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!



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11:47 pm  

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