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!



Post a Comment

<< Home