JOURNAL 48

MORE SNIPPETS

Ed Balls “Clause 27 will apply only when one of the main purposes of arrangements is to secure a tax advantage. It will not apply to genuine transactions or when a taxpayer simply makes use of statutory relief. If the purpose behind the amendment is to ensure that such simple actions are outside the scope of the rule it is unnecessary, because that is made explicit in the guidance.”

Mr Justice Walton once commented (in 1979) that “one should be taxed by law, and not untaxed by concession” – to which Lord Wilberforce, in agreeing with the sentiment, added, “when Parliament imposes a tax, it is the duty of the Commissioners to assess and levy it upon and from those who are liable by law”. The same might be thought to apply to HMRC guidance: one should be taxed by law not untaxed by guidance. It is a bad tax that is drawn so widely as to catch many innocent transactions with the government then expecting HMRC to draw up guidance setting out the circumstance in which they do not intend to apply the law that the government asked Parliament to enact.

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John Healey: “The onus on us is great, to get the legislation right in a way that gives effect to the principles of the ECJ judgement but protects properly the UK tax base by preventing the artificial location of profits”.

Actually the onus is on the UK to give effect to European Law. The ECJ has consistently held that protecting the UK tax base is not a justification for a measure that amounts to a fetter on the EU fundamental concept of freedom of establishment. A measure that seeks to give effect to an ECJ judgment only to the extent that its doing so will protect the UK tax base is accordingly a contempt of the European Court.

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John Healey “It was ably summed up by Paul Aplin, chairman of the Tax Faculty of the Institute of Chartered Accountants, when he acknowledged that HMRC was abiding by what he called the Carter principle, which is that “nothing is launched until its been tested and proved fit for purpose”. I would like to make clear also to the Committee that we are not introducing compulsory online filing for any income tax self-assessment returns…The introduction of differential filing dates, however, will encourage the further growth of online filing by capable and competent individuals confident about using it …It will do so by offering the incentive of a longer period in which to file an online return…HMRC already provide free software for nine out of 10 individuals and the Government will introduce supplementary pages and improvement to that situation so that by the time of the reforms the free software will be available to 19 out of every 20 individuals who might be involved in self-assessment.”

Many of us think the “fit for purpose” means that the software will meet the needs of 20 out of 20 people that the law requires to file tax returns. Something that cannot be used by 450,000 people (out of roughly 9 million who are required to file returns) hardly seems fit for purpose to me. For a government which so often talks about fairness in tax, the morality of providing an incentive and denying its use to 450,000 people can also hardly be described as fair.

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Ed Balls “My argument is that it would be premature to legislate today to return to where we were before last year’s Finance Bill when we are still consulting on detailed guidance to ensure that the intentions of the 2006 Act are properly implemented…My point is that STEP and the practitioners have a choice. They can either engage positively and constructively to get the guidance right, or they can walk way from the whole process and call for the legislation to be repealed. The former option is the better approach. The latter, at this stage, would be premature…The question is do we go back to where we were before 2006 or do we make the consultation process work? All I was saying was that it was better to consult to provide decent guidance to avoid the concerns of the Hon. Member. That seems to be a more constructive approach to making tax policy.”

Or, to put it another way, who cares if we got the law wrong last year? The law doesn’t matter. We can correct mistakes in the law by means of HMRC guidance – presumably on the circumstances where HMRC think taxpayers should ignore the law – as what matters is our “intentions” last year not the legislation that we asked parliament to enact. Worrying about the law is an outmoded approach to tax policy. The New Labour approach is to state our intentions to parliament, ask parliament to pass some wording that doesn’t really matter, and then for HMRC to issue guidance on how we intended the policy to work. That is the constructive way to make tax policy.

For the record neither STEP nor anyone else, as far as I am aware, has asked for the 2006 legislation to be repealed. It believes that a tiny provision in the previous legislation which avoided an overseas trust management company being treated at UK resident merely because it met UK clients at the offices of a UK associated company was accidentally repealed last year and that it’s repeal will seriously damage the contribution of such companies to the UK economy. In that context the Balls policy of waiting for the damage to occur and then trying to entice business back to the UK seems ridiculous.

Robert W Maas

JOURNAL 47

SOME SNIPPETS FROM THE FINANCE BILL DEBATES

Mr Timms (Chief Secretary to the Treasury) “In the past year, 35,000 of the 600,000 estates attracted an inheritance tax liability. The proportion of estates liable for inheritance tax is just 6%. The remaining 94% pay no inheritance tax whatsoever”.

Adam Afriyie MP “…has he rolled that figure forward? What proportion of estates and how many families does he predict will be caught in 2010/11?”

Mr Travis “The answer is 6%. I expect the proportion in the year that the hon Gentleman refers to and that is covered by the clause to be precisely the same as now – 6%. That is very different from the impression that one might get from reading some newspapers.”

Are you one of the lucky 6% whose assets will exceed £310,000 if you die in the year to 5 April 2001? The median house price in the last quarter of 2006 was £175,000. In the South East and London it was £292,000 which, Mr Timms pointed out, are within this year’s nil rate band. So do few Londoners die each year (so few fall within the 6%) or does the average Londoner to die leave his house and a mere £8,000 of other assets? And if London and S E house prices grow by 2% pa in the third quarter of 2010/11 the median value will be £316,000 as compared with the £310,000 IHT nil rate band. They will have to grow by les than 1.6% pa to be under £310,000 by 31 December 2010. The Halifax House Price Index for May indicated that house prices are actually growing at an annual rate of 10.6%, i.e. the December 2006 £292,000 house is already worth more than £310,000. Accordingly the Treasury must be predicting that having Gordon Brown as Prime Minister for the next four years will lead to a significant negative growth in house prices.

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Rob Marris MP “…even though by some standards we do not earn a fortune I am very well paid for being a Member of Parliament, and I have no other source of income. I am happy to pay tax at the highest rate. I do not regard myself as wealthy, and I should be quite happy to pay the inheritance tax were my estate valued above that threshold”.

The annual salary of an MP is £60,675. The UK average wage at April 2006 was £447 pw (£23,244 pa). It was £470 pw (£24,440 pa) in the SE and £572 pw (£29,744 pa) in London. What on earth is Mr Marris (who has been an MP since 2001) doing with all that money if he thinks it doubtful that he has £300,000 worth of assets?

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Ed Balls (Economic Secretary to the Treasury) “The comments just made by the Hon Member…which draw on her own experience, show that it would be desirable to debate the regulations under the affirmative procedure if that can be done. In the policy area in which I have been active in the Treasury I always welcome the use of the affirmative procedure. When important areas of policy are taken forward, it is right that there should be an opportunity to discuss the details in the House.”

The Finance Bill 2007 contains 40 provisions enabling either the Treasury or HMRC to make regulations, of which only one (the power to increase the £600 daily penalty for failure to notify a tax avoidance scheme) requires the affirmative procedure!

Incidentally I thought that I’d have a look at Ed Ball’s personal website. I can’t tell you what’s on it as it tells me that “By accessing and using this Web Site you agree to be bound by the Terms and Conditions set out below,” one of which is “the User undertakes that they will only view the Information for their own private purposes and it (sic) will not publish, reproduce, store or retransmit any of the Information contained in the Web Site.” So much for open government!

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John Healey (Financial Secretary to the Treasury) “Some have suggested that the word “influences” …captures all the advice given by accountants and advisers, but there is a world of difference …between a person who provides independent, tailored advice to a client, who is then able to consider that advice before accepting it or rejecting it, and the person who simply supplies a client with a standard solution or product that the client accepts. It is not the intention that the former situation – the provision of advice – be considered to be influencing in this context. However the latter situation – supplying a standard solution or product – is regarded as influencing.”

Well done to anyone who understands the distinction the Minister draws. I certainly don’t. What most of my clients are seeking are solutions; they want advice simply in the context of what is the most satisfactory way to solve the particular problem that they face. In that context there is no difference between a standard solution and a bespoke solution, other perhaps than that a standard solution is a tried and tested answer whereas a bespoke one is untried. Does Mr Healey think that advice is considered by the client but a standard solution is simply accepted? I would not want a client to accept a solution without understanding it and considering whether to accept or reject it, and I doubt that any other accountant would either. I find it difficult to conceive why anyone should seek my advice if he does not believe that obtaining that advice will influence what he does.

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Ed Balls, “The main purpose [of arrangements] may be inferred from the action of the parties to the arrangements, but it is best understood by the person making the arrangements. It is therefore not necessary to set up a clearance regime when the person best placed to judge whether the rule applies is the person who makes the clearance application.”

Lewis Carroll eat your heart out! There is no need for a clearance procedure because the taxpayer knows if he is doing something for tax avoidance purposes – but the reason why he is doing it is actually irrelevant as the law will infer a purpose from the actions that took place. In other words what matters is the inference that HMRC, and ultimately the courts, draw from the actions. But if that is right surely the taxpayer needs a clearance procedure because he can have no idea what inferences HMRC are likely to draw from his proposed actions unless they tell him in advance so that if they perceive it to be avoidance he can forbear from entering into the transaction. So is the answer that the government do not actually want to deter tax avoidance; they want to encourage it so that they can collect more money by penalising it?

Robert W Maas

JOURNAL 46

SHOULD LANDLORD’S BE EXCUSED PAYING TAX?

The Times used to pride itself on being a paper of record, one on which in the future historians could rely for accurate reporting of events. Since it went tabloid it appears to have adopted the philosophy of “never let the facts get in the way of a good story”.

The story that caught my eye was a recent three page (one front and two full inside pages) feature penned by two different reporters, which was headlined “Thousands of buy-to-let families face tax shock”. Even this headline seems questionable. What on earth is a buy-to-let family? My experience is that the investment activity is normally carried on by an individual, although of course frequently the property is put in joint names with the investor’s spouse. I have never seen a holder of, say, shares in Marks & Spencer called a Marks & Spencer family. Investment has nothing to do with family (other of course than the fact that most people build up assets to create an inheritance for their family). But why should an investment in buy-to-let properties (which correspondents in the Times letters page commented is almost certainly one of the main factors in forcing property prices out of the reach of first time buyers, normally families looking for somewhere to live), be attributed to the family whereas other investments are not?

Be that as it may, apparently HMRC is preparing to clamp down on tens of thousands of buy-to-let property owners who many not have paid enough tax. Hurrah! It is bad enough that they are forcing young families into rented accommodation, but it is scandalous if they are fiddling their tax too? Er, No. In the view of the Times it is wrong for HMRC to seek to collect the tax that such people owe. A leader article “Taxing tolerance: Revenue and Customs should not be harsh with buy-to-let investors” tells us that the rental market could not operate without such people and that their tax treatment is so complex that no wonder many have mistakenly claimed a deduction for capital repayments on their mortgages so, whilst “it is of course, the Revenue’s duty to prevent tax evasion, it should however be prepared to acknowledge where a situation is confusing and place its emphasis on clarifying the position so that future tax payments are entirely accurate. It is unreasonable to work on the assumption that buy-to-let investors have sought deliberately to defraud the tax authorities in the past and that they should be punished by having extra interest charges and demands for penalty payments. This market would face a severe blow if the taxman were to impose huge bills on part-time landlords, effectively turning what had previously been a profitable and socially useful investment into a criminal activity.”

There are a great many inaccuracies here. Asking for back tax is not turning an investment into a criminal activity. It is collecting the amount that parliament had decided it is fair for a landlord to pay. If the landlord deliberately understated his liability that is what most of us would call fraud and, as such, is a criminal activity to start with; HMRC’s uncovering the fraud does not turn it criminal! If there was not a deliberate understatement, collecting the tax due does not turn the understatement into a criminal activity. Even seeking penalties does not criminalise the activity; the penalty is imposed for not carrying out one’s civic duties as required by the law.

Secondly I very much doubt that HMRC “work on the assumption that buy-to-let investors have sought to defraud the tax authorities”. They are far more likely to work on the assumption that such people have been negligent in handling their tax affairs. Based on the Times articles, that is likely to be a reasonable assumption in the majority of cases.

Thirdly there are no “heavy extra interest charges”. Parliament has decided that people who pay their tax late should pay interest for the period that they have had the use of taxpayers’ money. The rate of interest is exactly the same if one pays six days later or six years late. The leader writer may be correct in describing the charges as heavy, although they are not much different to the rates that banks charge, and as they are not compounded over a period of several years they are probably less than if the taxpayer had borrowed from his bank and paid the tax on time.

Fourthly it is hard to see why people should invest in buy-to-let properties if paying the tax that is properly due on the rents makes the investment unattractive. It is certainly hard to see why HMRC should waive arrears of tax on such people, particularly as the capital growth on their investments is likely to have given them borrowing capacity to raise the funds to pay the tax.

Fifthly the situation is not confusing. The computation of letting income is very simple, subject to one proviso, and is well explained by HMRC in their notes to the Land and Property page of the tax return. The only real complication is the dividing line between repairs and improvements, but that dividing line is not the subject of their Times complaint.

This seems to be that when they borrow money to buy a property many people do not know if they have borrowed on an interest-only mortgage or a repayment mortgage. This presumably means that they did not read, or did not understand the mortgage agreement they signed and did not listen to what their mortgage broker would have told them. It also presumably means that when they completed their tax returns they looked at their building society or bank statements and said to themselves, “Clearly the interest cannot be this figure which the building society describes as “interest”. The building society is trying to mislead me. Obviously the figure of interest is the aggregate of the 12 figures that it calls “repayments”. Well if they can convince HMRC that they took all possible care and genuinely believed that the interest was not the amount described as interest, HMRC will not ask for a penalty. I suspect HRMC will take a hell of a lot of convincing though, because most people would regard such an approach as negligently completing the tax return.

The other “hard-done by” category of innocents according to the Times is “ghost” landlords, i.e. those who either deliberately sought to defraud their fellow taxpayers by not declaring their income or who did not realise that rental income is taxable. Surely even the Times can have no sympathy for the first of these. As far as the others are concerned there will again be no penalty on anyone who can convince HMRC that they genuinely believed that rental income is not taxable. Of course, bearing in mind that they knew that salaries are taxable, it is hard to see why someone should think that rents are treated more generously, but if that is the case, there is a no penalty.

Oh, and it is also wrong to suggest, as the Times does in one of the articles, that if someone wants to take advantage of HMRC’s limited offer of a discounted penalty, they only need go back 6 years; they actually need to go back 20 years, not 6. It is somewhat misleading to say that a penalty of 100% can apply when, as far as I am aware, HMRC have never sought such a high penalty even in cases of fraud, let alone negligence.

The real story is that HMRC are putting resources into collecting back tax due from landlords, whether the underpayment arises from fraud, negligence or a simple mistake, in exactly the same way as they collect back tax owed by employees, the self-employed and everyone else who has underdeclared their income for whatever reason. Neither ought it to be a “tax shock” that HMRC expect people to pay the right amount of tax at the right time. But that wouldn’t fill three pages of the paper.

Robert W Maas