BLOG 118

WHAT IS TAX AVOIDANCE?



I don’t know the answer to that question. I thought that I did! I see it as when someone enters into artificial transactions that create a tax effect that parliament did not envisage when it enacted the relevant legislation.

Using that definition I do not personally espouse tax avoidance. Nor does Graham Aaronson QC who has recommended that the government introduce a GAAR (General Anti-Avoidance Rules) that is targeted as such transactions. Unlike Graham (I think, from reading his report) I do however recognise that not everyone is opposed to tax avoidance. Accordingly I have no difficulty in informing clients of what is on the market if asked. I think it unprofessional to seek to impose my own moral outlook on clients who may have a different concept of morality than I do.

Indeed I am not sure even that I am opposed to tax avoidance. I feel uneasy about it but think it a consequence of parliament having enacted reams of tax legislation with virtually no debate and having given MPs little or no opportunity to consider its implications. If parliament chooses to treat the citizenry with complete contempt – which is surely the only rational reason for passing laws that MPs do not understand and have, in the main, little or no inclination to try to understand – I have a sneaking sympathy for those who seek to adhere to the constitutional concept that one has to abide by the laws that parliament enacts, not try to guess what laws it would have enacted had it bothered to think about it. Accordingly if parliament chooses to enact legislation that gives rise to unexpected consequences, I find it hard to criticise those who choose to exploit those statutory consequences.

Where ill-considered law imposes tax in situations that no right minded person could conceive that parliament or anyone else could have intended, HMRC tend to shed copious crocodile tears and explain that, whilst they recognise the unfairness, they have a statutory duty to enforce the law that parliament has chosen to enact however unreasonable the result may be and however unlikely it may be that parliament intended to impose tax in such circumstances.

Indeed under the last government I started a petition on the 10 Downing Street website asking the government to give HMRC power to decide not to enforce unfair laws. Sadly, I only garnered a couple of hundred signatures, which was not enough to achieve the change that I wanted.

But I digress. My point is the saying that, “What is sauce for the goose is sauce for the gander”. If HMRC and the government want to enforce unfair laws against taxpayers, I find it hard to criticise taxpayers who similarly seek to enforce laws that most of us consider unfair to the general body of taxpayers. I think that tax either ought to embody a concept of fairness or fairness ought to be irrelevant. A concept that the law should somehow be unfair in its application to taxpayers but fair in its application to the State is anathema to me.

But I should get back to my initial question. This was prompted by a recent article in The Times headed, “Stamp Duty”: Only the best will do for the super-rich, especially if you don’t have to pay tax”. Actually I don’t think it was about stamp duty at all. It was about stamp duty land tax. However, whilst I regarded The Times as a newspaper of record under Lord Thomson’s ownership, I no longer expect it to be unduly concerned about getting facts right.

The thrust of the double page spread devoted to this “story” was that if someone buys shares in a company that owns a property, one pays whatever tax parliament feels it appropriate to impose on a transfer of shares, not the tax that it feels appropriate to impose on a transfer of property. I do not myself find it odd that different transactions should have different tax consequences. Nor do I consider that I am avoiding tax if I choose to enter into transaction A whereas I would have paid more tax had I chosen to enter into transaction B, which has different tax consequences.

For example am I avoiding VAT when I buy my zero-rated lamb chop my zero-rated cauliflower and my zero-rated carrots and cook them at home paying only 5% VAT on my gas usage, whereas if I had chosen to eat out I would have had to pay 20% VAT on the entire cost of my meal? If so, I am one of those hated tax avoiders, because I eat in a lot more than I eat out.

If I am not a tax avoider, why should someone who buys shares in a company that owns a property be a tax avoider because a purchase of shares attracts stamp duty of 0.5% (or is exempt from stamp duty in the case of a non-UK company) whereas a purchase of a property attracts tax at up to 5%? Is there really a difference between parliament having chosen to tax meals I cook myself differently from meals I eat at a restaurant and parliament having chose to tax purchases of shares differently from purchases of property? I freely confess that I cannot see one. Yet if The Times feels that it should devote two pages to castigating those who choose to buy shares, why does it not equally castigate those who choose to cook at home rather than eat out and pay VAT? It surely cannot be simply because The Times itself encourages such VAT avoidance by printing cookery recipes at the weekend!

All that I can think of is that tax avoidance is not about tax at all; it is about envy. We, or perhaps, to be precise, Times journalists, are motivated more by jealously than by morality. It is not so much about avoiding tax as about the rich being able to “avoid” tax in ways that journalists cannot afford to do.



ROBERT MAAS

BLOG 117

DRAGONS’ DEN – NOT A GUIDE TO BUSINESS VALUATION?



I recently read an article in “Taxation” magazine that included, “no doubt we have all been surprised at the valuations that various entrepreneurs have placed on their businesses in the Dragons’ Den. Clearly, there is an area where, as accountants, we can assist our clients”. It also indicated that Dragons’ Den demonstrates that to secure finance or investment, a company needs some key features, namely good management, enthusiasm, a compelling product or service and potential market size.

I am note sure that I agree with either statement. I admit to watching Dragons’ Den but I see it as entertainment, not as a business video manual. The rules of the Den are somewhat odd. The entrepreneur cannot refer to his accounts; he is expected to remember the figures for the last five years. The amount of money he wants to raise is fixed; if the Dragons think he needs more, they cannot offer it to him. The entrepreneur is expected to go on his own (or with one or two others) he cannot bring along his accountant, lawyer, chief accountant and the rest of the team that most investors expect to be involved. If a Dragon makes an offer it must be accepted or rejected on the spot. I cannot recollect a Dragon ever agreeing to accept the deal on offer. Surely, in at least some cases, that deal must have been based on the advice of an accountant. Accordingly one could draw an inference that accountants are not actually very good at valuing businesses.

One could equally draw the inference that conventional valuation methods do not bear much relationship to the real world. I am fascinated by how little financial information the Dragons normally want. They ask for turnover and sometimes for gross profit and net profit, but do not normally seem to care what expenses have been charged in arriving at the profit figures – or indeed how much the proprietor is taking out of the business.

But the figures seem largely secondary to them. The sort of things the Dragons are interested in are the following. If the entrepreneur has a new product, is it patented and if so how secure is the patent? What is the risk that a major company could produce a competing product? What is the likely market? What is the profit per item? How long has the entrepreneur been trying to sell the product? How has he tried to sell it? Does he know who his competitors are and their prices?

The Dragons will form their own judgement as to whether they are likely to make a reasonable return on the investment and how quickly. They seem to invest on the basis of that judgement. However they rarely invest as a passive investor. Similarly, the entrepreneurs are rarely looking for a passive investor. They are looking for someone who will bring their skills and connections to the table along with their money.

Accordingly Dragons Den is not really about selling stakes in companies. It is primarily about finding a business partner who is prepared to devote some time and resources to help develop the business. That may well be why the Dragons are rarely, if ever, prepared to agree the deal that is on the table. The stake in the business that the entrepreneur is prepared to give up may well be predicated on a valuation of the business – although in many cases it seems doubtful whether much attempt at a valuation has been made. However the Dragon approaches the deal from the basis of the return he wants on his money and the value that he believes that he personally can create for the business.

Neither has much to do with the sort of valuations that accountants produce, which are formulaic and often take little or no account of the factors that draw the Dragon to a business. Indeed, normally the Dragons each place a very different price on the business from one another.

I also doubt that the programme demonstrates a need for good management, enthusiasm, a compelling product or service, and potential market size. Of course these are all important factors, but not as important as the Dragon’s own perception of the potential of the business.

I doubt actually that the programme demonstrates anything – except perhaps how difficult it is to turn an idea into a profitable business if the entrepreneur does not have a business background.


ROBERT MAAS

BLOG 116


DOES DAVID GAUKE SEE US ALL AS CROOKS?


Have you noticed that under David Gauke’s tutelage HMRC no longer recognise that many people who set up new businesses are not financially, or even mathematically, sophisticated. Whatever people thought of Dawn Primarolo, I do not think she could be accused of lacking humanity or not being capable of putting herself in the shoes of the man or woman in the street, who make up the vast majority of taxpayers. For all her faults (and to the tax advisor community she had many) she did seem to recognise that some taxpayers:

- make mistakes
- pay rather more attention to developing their businesses than completing their tax returns
- do not fully understand the tax laws (Neither do most tax advisors in many areas, albeit that there is a statutory fiction that everyone is deemed to know the law and albeit that Ms Primarolo introduced harsh new penalties on those who do not understand their statutory obligations. The number of tax cases that reach the tax Tribunals and the Courts might be said to call into question whether the MPs who introduce tax laws fully understand them either, but that is another question)
- shy away from simple mathematics – including totting up their turnover on a monthly basis and keeping a running twelve-month total of it.

However I am sceptical whether David Gauke does so as, under his oversight, HMRC seem to have taken to describing as such people as “cheats” – who of course, in the main, did not have the benefit of the Oxford University education that us taxpayers (or our parents) provided for Mr Gauke. The use of such a disparaging – and inaccurate – term to describe honest taxpayers trying to cope with a complex tax system seems to me wholly unreasonable and unfair. I notice that the latest HMRC press release headed, “VAT cheats have one month to come clean” goes on to describe such people as “VAT rule-breakers”, which I suppose is a bit less aggressive than “cheats” but still carries with it a connotation of deliberately breaking the rules, whereas in many cases the taxpayer is either ignorant of the rule, or aware of it but ignorant of the fact that his turnover has triggered its application.

Of course, there are indeed a number of tax cheats who either know that they owe tax but have chosen to opt out of the tax system, or who do not know that they owe tax because they have opted out of the system, so are indifferent as to its intricacies. I hope that HMRC chase them with the full vigour of the law.

Actually, though, HMRC are not doing that. At the same time as they label as criminals honest taxpayers who are doing their best and failing, they are offering attractive deals to real tax criminals to come clean and escape the punishments – including most of Ms Primarolo’s penalties – that parliament felt appropriate to impose on such people.

Sadly, to many of us who spend our lives coping with the tax system, under the Coalition HMRC seem to have moved from collecting the right amount of tax at the right time (which was their slogan under the previous government) to collecting as much money as possible in the shortest possible time with little regard to what is due and to how much of what they do collect is tax and how much is penalties. Personally I am worried stiff (as a citizen of what I had believed to be a parliamentary democracy) that much of what HMRC extract from frightened taxpayers under the label of penalties is little more than extortion money because they constantly claim penalties in circumstances where legally none is due.

Wouldn’t it be good if Father Christmas were to give David Gauke an understanding of the common people, many of whom do not even know where Oxford is let alone have the intellectual ability to study there? He might then be able to tell HMRC that people less educated than their mandarins may fail through ignorance as much as they may, indeed, be crooks.

Sadly, though, I no longer believe in Father Christmas!



ROBERT MAAS