Monday, April 13, 2015


BLOG 162


I am currently reading “The Great Tax Robbery: How Britain became a tax haven for fat cats and big business” by Richard Brooks.  I am a student of tax avoidance.  I like reading such books to try to understand what tax avoidance is.  However they have to be approached with great caution because, like most fact-based fiction, the author is often more interested in creating a racy story than letting the facts speak for themselves.  They tend to be selective with facts, often putting greater emphasis on facts that help their story than the facts can properly bear and omitting or glossing over those that detract from the plot.

I am particularly taken by the fact that the scourge of tax avoiders – or to be exact what she, often unfairly, perceives to be tax avoiders – Margaret Hodge MP, describes the book as “Required reading”.  This is not however intended as a review of the book, particularly as it is a book that does not grip me to such an extent that I cannot put it down until I finish it, and have so far only reached Chapter 3.

I want to talk about tax avoidance in general and about Sir Philip Green in particular.  Mr Brooks tells me that “Free from income tax in Monaco, Tina Green is the ultimate owner, through a series of offshore companies and trusts, of the Arcadia business empire run by her husband Philip and comprising some of the British high street’s biggest names …  It is a set up that in 2005 famously enabled the Greens to take a £1.2bn dividend from Arcadia tax-free, saving them the £300m tax that would have been due if it had been paid to a UK tax resident …  But were [protestors] right to dub [Sir Philip Green] “Britain’s most notorious serial tax avoider”?  As Green pointed out, he pays income tax here and his companies pay corporation tax.  His wife really lives in Monaco, just like many sports stars including Paula Radcliffe and businessmen such as Sir Stelios Hiji-Ioannou …” .  He concludes, “Of course on any plain understanding of the term, tax avoiding is clearly what Green is doing.  He is going out of his way to escape, dodge, avert, circumvent-avoid-a tax bill”.  Although facts can be boring, I don’t actually think the set up allowed “the Greens” to take a £1.2billion dividend.  I think it allowed Mrs Green on her own to do so, but then if Sir Philip Green did not receive anything, it is hard to see how he is avoiding tax, so the story runs better by giving the impression that he did.

But that again is not my point.  It is that I don’t believe that Sir Philip Green has avoided UK tax, so my understanding of “the term, tax avoidance” differs from that which Mr Brooks believe to be plain.

So what does Mr Brooks mean by tax avoidance?  In a section headed “State-sponsored tax dodging” (by which he means that complying with the tax law is itself avoidance because the law grants what in his view are too many concessions or exemptions), he says, “what the government regards as tax avoidance diverges even further from what everybody else does – broadly transactions designed simply to reduce a tax bill below real income at the relevant headline rate”.

I don’t actually understand what that means.  The headline rate of tax on the top slice of my income is 40%.  If I pay £10,000 into my pension scheme, I get tax relief on it at 40%.  That will reduce the headline rate on the top slice of my income to below 40%, which suggests to me that Mr Brooks thinks that by saving for my retirement via a pension scheme, I am avoiding tax.  If I take £15,000 of my taxed income and put it into an ISA, it will generate dividends on which I will not pay tax.  Had I made the same investment in the same unit trusts direct, I would have paid 32.5% tax on the dividend, so as the only reason to use the ISA is for the tax break.  That in Mr Brooks view is tax avoidance as I have reduced the headline rate from 32.5% to nil.  Far from “everybody else” than the government accepting Mr Brooks’ definition, I suspect that if most people think about it they will regard it as ludicrous.

But back to Sir Philip Green (or Green as Mr Brooks insists on calling him – have you ever noticed how common politeness seems to be incompatible with left-wing polemics).  What exactly has happened.

a)      Sir Philip married Tina Green.  But lots of people marry.  I cannot believe that “everyone” would regard that as tax avoidance.

b)      Tina Green is South African.  I doubt that “everyone” regards marrying a foreigner as tax avoidance.

c)      Tina Green lives abroad.  As far as I know, she does so voluntarily.  She is not forced to live abroad.  She has no particular affinity with England.  Her first husband was Greek-South African.

d)     Sir Philip Green chooses to live with his wife.  Accordingly he was also resident abroad, at least until 5 April 2012, after which the UK new statutory residence test contain provisions which attempt to make him UK resident after that date.  I understand that quite a lot of people live in France and work in the UK.  I suspect that they would be very surprised if that makes them tax avoiders.

e)      He passed the opportunity to acquire the shares in Arcadia to his wife.  Wikepedia tells me that he bought them and sold them to her 24 hours later.  But there is no suggestion that she did not use her own money to buy them.  Even if Sir Philip had gifted the shares to her, it is not uncommon within a marriage.  I suspect that most people would be horrified to learn that sharing the family wealth between husband and wife is tax avoidance.  Virtually all married couples that I know do that.  Indeed, most pass assets to their children too!  Is that even more wicked?

f)       Sir Philip works in the UK – and pays UK tax on his UK earnings.  Paying tax surely can’t be tax avoidance.

g)      He works for his wife’s company.  So do lots of other people.  And in these days of equality, a lot of wives work for their husband’s companies.  Are they all avoiding tax?

h)      The UK tax system does not impose a tax charge on dividends paid to a non-resident by a UK company, leaving it to the country of residence to impose tax if it wishes.  I appreciate that Mr Brooks regards that fact as State-sponsored avoidance, but I doubt that “everyone”, or even most people, share his view.

i)        Monaco does not tax dividends received by a Monagasque resident.  I have been to Monaco.  I wouldn’t shop there.  Everything is wildly expensive.  I suspect that is because Monaco raises the bulk of its revenue from sales taxes whereas the UK splits between sales taxes and income taxes.  But this is hardly Lady Green’s fault.  I find it difficult to see that she is somehow avoiding UK tax by choosing to live in Monaco rather than somewhere else.  Would she still be avoiding tax if she were to move a few miles down the road to Nice and pay heavy French taxes on her dividends?  In other words, is what annoys Mr Brooks not that she is paying no UK tax, but rather that by living in Monaco she is paying no income tax anywhere.

So where is the tax avoidance?  All I can think of is that it is a combination of the fact that the UK chooses not to impose income tax on dividends paid to a non-resident, Monaco chooses not to impose income tax on dividends received by its residents and Mrs Green likes to live in Monaco.  If so, I very much doubt that “everyone” regards that combination as tax avoidance.  Lady Green has no control over what either the UK government or the Monagasque government chooses to do.  She does of course have a choice as to whether to live in sunny Monaco or rainy London, but I doubt most people would regard choosing the sun over the rain as tax avoidance.

Oh, I nearly forgot, Mr Brooks places great significance that when he talks to the Press, Sir Philip sometimes refers to Arcadia as “my company”.  But most of us are surely not too concerned about the legal niceties in conversation.  Indeed, I think “my company” is as apt to describe the company that one manages as a company that one owns.

Incidentally, I am a bit puzzled by the “series of offshore companies and trusts” through which Lady Green holds her shares.  Wikepedia tells me that she owns a single Jersey holding company which owns all her retail investments, but that doesn’t sound as much like avoidance as a chain of companies and trusts.  And of course Wikepedia is notoriously unreliable.  But then if the first couple of chapters of Mr Brook’ book is representative, I tend to think the same thing about him.


Wednesday, April 01, 2015


BLOG 161


Last Autumn HMRC published some independent research on the “Statutory Review Process”, carried out by Opinion Leader Research.  I was fascinated by this report.

The Statutory Review process is an intermediate step between appealing an HMRC assessment and taking the appeal to the Independent Appeals Tribunal.  The taxpayer is entitled to ask for the case to be looked at by a fresh pair of eyes within HMRC.  Normally the Reviewer is part of a specialist review team.  He or she is not in the same line management as the original decision-maker, which ought to mean that the Reviewer is not concerned about upsetting the decision-maker.

At about the same time as HMRC published the research, they also published some statistics on reviews.  These show

                                                                                                2012/13                       2013/14

Non-penalty reviews
decided in taxpayer’s favour                                      26%                             26%
partly decided in taxpayer’s favour                            6%                               7%
VAT penalty reviews
decided in taxpayer’s favour                                      48%                             49%
partly decided in taxpayer’s favour                            9%                               11%
Other penalty appeals
            decided in taxpayer’s favour                                      33%                             39%
            partly decided in taxpayer’s favour                            3%                               2%.

With a 1 in 3 chance of at least partial success, it is hard to see why anyone would not ask for a review but only around 38,000 requests are made each year which is a fairly small proportion of the total reviewable decisions made by HMRC in a year.

Opinion Leader Research interviewed (on the telephone) 580 taxpayers, 375 of which had had a review, 25 of which had declined the offer (albeit that Opinion Leader Research felt that too low a number for robust analysis) and 180 of which had an unsuccessful review and then pursued their appeal to the Tribunal.  They prefaced the results with the warning that, “In this survey the subject matter is emotive and respondents may have particularly strong opinions given the survey was looking at the process to deal with disputes about HMRC decisions, including decisions to charge financial penalties”.

The research found that 51% of those who had had a review and 35% of those who had lost and subsequently gone to the Tribunal found the appeal process either very useful or moderately useful.  However that is made up of 69% of those who won and only 32% of those who lost.  44% thought the review impartial with another 18% thinking it probably was (although the 44% figure broke down to 51% of those who had only had a review and 29% of those who had then pursued their appeal to the Tribunal).

However the most telling figures are probably that 81% of people who had a review and 65% of those who both had a review and then took their appeal to the Tribunal would ask for a review again if they have another dispute with HMRC.  This is heartening, but curious.  Only 51% felt the review even moderately useful, but 81% would opt for a repeat performance.  Why would 30% of taxpayers want to adopt what they regard as a pointless procedure?

What I hope is less heartening for HMRC is the top reasons taxpayers gave for going to the Tribunal following an unsuccessful review, namely

-          The taxpayer thought that HMRC were treating him harshly for a minor infraction (25%)
-          The taxpayer believed he had a good case (20%)
-          HMRC ignored the taxpayer’s questions (17%)
-          Poor communication (9%)
-          HMRC being too bureaucratic (9%).

Opinion Leader Research think these reasons could point to there being a lack of understanding of (or faith in) the review process in general.  Bearing in mind that around one-third of the review cases went to appeal, but that in around 50% of penalty appeals and 33% of other appeals the review found in favour of the taxpayer, that points to a high proportion of those who lose on review opting to go to the Tribunal.  That does not suggest a lack of understanding of (or faith in) the review process.  Rather it suggests that the review process is successful in correcting cases where HMRC got the decision wrong, but that where the decision is upheld, taxpayers see the review as simply a step that may obviate needing to go to the Tribunal.

When the process was introduced, it was thought that a lot of taxpayers who lost on review, would be satisfied that their concerns had been taken seriously within HMRC and would abandon their appeal, feeling that they had then been treated fairly.  This does not seem to be happening.  Sadly Opinion Leader Research do not appear to have felt this a question worth asking.

“Harsh treatment for a minor infraction”, must relate to penalty appeals.  Bearing in mind that 60% of VAT penalty appeals and 40% of other penalty appeals go wholly or partly in favour of the taxpayer, the 22% figure suggests that 22% of the unsuccessful 40% or 60% (as the case may be) still think they have been harshly treated.  That suggests that neither the decision-maker or the reviewer was able to explain to the taxpayer why they believed the penalty level fair.

What I found particularly worrying is that 56% of the 25 people who spurned a review did not know about reviews and were not offered one.  This is worrying because HMRC’s internal procedures require a review to be offered.  This means that either that is not being done or that the wording of the offer is such that these taxpayers did not understand it.

What everyone ought to find worrying is that of those who lost at review stage and abandoned their appeal, 14% did so because they thought they would have no chance against HMRC at the Tribunal, 16% because the cost of going to the Tribunal was perceived as prohibitive and 14% because it was perceived as too time-consuming.  In the majority of Tribunal cases, a taxpayer can simply turn up in person and present his case, so in reality cost and time ought not to be issues at all.