"WRITE YOUR OWN TAX LOOPHOLES"

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“WRITE YOUR OWN TAX LOOPHOLES”

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!

ROBERT MAAS