Monday, February 22, 2016


BLOG 170


We are constantly being told by both Ministers and HMRC that we have a fair tax system.  I am not sure what “fair” means.  It seems to me to be a concept that takes its meaning from the particular circumstances in which fairness falls to be addressed.  However, at a minimum, I think it implies even-handedness.

In the context of tax I would have thought that if one pays the tax prescribed by the legislation, one has fulfilled one’s duty to society.  That always used to be the case.  However in recent years, politicians have asserted a doctrine of tax morality, by which they mean that it can be immoral to pay the tax prescribed by the legislation if that does not reflect what they describe as the intention of parliament.

Conceptually, there is a problem here, insofar as everyone who is familiar with parliamentary procedure knows parliament does not normally have an intention in enacting tax legislation.  What happens is once the Finance Bill is published, it is considered in Committees.  For a few clause this is a Committee of the Whole House, but for most of the Bill it is a Committee of around 20 people, which is roughly 3% of the number of MPs.  Erskine May on Parliamentary Procedure defines the role of such a Committee as to consider the Bill line by line and to refine it.  That happened up to the 1970s.  It no longer happens today.  A Committee is an opportunity to make political points.  There is little or no attempt to improve the legislation or even to consider it line by line.  It is considered clause by clause but almost all the debates are on either a motion that “the Clause stand part of the Bill” (i.e. that it simply be accepted as drafted) or that the Government should publish a report of the clauses operation (normally within six months and often well before the clause comes into operation at all).

Accordingly what is in the Finance Bill may reflect Ministers’ views; it may reflect the draftsman’s view; it may reflect HMRC’s view.  But it certainly does not reflect the view of Parliament.

Traditionally the courts have sought to discern the view of Parliament from the wording that Parliament has used in the legislation.  Sadly, in doing so, they have a nasty habit of arriving at a result that the government of the day doesn’t like.  Accordingly our political masters have developed a concept that what the law says is not what the law means if the result cannot have been intended by parliament.  They have gone on to introduce the concept of fairness into tax.

I have no particular problem with either morality (as long as it is for the taxpayer, not for Mr Osborne or Mr Gauke to determine what he believes to be moral) or fairness (provided that it is a two-way street).  It does however seem to me completely unreasonable for either the government or HMRC to be saying, “We think that taxpayers should refrain from asserting their legal rights when it is immoral or unfair to do so, but HMRC should enforce the law rigorously, no matter how immoral or unfair that may be”.  But that seems to me to be the position of both the government and HMRC.

This is well illustrated by two recent tax cases.  The first is Ames v HMRC.  Mr Ames invested in a company.  His investment qualified for income tax EIS relief.  The CGT legislation provided that if EIS shares are sold after the end of the EIS period and “an amount of EIS relief is attributable to the shares”, the gain is not taxable.  Unfortunately his income was less than his personal allowance, so he had no taxable income against which he could claim EIS relief in the year in which he invested.  Mr Ames consoled himself with the fact that he realised a substantial tax-free capital gain on the shares.  “Oh No,” said HMRC, No amount of EIS relief is attributable to your shares because you had no income against which such relief could be given.  Does anyone believe that in enacting the EIS legislation, parliament deliberately decided to give CGT exemption if the shares increased in value and the taxpayer had £1 of income against which the relief could be claimed but there should be no such exemption if the person happened to have no taxable income in the year he made the investment?  Does anyone think that is a fair outcome?  If the government is not prepared to treat Mr Ames “fairly” by taxing him only on the basis that parliament would undoubtedly have adopted if it had considered a person in Mr Ames position when it introduced the EIS legislation, it seems highly hypocritical for it to urge those who successfully use artificial tax avoidance schemes to pay the tax that parliament would have imposed (but didn’t) if it had contemplated the scheme at the time it passed the legislation.

The next case is Flix Innovations Ltd v HMRC.  The company raised money on the basis that the shares would qualify for EIS relief.  It had in issue a class of valueless non-voting deferred shares.  The shares were entitled on a liquidation to repayment at par but only after the par value of the ordinary shares had been repaid.  They had no other rights.  The company then issued the EIS shares.  “Sorry”, said HMRC, “One of the conditions for EIS relief is that the EIS shares must not have preferential rights.  They have preferential rights over the deferred shares so no EIS relief is due”. 

Did parliament really intend that EIS relief should not apply if a company were to strip some of its existing shares of virtually all of their rights prior to an issue of EIS shares so that the EIS investors would obtain a fair stake in the company?  I very much doubt it.

So why didn’t HMRC say, “We will ignore these valueless shares because they clearly don’t fall within the mischief that parliament had in mind when it said that EIS shares should not have preferential rights”?  That is what the government expects taxpayers to do when the law “unfairly” benefits them.

Surely we should either have a fair tax system or everyone, including the State, should accept that legislation can give rise to unanticipated results.  It is not reasonable for the State to berate those who benefit from such anomalies but itself insist on taking those unintended benefits that accrue to the State.


Tuesday, February 02, 2016


BLOG 169


A headline in The Times the other day “Pension scam victims need leniency too” caught my eye.  The article that followed was one of the most depressing that I have read for a long time.  The author started from, “If Google, the internet search giant, can negotiate a special 3% deal in its own sweet time, why can’t the rest of us”; moved on to, “While HMRC has shown leniency over Google’s use of loopholes, it hasn’t shown the same forbearance to the thousands of victims of pension-liberation scams; people who were convinced by crooks that they could use loopholes to access their retirement savings before the statutory age of 55”; and ended, “Why have we allowed our corporate tax code to become so complex?  We really could simplify things substantially and raise overall collection levels at a lower headline rate while reducing the ridiculous court costs and risks”.

I was depressed, not merely by the infantile and erroneous comparison of apples and oranges, but also by the fact that all three premises are simply incorrect.

Let’s start with Google, or rather let’s start with some tax basics.  A country can tax profits.  It can also tax turnover.  Indeed it can tax lots of different things.  But they are all distinct and separate taxes.  It is ridiculous to take a settlement figure that Google has reached over corporation tax (a tax on profits) and express it as a percentage of turnover, as profits and turnover bear little, if any, relationship to one another.

When I use Google, they do not charge me.  Accordingly there is no rational reason why they should pay tax on my search.  They do charge advertisers for advertising on their site.  But such advertising attracts VAT.  The EU has decided that it is easier to collect that tax from the advertiser than from Google.  But it is nevertheless Google’s tax liability and goes into the UK Exchequer when the advertiser is in the UK.

There is certainly an argument that if I read an ad on the Google website from an Italian company, it might be sensible for the UK to get the tax, but the EU has decided that Italy should get the tax.  Google has no say in the matter; nor does HMRC.

Let’s look at tax on profits.  There is no international system for dividing up the tax on profits.  There is an international consensus that a company should not be taxed twice on the same income.  Effect is given to this by a network of double tax agreements negotiated between countries.  Both the OECD and the United Nations have produced suggested clauses for such double tax agreements but each country is free to adopt them or to ignore them and negotiate something different.  Most developed countries use the OECD model.  This says that tax should be paid in the country in which the supplier has his shop.  If I buy a US tax book from a publisher in Chicago, the US taxes the profit on my purchase because the publisher does not have a shop in the UK.  In the same way if Hank in Cincinnati buys a shirt online from Top Shop, the UK taxes the profit because Top Shop does not have a shop in Cincinnati.  Top Shop does have a shop in Chicago, so if Hank travels to Chicago to buy his shirt, the US now has the right to tax the profit.

It is obviously arguable that this system no longer makes sense in the internet age.  However representatives of 92 countries have just spent a year considering just that, and have concluded that we should retain the existing system but clarify some of the rules.

So Google has to pay tax on the profits that it makes through its UK shop (or permanent establishment as we call it in the tax world) but not UK tax on profits that it makes through its shop in the USA.  I am not privy to Google’s affairs.  I suspect that it makes a profit in the UK by developing its software here and selling the patent to an overseas group company.  The tax law requires such sales to take place at open market value.  Clearly Google’s idea of the value of a piece of unique software is likely to differ from HMRC’s.  Accordingly the £130million is likely to be a compromise figure to save having to pursue the case before the Court.

So there is no special deal for Google; no 3% tax rate; Google is subject to the same tax regime as any other US company that makes sales in the UK.  It pays UK sales tax (i.e. VAT) but makes little taxable profit here as the UK’s double tax agreement give a different country the right to tax the profit on UK sales that are not made through a UK permanent establishment.

Let’s move on to the pension liberation scams.  I don’t know precisely what scams by crooks The Times writer has in mind.  My dictionary tells me that a scam is “a stratagem for gain; a swindle”.  I doubt that anyone has been swindled – apart, that is, from you and me and the rest of the general body of taxpayers.  The deal on pensions is that you can deduct the cost of pension contributions from tax, but that pensions are long-term savings.  You cannot touch the money until you reach 55, but after that you can take 25% of your pension pot tax-free and the remaining 75% as income.  That is a fair deal.  It enables a person to defer tax on long-term savings.

What happens with pension liberation is that a person scams the taxpayer.  Having had his tax relief, he seeks to renage on the deal not to touch the money until age 55.  Nobody scams him.  There are people who will say to him, “If you give me part of the fund, I will give you the rest of it now; there is no need to wait until you are 55.  But if he accepts such a deal, the “taxpayer” genuinely gets what he has bargained for.  He gets a reduced sum in his fist that he can spend now.  That is not a scam.

The problem is that, unsurprisingly, the tax legislation contains rules that say if you try to take the money out of your pension fund before 55, that will trigger a penal tax charge.  That is not hidden from the taxpayer.  What the liberator says is that he has a tax scheme to bypass the rules.  The liberator does not normally even hide how the scheme works.  He tells the taxpayer and the taxpayer is free to take his own professional advice.

The reality is that at the end of the day, most tax avoidance schemes don’t work.  Jimmy Carr did not get much sympathy when his tax avoidance scheme was held to be ineffective.  I am puzzled why any other would-be tax avoider should either expect or get public sympathy.  After all it is you and me he is trying to cheat, because HMRC acts as agent for us in collecting the taxes that parliament has felt fit to impose.  So I am puzzled why the author of the Times article  wants HMRC to be lenient on would-be tax avoiders.  He does not say what that leniency should entail.  If the taxpayer can show that he cannot pay the tax that parliament has imposed on him and that he sought to avoid immediately, HMRC will already agree a time to pay arrangement.  Does the author want you and me to forgo the tax from people who try to cheat us and are caught out?  I suspect so, but, if so, I think that is a crazy proposition.

Tax avoidance schemes are not loopholes.  They often seek to exploit perceived loopholes, but if that perceived loophole does not in fact exist, why should we forgo the money we need to run the country because, like most would-be tax avoiders, the taxpayer ends up worse off than if he had not tried to beat the law?

Finally, tax simplification.  It is a myth!  The system can be simplified by abolishing tax reliefs.  But most reliefs are there to create fairness.  Do we really want to abolish fairness?  It can be simplified by cutting out some of the anti-avoidance rules.  But do we really want to open the door to avoidance after having told people what the provisions were trying to block?  It can be simplified by eliminating incentives to people to change behaviour, in most cases to invest in things that the government believes will increase jobs.  There is a lot to be said for that as it is questionable whether the tax system is the best way to change behaviour.  Grants may be better, for example.  But the tax system can be a cheaper way of providing incentives and can better target them to the people who can benefit from them.  But that is about it.  We cannot significantly simplify the tax code; we could stop it becoming more complex, by not changing it so frequently or by forbearing from introducing new incentives via the tax system.  But it is unrealistic to suppose that any Chancellor is going to forgo his time in the spotlight that the annual budget provides!