Monday, May 19, 2014


BLOG 149


I have received an e-mail from edftax, who provide tax strategies (I think these are what most people call tax avoidance schemes).  They are urging people to lobby MPs to protest about the Finance Bill proposals on tackling marketed tax avoidance schemes, and in particular the proposals that HMRC should be able to require those who seek to avoid tax to put their money on the table before they can pursue an appeal, even if they entered into their tax scheme before the proposals were announced.

Edftax have surveyed their clients and have discovered that, if they have to pay the tax that they have sought to avoid (as is likely at some stage even apart from the Finance Bill proposals as HMRC are winning most tax avoidance appeals),

93.4% of their clients cannot pay the tax

99.6% believe that having to pay the tax on their past income is likely to affect investment, expansion and development plans in place for their business

68.3% will have to consider making staff redundant in order to pay their tax, which could lead to 8,000 redundancies.

82.1% say that having to pay the tax on their past income or capital gains would affect their ability to pay current tax and duties due to HMRC.

82.8% say that paying their past tax will mean delaying payments to creditors generally.

66.1% believe that having to pay the tax on their past income will force their business into insolvency.

I find these statistics astounding.  Surely a business that employs staff and makes investment and plans to expand and develop, goes into a “tax strategy” in the knowledge that it may not work.  I tell my clients, in the context not of tax avoidance but of simple planning, that nothing is certain in tax.  I cannot predict what HMRC will or will not challenge; all that I can do is to recommend a strategy that I believe will not be attacked and, if it is, the client is likely to win.  I would be astounded if my clients ignored the possibility of attack to such an extent that, if at the end of the day we were to lose, it would push their business into insolvency.  Yet two-thirds of edftax’s clients seem to have done just that.  Indeed, virtually all of their clients seem to have recklessly spent their tax money, with indifference as to whether or not their scheme worked.  I find it hard to comprehend how so many people can act so irresponsibly.

As a taxpayer, I hope that HMRC will keep a very close eye on the 4 out of 5 of edftax’s clients who believe that having to pay the tax on their past income will affect their ability to pay current tax.  HMRC surely ought to feed the edftax client list into their risk-assessment processes and ensure that such people pay their future tax liabilities promptly.

edftax are asking people to lobby their MPs to oppose the Finance Bill Clauses.  They are particularly anxious to lobby MPs on the Finance Bill Committee which is considering the proposed legislation.  The Committee Stage Hansard is pretty dull reading, so I look forward to those clauses being reached.  It will be fascinating to see which MPs are willing to support those who seek to avoid tax and the strength of the arguments that they deploy.

In Blog 136, I highlighted the Tax Avoidance Liberation Front (Westminster Branch), the Westminster 18, the 18 MPs who were petitioning the Chancellor a year ago to prevent HMRC pursuing the collection of tax from those who had entered into failed tax avoidance schemes and, like most of edftax’s clients now, had spent the money without providing for the tax.  The Westminster 18 felt that it was unreasonable for HMRC to take the same enforcement action against unsuccessful tax avoiders who had spent the tax money as they take against other people who had, for example, invested their tax money in their businesses, donated it to charity or otherwise spent their income without providing for tax.  Luckily for edftax, one of the Westminster 18, Teresa Pierce, the Labour MP for Erith and Thamesmead, is a member of this year’s Finance Bill Committee.  I accordingly suspect that they can count on her to strongly promote their case.

MPs are, presumably, referred to as honourable members because they are expected to be honourable, not hypocritical.  Teresa can hardly say that she believes that some tax avoiders who have recklessly spent their tax money should be let off their tax debts but does not believe that other tax avoiders who have done the same thing should be treated so leniently.  That would be a ridiculous position to adopt.  It would also be clearly unfair, which goes against the Labour party’s (or at least Ed Milliband’s) core values; “We cannot shrug our shoulders at injustice”.  Accordingly I cannot wait for the Committee to reach clauses 192 – 222 of the Bill.  It will be fascinating to see how Teresa presents her plea for sympathy for the tax avoider.


Friday, May 16, 2014


BLOG 148


The consultation paper on George Osborne’s plan to let HMRC raid your bank account to collect money that you owe them (or that they think you owe them) has now been published.  It is open for consultation until 29 July.  Co-incidentally last Saturday’s Times told me that HMRC have dismissed MPs warning that “mistakes could mean innocent people’s bank accounts might be plundered”, saying, “We’re not going to be dipping in and out of anyone’s account.  This is only about hard-core defaulters who have ignored a minimum of four requests for payment”.

Unfortunately it is not clear either how HMRC can ensure that a person is not identified as a “hard-core defaulter” by mistake or what they mean by a hard-core defaulter.  The consultation document explains that 10% of taxpayers in self-assessment “file late or do not file at all, which can create a debt owed to HMRC”.  That is not quite right.  Not filing does not create a debt; non-filing entitles HMRC to make a determination (i.e. to make a wild guess at what you owe) and that determination creates a debt, the amount of which can be altered only by filing a return.  So is a person who, for whatever reason, does not file a tax return a hard-core defaulter?  Commonsense would say, “Of course not”.  However that does seem to be how the government interpret the term.

You are probably thinking that I am being unfair.  HMRC say that they are going to send such a person at least four requests for payment.  It appears though that the “at least four requests” included “letters reminding them that they are due to file a tax return and pay”.  Many people get such a reminder in September and a further one in December.  That’s two of the four requests.  After the end of January, a taxpayer gets a penalty notice (request 3) and he gets a warning before HMRC make their determinations (request 4).  Accordingly all four lives will have been lost before the debt has even been quantified.

Of course HMRC say that in most cases a taxpayer will have received a minimum of nine reminders.  In their Case Study he seems to have received a lot more than 9.  So if HMRC want this power as a last resort, why should the law specify four reminders?  In HMRC’s Case Study 1, they seem to envisage around 14 reminders. Many of us would be a lot more comfortable if it specified 14.   With only 4 reminders (all of which can be reminders not that tax is owing, but that a tax return needs to be filed) mistakes are undoubtedly going to occur. 

I suspect that HMRC’s view is that safeguards are proposed, so that mistakes can be rectified before any money is taken.  Let’s look at another Case Study.
1.      Jane is widowed in March 2005.  She had been married for 50 years and her husband had always handled all of the family finances.

2.      In April 2005, Jane receives a notice to file a tax return.  So does her deceased husband.  Jane writes to HMRC telling them that her husband had died and she has no income.

3.      In September 2005 Jane (and her deceased husband) receive a reminder that a return is due.  Jane assumes that this computer-generated letter has been issued by mistake and ignores it.

4.      In January 2006, Jane receives a further letter reminding her that a tax return is due.  She does not know what to do as her late husband always completed her tax return.

5.      In March 2006, Jane receives a penalty notice.  She does not understand it but as it is for only £100, she assumes that it is correct and pays it.

6.      Jane’s daughter Jenny, who lives in Australia, does not want Jane to be on her own on the anniversary of her father’s death so she persuades Jane to come to Australia for a few weeks.

7.      On the morning Jane is due to fly to Australia, she receives a determination for £50,000.  She does not know what to do.  She phones HMRC in a panic.  Like many 70-year olds she is not too comfortable with phoning people, particularly as she is going a bit deaf.  She half hears a lady reciting a menu of different things, most of which seem irrelevant to her and which in any event she hears indistinctly.  Eventually she pushes a number and receives a message that she is being held in a queue, she is the 25th person in the queue and she might find it easier to call back later.  Jane does not want to miss her plane.  She decides she will sort out the problem when she gets back from Australia in three weeks time.

8.      When Jane returns home, she finds that HMRC have taken the £50,000 from her bank account.
Of course HMRC will say that cannot happen as Jane is not a “hard-core defaulter”; she is simply a confused and frightened pensioner who is having to learn how to handle her own finances, having been insulated from that for the last 50 years.  But legislation that enables HMRC to take Jane’s £50,000 is surely unfair legislation; it is irrelevant whether in practice HMRC are not going to use the legislation on Jane.  A learned judge said many years ago that a person should be taxed by law, not untaxed by concession.  It is surely equally right that if a person’s human rights are to be infringed, they should be infringed by law, not protected by HMRC’s discretion. 

In any event, the consultation document does not say that the legislation is aimed only at hard-core defaulters.  It makes clear that it is also aimed at “those who are in a position to pay but choose not to, or delay payment for as long as they can” and “those who deliberately avoid engaging with HMRC”.  HMRC undoubtedly regard Jane as falling into the second of those categories.  The first will of course include the small businessman desperately trying to keep his business afloat and paying bits fairly to all of its creditors (including HMRC) whenever it gets some money in, as it needs to get over its cash flow problems before it can thrive.  The good news is that HMRC do not want to force viable businesses into insolvency.  The bad news is that whether or not a business is viable is down to the judgement of an HMRC Officer whose job is to collect money due to HMRC and who has probably had no experience of having to juggle limited funds to try to keep a large number of creditors exercising patience.  If the HMRC Officer judges that the business is not viable, HMRC will grab whatever cash is there.  Curiously the last Labour government thought it unfair that debts due to HMRC should be given preference over debts due to other creditors and abolished Crown preference.  The current government seem to be restoring it.  I leave it to you to decide which political party pursues more “business-friendly” policies.

There are a lot of other worrying things in the proposals.  HMRC will “request” from your bank information about all of your accounts, including current and savings accounts and ISA’s, along with current balances and details of transactions within the previous 12 months.  Goodbye bank secrecy!  HMRC are to be given power to require your bank to hand over to them your bank statements for the last 12 months even though these do not include taxable income and have no relevance to your tax affairs.  Currently the Human Rights Act 1998 gives you the right to respect for your private and family life, your home and your correspondence except where interference with that right is “necessary in a democratic society in the interest of … [inter alia] the economic well being of the country”.  In order to collect taxes, is it “necessary” for HMRC to have access to Jane’s bank statements?  Surely not.  Even HMRC do not claim that.  They say they need the information to ensure that they leave Jane with enough to live on!  How generous; but surely nothing to do with “the economic well-being of the country!”  So goodbye your fundamental human right to privacy.  Big Brother has finally arrived (albeit a little later than George Orwell’s guess that it would take only until 1984 for the State to take control over citizen’s private lives).

Incidentally, that word “request” seems to have acquired a new meaning.  The proposal is that your bank “should be required to provide this information within five working days”.  So in HMRC speech, “request” no longer has the connotation that a person is free to ignore a request; it now has the same meaning as “require” or “demand”.

There are two safeguards to protect Jane.  The first is that she can “provide evidence to HMRC’s satisfaction that DRD action will cause undue hardship or that the debt is no longer due”.  The second is that she will “continue to have the right to judicial appeal on the use of DRD”.  It is not clear what this means.  It appears to mean that she can apply to the High Court for judicial review of HMRC’s actions.  But this is an expensive process that most taxpayers cannot afford to pursue, and HMRC are sitting on your money so you may well not have the resources to pay the legal costs and live for the many months that are likely to ensue before your appeal is heard.

Every year I go to an accounting show in Chicago.  That is my annual update on US tax.  A few years ago, one of the speakers was explaining how to get a time to pay arrangement with the IRS.  You call them.  You will speak to someone charming whose sole objective is to get you to tell him the name of your employer (so they can garnish your salary) or the name of your bank (so they can garnish your bank account).  You must not reveal this information.  If you achieve that, someone else from the IRS will call you back and agree a payment plan.

HMRC do not need such a procedure.  If you receive bank interest they already know your bank account details through the returns of interest that the bank has to make each year.  If you do not have an interest bearing account but have given your bank details on your tax return to speed up a repayment due, or you are in business and pay PAYE or VAT, both of which are required to be paid electronically, they know your details too.

What HMRC propose to do is to gather together all of the accounts that they know about, ask your bank, building society or ISA provider if they know of any others; look at the bank statements, decide what they think you need to live on, and grab the rest (up to the amount of the debt).

If you are so old-fashioned that you want privacy and do not want HMRC to be able to pry into your private life, the only safe thing is to open a current account with a bank overseas and put your private finances though that account.  HMRC cannot obtain access to bank accounts in another jurisdiction.  Safe in this context is not an absolute term.  Although HMRC cannot access your overseas account, the world is a shrinking place.  They may be able to ask the tax authorities in the bank’s country to get the bank statements for them – although it is unlikely that the other country will let them grab funds from your overseas account.  But make sure that your overseas account is not interest-bearing as there can be massive penalties if you forget to declare the interest on an overseas account.


Wednesday, May 07, 2014


BLOG 147

George Osborne  announced on 14 April that the government intend to consult on plans to introduce a new strict liability criminal offence for individuals who hold money offshore.  HMRC will only have to demonstrate that income is taxable and undeclared to secure a successful criminal prosecution.

For example –
      Rose comes from a poor family in Jamaica.  She has been recruited by the NHS to work in a London hospital.  She works very hard and leads a frugal life because she wants to send as much as she can back to Jamaica so she can put together the deposit on a house for her mother to live in.  It has taken a long time to build up sufficient funds because the interest paid on the bank deposit in Jamaica is very low.  Rose is paid by the NHS under PAYE and has never been sent a tax return in the UK.

George Osborne wants to send Rose to jail.  He thinks she should know that her Jamaican bank interest is taxable here and that it is her responsibility to tell HMRC that she is receiving Jamaican bank interest even though she has had no communications from HMRC other than her PAYE Notice of Coding.  As the law stands, she cannot be sent to jail because she has no intention of avoiding tax; she is simply unaware, like the vast majority of the people who live in this country, of her tax obligations.  George Osborne does not believe in reasonable excuses and thinks Rose should go to jail.

2.     Raj is an Indian computer programmer.  He lives and works in India.  He is sent by his employer to work in the UK for six months.  While here, he sells some Indian shares and pays tax in India on the capital gain.

George Osborne wants to send Raj to jail.  Because he is here for six months, he is resident here.  As a resident, he is liable to tax here on his Indian capital gains.  There is probably actually no tax to pay as the UK will give credit for the Indian tax paid.  Nevertheless, Raj should have declared the capital gain so in George Osborne’s view he should go to jail.

3.     Mary has always lived in the UK, but two years ago took a job in France.  Her mother became seriously ill and Mary came back to the UK to look after her.  In order to nurse her mother, Mary stayed in her mother’s house.  Mary’s French employer is very understanding and continues to pay her salary into her French bank account on the understanding that Mary will work at least four hours each day remotely over the Internet.  Sadly, Mary’s mother died and after the funeral Mary returned to France.  She was in England for 100 days and did not even consider that she might be taxable here.

George Osborne wants to send Mary to jail.  Because she was here for 100 days, had been UK resident here within the previous three years, lived in her mother’s house and did some work in the UK, Mary became resident here (although it is improbable that she knew it).  As a resident, she is taxable on her French salary in the UK even though it has been taxed in France and the French tax is likely to eliminate any UK tax liability.

Of course, George Osborne undoubtedly did not have Rose, Raj and Mary in mind when he devised his new criminal offence.  They are what the Americans call “collateral damage”.  George wants to send people to jail who evade tax by hiding their offshore income from HMRC.  However, he thinks it unreasonable that HMRC should have to show that such people intended to evade tax in the same way as the State has to prove that a person is guilty of any crime before he can be sent to jail.  He wants HMRC to be able to send Rose, Raj and Mary to jail simply because it is too difficult for HMRC to distinguish between criminals and those who are simply ignorant or naïve. 

Curiously, the Human Rights Act provides that, “Everyone charged with a criminal offence shall be presumed innocent until proved guilty according to law”. Fortunately for George, the Human Rights Act also provides that the UK Courts must ignore human rights if it is not possible to interpret the legislation in such a way as to give effect to them; but then the Human Rights Act is based on the European Convention on Human Rights and, just because those nasty foreigners believe that innocent people should not be jailed at the whim of the State, doesn’t mean that the UK should adopt the same attitude.  After all, George Osborne is constantly telling us that he is committed to a fair tax system, so it must be fair that Rose, Raj and Mary should be sent to jail to punish them for their ignorance of the details of our highly complex tax system.