Wednesday, October 22, 2014

BLOG 156


Do we any longer have any sense of responsibility for our own deliberate actions?  What sort of society are we living in when people think that they don’t?  There was an article in The Times recently entitled, “The taxman’s role in a pensions scandal”.  As I was not aware of any such scandal, I read on.  The more I read, the more astounded I became.

Apparently “UK investors have lost at least £500million in “pension liberation” scams that promised early access to their cash”.  I thought I knew what a scam is, namely something where a person is promised X which he believes is valuable, but instead receives something of no value.  But that is not what The Times describes.

Pensions are deferred salary.  A person is given tax relief for contributions to a pension scheme but in return for such relief cannot touch the funds until he reaches a minimum age and at that stage can take a quarter of his savings tax-free but pays tax on any excess.  That is so well known that I find it inconceivable that anyone could pay money into a pension scheme without being fully aware that he cannot touch the money until he reaches the minimum age.

Pension liberation is when someone enters into an artificial arrangement that is designed to give an individual the use of the funds in his pension scheme before he has reached the age at which the tax laws allow him access to those funds.  In common parlance it is tax avoidance.

I have no strong feelings about tax avoidance but The Times has repeatedly told me over the last few years that it is immoral and socially unacceptable and anyone who indulges in such activities ought to be publicly castigated.  Yet here it is giving its columnist, Mark Atherton, a two-page spread to exclaim how unfair HMRC is to seek to collect the tax and interest due from a person who attempts to avoid tax but whose tax avoidance scheme – like most such schemes – is found not to work.

How can this be?  Well apparently Mr Atherton thinks that HMRC encouraged people to enter into this tax avoidance scheme so it was wholly unreasonable to then turn round and seek to apply the law.  In Mr Atherton’s world, if the government gives a person tax relief on condition that they let the funds accumulate in their pension scheme until age 55, it is perfectly reasonable for the individual to renege on that bargain and enter into a tax avoidance scheme to give him access to the pension fund at age 50.

So how is it HMRC’s fault that individuals were trapped into using this tax avoidance scheme?  Perhaps I should explain how the scheme works.  The sub-article, “I owe £16,000 to HMRC.  How can I retire?” highlights the plight of an individual that I shall call Mr X.  Mr X was in a civil service pension scheme.  He was “persuaded” by the wicked scammer to transfer his pension from the civil service scheme into another registered pension scheme.  A total stranger then lent Mr X £27,000 using 50% of the funds in that stranger’s pension scheme and Mr X’s pension scheme would make a similar loan to another total stranger.  The scammer took a fee of a couple of thousand pounds for arranging the scheme.  Pausing there, taking a fee of £2,000 for arranging a £27,000 loan is a bit on the high side but hardly a scam.  So where is the scam?  Mr X certainly seems to have been ill advised to move from a civil service pension, which I imagine was a final salary scheme.  But it is not clear that he took advice.  I suspect that he wanted to get his hands on the money and like many would be tax avoiders, was not too concerned about the mechanics of achieving that objective.

It seems most improbable that he was sitting at home minding his own business and the scammer knocked on his door and “persuaded” him to avoid tax.  That is not how those things normally work.  Normally a person answers an advert telling him that the advertiser has a way to avoid the tax rules if that is what the individual wishes to do.  In other words, there is no persuading someone to avoid tax; the individual has already decided that is what he wants to do.  If there is any persuading, it is to adopt one particular tax avoidance scheme rather than another.

So how is it the fault of HMRC?  Well, the government requires HMRC to set up a register, i.e. create a list, of pension schemes that meet certain criteria.  A pension fund can be transferred without adverse tax consequences from one scheme on the register to another.  Apparently the civil service (or more likely, I suspect, the trustees of Mr X’s civil service pension scheme) did some research and found that the scheme to which Mr X wished his funds to be transferred was properly registered.  I am a bit puzzled that they had to do any research.  The register is a public document so all they needed to do was to look it up.

And that, in Mr Atherton’s view, is why it is all HMRC’s fault.  The pensions regulator and HMRC registered the schemes without doing any detailed checks.  That is actually what the law requires them to do; it does not require any checks other than to be satisfied that the qualifying conditions are met.  Prior to 2004, pension schemes had to be approved by HMRC, but the then government decided that this was not the best use of scarce taxpayer resources and that HMRC should merely draw up a register so that they could keep track of what pension schemes exist, ask the fund to make an annual return of transactions and tax any money that comes out of the fund in breach of the rules.  To seek to deter such breaches the tax charge is high – it can be up to 55% of the money unlawfully “liberated” from the pension scheme.

Mr X is not the only would-be tax avoider to have been caught out. The Times tells me that an Action Group has been set up “representing victims of the scam”.  I personally find it hard to call a would-be tax avoider a “victim” when his scheme to thwart the tax laws is shown to be unsuccessful, but that is apparently how Mr Atherton views those who try to avoid tax but fail.  The Action Group is headed by a Ms Brooks who told Mr Atherton, “The fact that the schemes were registered gave would-be investors the impression that they were approved by the government”.

I think that an extra-ordinary statement.  Why on earth should anyone think that putting someone’s name on a statutory list or register gives the impression that the government has “approved” everyone on the list?  My doctor is required by law to be on the Medical Register but if she makes a mistake and I become chronically ill as a result, I will sue her, not the government, because I do not think that by requiring the creation of the register the government is somehow approving my doctor’s medical advice to me.  If a limited company becomes insolvent owing me money, I do not believe that I can look to the government to pay me because by putting the name on the Companies Register the government were approving it and as such guaranteeing its continuing solvency.

Furthermore, what the Register listed was the pension scheme.  There is nothing in the article to suggest that it did not operate properly as a pension scheme.  The issue was not that it broke the pension scheme tax rules, but rather that lending money to a total stranger in return for a total stranger lending money to Mr X was held by the courts to be an unlawful distribution of the funds from the pension scheme, not the simple investment of the pension scheme’s funds.

Mr X believes himself to be a victim because he says, “I was told … that there would be no tax to pay on the money I received”.  Over the years I have seen a great many tax avoidance schemes but not one of them ever claimed to be risk-free.  The scheme promoter is indeed a scammer if he really told that to Mr X, but it would have been such an extraordinary thing to do that I find it wholly incredible.

I also find it hard to see how a person who deliberately seeks to take money out of a pension fund in breach of the law can legitimately be described as a “would-be investor”.  Taking money out is surely the antithesis of investing!

I obviously have a degree of sympathy for Mr X.  He is faced with an unexpected tax bill of around £15,000, plus a couple of thousand pounds of interest and does not have the resources to pay it.  Furthermore, he thought that his avoidance scheme worked and it took many years for the courts to hold otherwise.  He is not alone in that.  Many people who entered into tax avoidance schemes are now facing heavy tax bills under the new Accelerated Payment rules and are fearful that they do not have the resources to pay.  At least Mr X has the other half of his pension fund intact, so at the end of the day that might be available to pay the tax.

But Mr X sought to circumvent the rules.  He knew what the rules were.  He knew that what he was trying to do was against the rules.  I would feel a lot more sympathetic if he was prepared to accept responsibility for having sought out his tax avoidance scheme, rather than trying to blame HMRC.


Monday, October 06, 2014


BLOG 155

Marie moved to the UK from France in 2004.  At the time she took tax advice from HMRC and was told that she did not have to declare her French income provided she does not bring it into the UK.  Marie has accordingly never declared that income.  She did not know that the law changed in 2008 and that she now has to pay UK tax on such income unless she pays a fee of £30,000 p.a. to HMRC.  Do you think that Marie should go to jail?

Sarah is a nurse working for the NHS.  She lives frugally and manages to send £100 a week home to her mother in Jamaica.  Her mother puts these funds on bank deposit in Sarah’s name so that Sarah has some savings when she returns home.  Sarah has not given a thought to the possibility that the interest building up in Jamaica might be taxable in the UK.  Do you think that Sarah should go to jail?

Chrissie came to the UK from the USA in 2000.  Two years ago, her father in America put $200,000 into an interest-in-possession settlement for Chrissie’s benefit.  Chrissie is technically entitled to the income as it arises but her father has not told him that the settlement exists because he does not want Chrissie to spend the money recklessly.  Do you think that Chrissie should go to jail?

Denise moved from Switzerland to the UK in 2010.  She discussed her UK tax position with CBW Tax, who told her that they consider that she is domiciled in Switzerland and that she did not need to put her unremitted overseas income on her UK tax returns.  HMRC have challenged Denise’s domicile status.  She does not think that the UK tax on her overseas income justifies the costs of arguing with HMRC and has accepted their view.  Do you think that Denise should go to jail?

Fiona lives in Monaco.  She believes that she is resident in Monaco and is not a resident of the UK.  She has accordingly not completed a tax return here.  HMRC disagree.  They think that Fiona has misinterpreted our complex residence rules.  Eventually she has agreed that they are right.  Do you think that Fiona should go to jail?

Georgina is a beneficiary of a US trust fund.  She declares the income each year on her UK tax return.  In 2012/13 the trustee accidentally transposed one of the figures so she under-declared the income by £2,500.  Do you think that Georgina should go to jail?

Harriett is a partner in an overseas investment partnership.  She received a distribution in 2012/13 which the partnership told her was a capital gain.  She declared it as a capital gain on her tax return.  While it is a gain under US rules, it is income under UK rules.  Do you think that Harriett should go to jail?

Jennie stays in her holiday home in Florida for a couple of months each year.  She has a bank deposit account in Florida as she wants to keep funds there to meet her US expenses.  She declares the interest on her UK tax return.  She somehow overlooked the account when doing her 2012/13 return even though she declared it in both 2011/12 and 2013/14.  Do you think that Jennie should go to jail?

George Osborne thinks that they should all go to jail!  I assume that David Cameron and Nick Clegg think so too, as I can’t imagine that they have given George freedom to imprison whoever he likes without consulting them first.

So why does Nick Clegg want to send Marie, Sarah, Chrissie, Denise, Fiona, Georgina and Jennie to jail?  I don’t know.  I think it an extraordinary thing to do!  I do know why George Osborne wants to send them to jail, but do not have the faintest idea why Nick and Dave would have countenanced his scheme for one minute.

George is concerned about tax evaders.  He thinks that people who evade tax should go to jail.  So do I.  I imagine that Nick and Dave do too.  HMRC have told George that it is hard for them to prove that people put money overseas in order to evade UK tax.  It is also of course expensive for HMRC to gather the evidence needed to get a conviction.  George’s big idea is that there should be a new criminal offence of “failing to declare taxable income and gains arising offshore”.  It then becomes easy to send tax evaders to jail.  There are only two things HMRC need to prove; namely that the individual received taxable income and that it was not shown on his tax return.  That way no tax evader will be able to escape jail.

It’s a shame about Marie, Sarah, Chrissie, Denise, Fiona, Georgina and Jennie.  But George, and Nick and Dave (I assume), think it better that seven innocent women go to jail than that one tax evader escapes his just deserts. 

These poor women are not accidentally caught.  They are deliberately to be criminalised.  The offence is a strict offence.  Misunderstanding the law, not knowing about the income, making mistakes, taking advice from HMRC that turns out to be incorrect, making a judgement to the best of your belief, etc are all irrelevant.  You have income.  It’s not shown on your tax return.  Go to jail.

I’m not a political person.  Over the years I have voted for all of the three main parties at some time.  I like to think of myself as a liberal.  I believe in the apparently old-fashioned concept that it is better for seven guilty men to escape jail than for one innocent person to be sent to jail.  I thought that Nick Clegg was a liberal too, but it seems that Liberal with a Large L is very different from liberal with a small one, and that freedom of the individual doesn’t count for much with Nick.

Of course, I don’t really think that Nick and Dave are wondering how to raise the funds for a new wing at Holloway to house Marie, Sarah, Chrissie, Denise, Fiona, Georgina and Jennie.  I doubt that the Director of Public Prosecutions will take criminal proceedings against any of them.  But that ought not to absolve Nick for blessing George’s scheme.  I think it fundamentally wrong to label any of the above ladies as a criminal.  They are all people who have done their best to comply with the law but, for one reason or another, their best has resulted in the omission of taxable income.

I want to live in a country where everyone is bound by the rule of law but otherwise has the freedom to live their lives as they wish.  The Nick and George system under which it is up to an HMRC official or the DPP to decide whether an innocent person should nevertheless be sent to jail is anathema to me.  That is what happens in a dictatorship.  I hope that when you come to cast your vote next May, you will think hard about whether it is really what you want!