Wednesday, May 29, 2013


BLOG 137

Don’t do as I do, do as I say!

Someone has sent me a news release telling me that “David Cameron has written an open letter to leaders of the Crown Dependencies and British Overseas Territories urging them to work in partnership with the UK on stringent measures to establish beneficial ownership of companies”.  I have not read it.  I did Google “Open Letter from David Cameron” but after ploughing through three pages of open letters “to” him I gave up.  I suspect that No 10 is not computer literate enough to know how to get his letters onto the first page of Google.  I did however see that the Isle of Man’s Chief Minister has welcomed the letter, although, as a (presumed) recipient of it, he seems to think that it is urging the IOM’s competitors to get their houses in order and sign up to international treaties on tax.  In fact all of such territories have entered into a number of Tax Information Exchange Agreements, although not enough – probably because these take a time to negotiate.

But I digress.  I doubt that I am alone in deploring hypocracy.  There is something in the bible about removing the mote (not a common word nowadays, but I believe it means a great big plank) from your own eye before worrying about splinters in other people’s.  So surely if Mr Cameron thinks that tiny countries ought to have in place stringent measures to establish beneficial ownership of companies, the obvious thing for them to do is to mimic the UK’s own stringent measures.

Well No!  We don’t have any!  Indeed, not only don’t we have any but the Companies Act 2006, s 126 actually makes it illegal for a UK company to disclose (or even know) its beneficial ownership; “No notice of any trust, expressed or implied or constructive, shall be entered on the register of members … or be receivable by the Registrar”.  This means that if the company knows that shares are held by a nominee, it must hide that fact.  If shares are held by trustees, it must pretend that they are also the beneficial owners.

We also have no public register of trusts.  So if shares are held by trustees not only must the fact that they are trustees be hidden, but no one knows whether the trust is the beneficial owner or it is a bare trust, i.e. the trustee is a nominee for a specific person.

Is this all somehow wicked?  Of course not.  We all quite like a bit of privacy.  Indeed it is a basic human right.  And there are often good commercial reasons for the beneficial owner of an asset wanting to keep his identity secret.  For example, he might be afraid that if he buys something in his own name, the seller will demand a premium price because he knows that the purchaser has a unique reason for wanting the asset.

I recently bought some shares.  I bought them online.  It was quick, simple and cheap.  But the reason it was cheap is because the stockbroker insists on the shares being registered in its name not mine, which cuts out a lot of work as I imagine that their computer deals direct with the company Registrar’s computer, so very little paperwork needs to be created.  But the result is that the company does not know that I am a shareholder, and I am disenfranchised.  I doubt the company cares who owns my few shares and, as I have no desire to attend AGMs and the company’s accounts will be on its website, I am happy to be unknown to it.  A number of foreign companies are listed or quoted on the London Stock Exchange.  I would not be surprised if some are based in Crown Dependencies.  So is David Cameron going to ban my UK stockbroker from registering my shares in such a company in its own name?  If not, how can the overseas country introduce stringent measures to establish the company’s beneficial ownership?  De-listing its shares from London in order to do this would help no-one.

Actually if you want to hide your beneficial ownership you are better off to set up your company in one of the tax havens of Delaware, Texas or Nevada.  The Crown Dependencies have all entered into Information Exchange Agreements with the UK under which HMRC can ask them to obtain whatever information they can about shares that I hold in companies incorporated there.  Delaware, Nevada and Texas have not done so.  Their secrecy is much stronger.  But perhaps not for much longer. And they seem to welcome criminals such as tax evaders.  The Texas Bankers Association is currently suing the US tax authority, the IRS, for billions of dollars.  Why?  Because it has entered into agreements with HMRC and with the tax authorities of a number of other countries to exchange information about bank interest paid.  The Texan bankers say that this will deter English people from keeping Texan bank accounts.  Why should it do so?  I do not have a bank account in Texas but I do have one in Chicago, Illinois.  I have no problem with my bank telling HMRC about it if they need to.  If I receive interest, I am going to tell HMRC, so why should I be concerned if the bank tells them too?  Of course if I were a fraudster and intended to hide my interest from HMRC I would be concerned, and can see that the bank might then be concerned that I would move my money if I thought that keeping it in Texas would expose my fraud.  But if that is the concern of the Texan bankers, HMRC should be worried about Texas, not about Bermuda!

Perhaps they are.  David Cameron undoubtedly learnt from his time at Eton not to pick fights with the bigger boys.  It is only the small ones that you should try to bully.  So it would be crazy to pick a fight with the USA, where the real problem is.  It is far easier to go for tiny countries like the Crown Dependencies even though, if the problem is to expose tax evasion, HMRC have already negotiated with such countries the powers that they need.


Friday, May 10, 2013

BLOG 136


A lot of odd things pass over my desk (or to be more precise my computer screen), but one of the oddest is a letter from a cross-party group of 18 MPs, (9 Conservative, 4 Labour, 2 Lib-dems, 2 Democratic Unionists and 1 Green, “the Westminster 18”) to George Osborne urging him to “consider using this year’s Budget to amend the retrospective nature of FA 2008, s 58, so that the changes it introduced would take effect only from the moment they were announced”.  They were announced on 12 March 2008 (in the Budget Notes for that year) but deemed by parliament to have always had effect.

Why is this odd?  Well firstly 8 of the Westminster 18 were MPs in 2008, including 2 of the Labour members and both of the Lib Dems.  A Lib Dems amendment at the Committee Stage of the Finance Bill to remove the retrospective nature of the provision was supported by the Conservatives, fully debated and forced to a division.  Accordingly this is not an issue that slipped through; it was fully debated at the time.  Admittedly the only member of the Westminster 18 who was on the Finance Bill Committee was absent from the debate, but that is not Mr Osborne’s fault.  The Westminster 18 are effectively asking George Osborne to cock a snook at the 2008 parliament.

Secondly, section 58 is an anti-avoidance provision that blocked a very blatant tax avoidance scheme.  This was described in the Finance Bill Explanatory Notes, which are produced by the Treasury to help MPs to understand what they are legislating:  “This scheme involves the establishment of offshore trusts (of which the UK individuals are both settlors and beneficiaries) and partnerships (of which the foreign trustees of those trusts are partners).  The partnership acquires the rights to receive the UK individual’s income.  However the terms of the trust are such that, as beneficiaries of the trust, the UK individuals retain beneficial entitlement to the income – with the trustees obliged to remit the income to the UK individuals as it arises.  The users of the scheme claim that, under the terms of the relevant Double Taxation Treaty, the UK is not entitled to tax the partnership income …  As that income is precisely the same income as that received by the UK individuals as beneficiaries of the trust, they argue that the UK is not entitled to tax the UK individuals on it.  Legislation was introduced in F(No 2)A 1987, which provided that a Double Tax Treaty did not affect UK residents’ liability to UK tax on their share of income or gains from a foreign partnership.  The new avoidance scheme purports to get round that legislation”.

In the current climate I find it odd that four Labour MPs want to help past tax avoiders, particularly as this is clearly a very blatant scheme.

Thirdly, the Westminster 18 seem to want to protect a weird minority of people.  Even if the Chancellor were to accept their plea (which he clearly won’t) it would take out of tax (for years up to 2007/08 only) those who entered into this tax avoidance scheme and who have not yet agreed their tax assessments for that year.  It would not help those who entered into the scheme and have agreed assessments, as those assessments cannot now be re-opened.  Nor would it take out those who have conceded defeat and paid their tax. That surely leaves a very tiny minority of the users of the scheme.  I imagine that HMRC will have written to those with un-agreed tax affairs in around July 2008 asking them to agree the assessment.  It is almost inconceivable that five years later HMRC have not taken such people to the tax appeals Tribunal.  Accordingly the people who the Westminster 18 seem to want to help are likely to be those who HMRC did not know about, and after FA 2008, was passed chose not to amend their tax returns to reflect section 58 or even to tell HMRC that their earlier returns were wrong.  There is a good argument that a person who knows that a change in the law has rendered an earlier tax return incorrect and does not tell HMRC about it, is committing tax fraud.  So it seems to be evaders, not avoiders, that the Westminster 18 wish to benefit.

To be fair, the Westminster 18 say that they do not wish to endorse tax avoidance but believe that retrospective changes to the law are against natural justice.  I’m against retrospective legislation too, but mainly because I think that tax needs certainty.  Deciding to use a highly artificial scheme to avoid paying tax on one’s earnings, so that the burden of supporting society falls wholly on others, seems to me to be far more against natural justice (whatever that may be) than clarifying legislation with effect from the date that it was introduced.  There is a legal maxim that the courts won’t help those that don’t come to it with clean hands.  Shouldn’t that apply in the courts of natural justice too?

The Westminster 18 also say that tax avoiders entered into their arrangements with a “legitimate expectation” that they would be subjected to the law as it stood at the time.  But it doesn’t need a very belated change in law to uphold a legitimate expectation.  The courts will already do that under judicial review – but only if one acts promptly, not leave it for five years.  And does someone really have a legitimate expectation that the courts won’t interpret “a member of a firm” as including any person entitled to a share of the income of the firm (which is the clarification that section 58 inserted)?  Furthermore, if the income on which tax was sought to be avoided is employment income, there can be no legitimate expectation in relation to periods after 2 December 2004 when the Minister said that in future the government would, if necessary, close down such tax avoidance arrangements with effect from that date.

Actually, repealing section 58(4) would not let the would be tax avoiders off the hook, it would simply force HMRC to litigate the issue, probably costing the general body of taxpayers thousands of pounds in legal fees.  In the current climate I would be amazed if HMRC did not win before the Supreme Court if the Westminster 18 were to achieve their apparent wish to force HMRC to spend a large sum of taxpayers’ money in this way.

Astonishingly, the Westminster 18’s justification is apparently that “Parliament knew about the loopholes in question as far back as 1987 and allowed them to continue”.  Sadly, they do not appear to have sent Mr Osborne the evidence for such an amazing claim – amazing because it is most unusual for parliament to be aware of, let alone approve, loopholes; it normally simply votes on draft legislation that the government (or an individual MP) puts before it.  I can quite believe that HMRC knew of the scheme for a number of years before asking the government to block it.  As a taxpayer I do not want them to challenge every scheme through the courts; it is sensible, as they normally do, to wait to see how much tax is being lost before deciding whether to incur the costs of litigation. 1987 is when the anti-avoidance legislation was introduced.  Accordingly the suggestion seems to be that Nigel Lawson, the then Chancellor, deliberately included loopholes in an anti-avoidance provision (which was introduced following the High Court decision in Padmore v HMRC (62 TC 352)), so as to render it largely ineffective.  That is so fatuous that I find it hard to accept that any of the Westminster 18 really believe it!  But I accept that the possession of even a minimal amount of commonsense and scepticism is not a qualification to standing as an MP.

The Westminster 18 say that they were prompted to write to Mr Osborne after attending a presentation by the No To Retro Tax Campaign Group.  I have never heard of such a group but the Westminster 18 helpfully gave the Chancellor a link to their website.  I learn from this that it has been “created by a group of victims of Section 58” – including IT engineers, property developers and healthcare workers.  I can understand healthcare workers being so tied up with caring for patients as not to realise that the amendment they have asked for will not help them but whilst I can understand doctors being financially naïve (I suspect that healthcare workers are more likely to mean hospital consultants than nurses, as tax avoidance schemes tend not to be aimed at the lower paid), I am worried if naivety applies to MPs too.

What the Westminster 18 – and the tax avoider “victims” - really seem to be looking for is not a change in the law but rather for the Chancellor to tell HMRC not to enforce the tax and interest (and possibly penalties) that are due from those who have been thwarted in their attempts to avoid tax.  If so, why?  People who enter into artificial tax avoidance schemes are invariably warned by the scheme promoter that there is a risk that it will not work (and if these “victims” weren’t they should surely sue the person who introduced the scheme to them).  It is sad that some appear to have ignored that warning and not put the tax money aside until it was clear that HMRC would not attack the scheme.  It is equally sad that some such people are now facing bankruptcy and the loss of their homes.  Nevertheless there is an old saying about playing with fire and not being entitled to complain about burnt fingers.  Sadness and sympathy are not the same thing. What is surely against natural justice would be to let some of those who unsuccessfully sought to avoid tax off of their obligations to society when society has already enforced those obligations against their more thrifty fellow scheme users and regularly enforces tax obligations against those who do not seek to avoid them but are simply ignorant of their obligations or make mistakes in calculating them.

If the Westminster 18 are as naïve as they appear to be, they may not realise that they do not actually need to convince George Osborne.  Parliamentary procedures allow any MP to seek to add a new clause to the Finance Bill which is currently going through parliament, and a clause with the backing of 18 MPs from five parties stands a good chance of being selected for debate.  The 18 then merely need to convince their fellow MPs as, if enough vote for it, the government have to accept it.  There is of course a risk both that the majority of MPs will not see those who seek to avoid tax and fail as victims, and that the Westminster 18 will be portrayed as idiots by the press if they do so. But they cannot surely look more idiotic than they seem to me to do already!


Wednesday, May 08, 2013


BLOG 135


That’s not my title.  It comes from “Metro”.  It heads an article that starts, “Accountants are helping the government write tax laws and then using their inside knowledge to help the rich dodge them, MPs have found”.  The Times, a little less intemperately, reported that “the Public Accounts Committee (PAC) said it was alarmed that the four biggest accounting firms were advising the Treasury on formulating legislation while helping their clients to find loopholes to reduce their liabilities”.

Most tax practitioners do not pay much attention to what the PAC says on tax.  Most of what they say seems superficial and largely uninformed.  The PAC seem to start from the premises that tax avoidance is wicked and then strive to bring anything that they don’t like into the ambit of tax avoidance.

I also have little sympathy for the “big four”.  Most, if not all, have marketed artificial (and very expensive) tax avoidance schemes and, although they claim that is all in the past, they seem to me to be still very much involved in selling SDLT avoidance devices at least.  But “write your own tax loopholes” is so misinformed that I cannot let it pass.

The PAC actually came up with six recommendations of which their conflict of interest claim is just one of them, but all of which raise interesting issues.

The UK tax system is too complex and a more radical approach to simplification is needed

No one would disagree that it is too complex.  However it seems unlikely that simplification would provide an answer.  Where does the complexity come from?  Firstly, the inclusion of reliefs to promote fairness.  Does the PAC want to scrap fairness?  They are always quoting fairness as a reason why people should voluntarily abstain from tax avoidance.  Perhaps the two fairnesses are different.  Should fairness that parliament writes into the legislation be ditched, but the PAC’s concept of fairness, which seems to be to proscribe anything that results in someone paying less than the headline rate irrespective of the fact that the PAC’s members has never persuaded their fellow MPs to enact such a provision, override parliament?

Secondly, anti-avoidance provisions.  I doubt that the PAC really wants to scrap these.  But they are undoubtedly the main source of complexity in the legislation.  Thirdly, the use of the tax system by parliament to achieve non-tax collection objectives.  Most tax practitioners would like to see these scrapped, but as they are complexities deliberately put into the tax system by parliament, that seems unlikely to happen.

It might also be mentioned that the last attempt at making tax law easier to understand, a more achievable objective than simplification, was scrapped in mid-stream by parliament before it had reached CGT, VAT, IHT, or stamp duties.  It was scrapped on the grounds of cost pre the recession, so the chances of parliament making funds available for anyone to think about simplification at the current time are minimal.

Actually academics who have looked at simplification have concluded that the most efficient tax is not a tax on earnings and profits but a tax on sales or expenditure, so the most sensible simplification would be to double VAT and scrap everything else.  I somehow doubt that would find favour with the PAC though.

There is no clarity over where firms draw the line between acceptable tax planning and aggressive tax avoidance

The PAC recommend a code of conduct for tax advisors setting out what HMRC consider acceptable.  Most of us were brought up to believe in the rule of law.  The (unwritten) UK constitution is built on separation of power; parliament makes the laws, the government administers them and the courts ensure that the administration reflects the laws.  I suspect that I am not the only one who would be horrified at scrapping Magna Carta, but that is what the PAC recommendation entails; that the laws should not matter; people should simply comply with what HMRC wants them to do.

Interestingly the current government, unlike the PAC, itself believes that the line can be clearly drawn.  It is introducing a GAAR which aims to combat aggressive tax avoidance but to leave acceptable tax planning unaffected.

Tax laws are out of date and need revising

Not UK laws actually, but international tax rules.  Few would disagree but, by their nature, international tax rules require the agreement of a large number of countries.  Even when changes are agreed, they cannot be altered without renegotiating thousands of individual double tax agreements.  Actually the OECD has already started reviewing the rules (although the PAC overlooked mentioning this) but it will take 10-20 years for any change to come about.  And it is not clear what the PAC want.  The quid pro quo for Amazon not paying UK tax on sales in the UK is that John Lewis does not pay US tax on Internet sales to Americans, which potentially means that, as Internet sales bloom, the current system might work in favour of the UK, so the PAC’s call for reform seems highly magnanimous as far as UK Plc is concerned.

Greater transparency over companies’ tax affairs would increase the pressure on multinationals to pay a fair share of tax in the countries in which they operate

It is not clear why.  Nor is it obvious what is a fair share of tax or even what is meant when the PAC (and the various charities who have chosen to divert resources from relieving poverty overseas to compiling reports on tax) talk about transparency.  Suppose a company buys raw materials, some in Brazil, some in Tanzania, etc, etc, transports them to China where they are processed, transports some of the processed materials to Taiwan and some to Italy where they are turned into components, imports the components into the UK where they are assembled using patents devised partly in the UK, partly in the US and partly in India but owned in Hong Kong so that they can be exploited together, and sells the finished products worldwide, partly through an Internet platform in Luxembourg and partly through direct sales teams in London and Chicago.  How should the tax be fairly shared?  The mix of the inputs is likely to be different for each of the hundreds or thousands of different products that the company sells.  And is it really sensible for the company to have to engage a raft of extra accountants to work out the apportionment and reflect it in the accounts to make its tax charge “transparent”.  And to whom is that information going to be useful?  It will clearly show that more tax than is “fair” has been paid in some countries (which in most cases will include the UK) and that paid in other countries is “unfairly low”.  So what?  The company cannot say to HMRC, “The UK tax rules operate unfairly against Tanzania and Brazil where we sourced some of our materials, so we would like to pay some of our tax to them instead of to you”, and expect HMRC to agree.

HMRC is not able to defend the public interest effectively when its resources are more limited than those enjoyed by the big four firms

The PAC say that between them the big four have 9,000 tax staff.  HMRC have 75,000 staff.  Accordingly it may be that the big four use their staff more efficiently or recruit more high-level staff and less cheap junior staff than HMRC.

It seems odd to me to describe 75,000 as more limited than 9,000.  That is not to say that HMRC is not under-resourced.  Anyone who has dealt with HMRC recently knows that it is.  However it is far more likely that the under-resourcing has resulted in poor service than in lack of technical expertise.  It is also fairly obvious that it takes far less staff to ask questions than to search out the information needed to answer them.

It is inappropriate for individuals from firms to advise on tax law and then devise ways to avoid the tax

As this is what prompted the Metro headline, I have left it to last.  I would semi-agree with the above heading (which is taken from the PAC report) if that is what happens.  Semi-agree, because advice is just that.  An advisor does not write the law.  He merely suggests what the law should be.  In theory it is parliament that decides what the law should be – and that is what used to happen until the 1960s – but the reality is that nowadays parliament can no longer be bothered to do so.  Vast amounts of tax law are enacted with little debate, hardly any challenge to the drafting and, I suspect, MPs having little idea of what the detailed provisions that they are passing actually mean.  In practice of course, the parliamentary draftsman decides on the wording and a Minister, in consultation with senior Treasury officials, decide the broad thrust of what they want the law to say.  Secondees from the big four are unlikely to be in the meeting with the Minister and certainly have no ability to instruct the draftsman on what loopholes to incorporate.

But, more to the point, even with the input of the big four secondees, much modern tax law is over-complex and unfathomable in parts.  Furthermore, a lot of it nowadays is broadly drawn anti-avoidance legislation, which is effective only because it creates such uncertainty that no one would attempt a transaction that might be caught.  Accordingly if big firm secondees are expected to write tax loopholes they are making an extra-ordinarily bad job of it!

Commonsense also says that the big four do not second to the Treasury (or HMRC) for free their senior partners, whose time they can sell at hundreds of pounds an hour.  They second more junior staff whose career development should benefit from having a chance to approach problems from the State’s point of view and from having seen the pressures within the Treasury and HMRC.  HMRC beg smaller firms to second staff to them as well as the big four.  Such firms do not have the resources to do so, but it is clear that HMRC see a huge benefit in having experience from “the other side” available to them to inform their staff.  In the US, it is common for staff to move from the IRS to private practice and back to the IRS, often several times.  That does not happen in the UK.  If secondment gives great benefits to both sides, it is hard to see why it should be banned because the PAC chose to draw erroneous conclusions from what happens.

Oh, and if what parliament churns out in the annual Finance Bill is largely unintelligible (which it is), I shudder to think what it would be like if there had been no input at all from people with experience of having to use tax legislation in order to advise taxpayers of its effect on proposed transactions!