companies. I find this amazing. It is also alien to my personal experience, which is that the vast majority of small companies that I have come across have incorporated to obtain the benefit of limited liability, to be able to give senior employees an interest in the business, or to segregate activities into different entities.

Of course in the fast growing IT industry, many have incorporated because the large computer companies, most of whom do work for the government, are unwilling to deal with PAYE and NIC as unpaid tax collectors for the government, and the government, in particular the Treasury and HMRC, have been unwilling to make a stand and require its own IT contractors only to use their own employees to fulfil government contracts. I am unclear whether Mr Healey regards small companies set up to enable the proprietor to obtain work from government contractors as falling within the tax avoidance or commercial category. As it is really government sponsored tax avoidance I suspect it is the former.

The other extraordinary thing is that over the last 10 years the government have directed the vast majority of its small business incentives towards companies – indeed to such an extent that many commentators and advisers were convinced that the government was seeking to discourage unincorporated businesses completely.

It seems an extraordinarily odd policy to hand out benefits to 1.2m avid tax avoiders in order to benefit a smaller number of genuine businesses. It seems an equally strange policy to choose to incentivise only around half of all genuine small businesses (Incentives that relieve the corporation tax burden have no effect on companies that do not make profits so cannot impact on that 800,000). Yet this is what Mr Healey’s figure suggests that Gordon Brown has consistently chosen to do.

Robert W Maas