EVASION BY SMALL BUSINESSES

BLOG 182

EVASION BY SMALL BUSINESSES

HMRC commission a fair amount of research from research companies and in the interests of transparency tend to publish the reports.  Some of these reports make interesting reading but some don’t.  I have been reading one on “Understanding evasion by Small and Mid-Sized Businesses” and am wondering what, if anything, HMRC get for their money.  The report is qualitative research which apparently is designed to reveal a target audience’s range of behaviour and the perceptions which drive it with reference to specific types or issues.  It uses in-depth studies of small groups of people to guide and support the construction of hypothesis (per the Qualitative Research Consultants Association).

The report makes fascinating reading.  Unfortunately I have two problems with it.  The first is that I am sceptical to what extent a tax evader (which I assume to be someone who has been caught out in having lied to HMRC) is likely to give honest answers to a researcher probing the reasons for his past dishonesty.  The second is that the key findings do not reconcile with my own experience.  The report identifies four core types of evader:

a)      unthinking evaders, for whom low level evasion is habitual, and often adopted without thought,

b)      invested evaders, for whom evasion is seen as an unfortunate financial necessity in order to stay in business,

c)      lifestyle evaders, for whom evasion enables a life-style otherwise out of reach, which they feel is justified by the taxes they do pay,

d)      systematic evaders, where evasion is actively considered and integral to the business model.

I have a fair amount of experience of tax evasion – from the perspective of helping evaders to come clean I hasten to explain – and I find it hard to fit my typical evader into any of those categories.  This is because under all of those types of behaviours the cash is either spent or invested in the business, yet my experience is that while some of the cash may well be spent, most of it is diverted away from the business and put into some form of savings.  If that were not the norm, I doubt that many tax evaders would come forward and confess their crimes.  If a person has not created the wherewithal to make a financial settlement, it is hard to see how he can make his peace with HMRC.  It is equally hard to see why anyone should want to tell HMRC that he owes them a large amount of money if he can see no way in which he can settle that debt.

I am also concerned about what the report says regarding agents, bearing in mind that the researchers did not actually talk to any agents and there is an obvious risk that a tax evader may seek to shift the blame by saying, for example, “my accountant must have known that I was not declaring everything”.  Thus the report says … “Agents may be unaware of the full extent of evasion taking place …  However where agents are used primarily to reduce taxes due, a minority may be complicit in evasion to some extent”.   The report later says, “A minority appeared to engage in evasion on the advice of an agent (who might for example point out personal expenses that could be put against the business) …  Businesses typically chose not to inform agents of any activities which were known to be high-risk evasion, since it is understood that agents would not be comfortable with the level of risk involved.  Ultimately how the agents was used (and the extent to which that advice was followed) was determined by the business attitudes and perceptions in relation to tax”.  Under a heading of “perceived risk”, it later says, “Evasion behaviours were believed to be safe on the basis that… agent involvement may also have provided a sense of security (on the basis that the agent would not allow anything to appear on record which could cause problems later)”; and under “Opportunity” it says, “In some cases, agents may have played a role (whether knowingly or not) in raising awareness of opportunities or flagging risky behaviours”.

So the report is saying that some of us actively encourage evasion, others turn a blind eye to it knowing the client is evading tax, others are comfortable with evasion provided that it is not documented, and some of us advise clients to change their ways but are indifferent as to whether or not they accept that advice.  Of course the report does stress that it is a minority and does not speculate on how large that minority may be.  Nevertheless it is frightening if the authors are right in any of these respects.  No wonder HMRC seem to have so low a view of the tax profession if that is what their outside advisors are telling them.

So what can be done to prevent evasion?  The authors say that “Actions intended to tackle evasion and improved compliance… could be more visible and [HMRC should] work harder to cut through the dominant media noise, social norms and market pressures in order to meaningfully impact on evasion behaviour and “promote compliance”.  They suggest that HMRC should “increase the perceived likelihood of getting caught”.  This could be done by promoting awareness of HMRC’s capabilities/tools available to catch those who evade.  Yes of course HMRC should do this but, as much evasion takes the form of not declaring cash income or claiming business-type expenses where the motive is a personal, not a business one, it is not readily apparent what capabilities and tools HMRC have available to detect such things. HMRC’s database program, “Connect” is a very powerful tool for collating information, but it cannot identify either non-information or motive – other than to the extent that it can highlight differences between businesses of the same type which can point to large scale evasion but not to a lot of the fairly petty evasion that the report highlights.  For example, it gives as an example taking home toilet rolls purchased by the business.  I suspect no accountant has ever sought to compare toilet roll purchases with likely business usage to try to detect pilfering.  But I also suspect that Connect cannot do this either!

Their second recommendation is to “improve understanding of potential consequences”.  Apart from the risk of getting caught, which seems minimal in relation to low-level evasion, I doubt that many taxpayers (or rather non-taxpayers) are likely to be unduly concerned about either late payment fines or media coverage, which are the only examples the report identifies.

Finally, they tell HMRC to “tap into what matters, beyond the consequence itself”.  They accept that “there is no silver bullet for tackling evasion” and tell HMRC, “In order to be compelling, interventions must be personally motivating, going beyond the immediate impact of the consequence itself, to get under the skin of what this would actually mean to the business”.  They suggest HMRC might play on an individual’s position in, or perceived responsibility toward the State, the consequences of the publication of evaders name through localised channels, the possible impact on employees who may be innocent bystanders to the evasion taking place but would share in the consequences non-the-less; and most effective of all, leverage personal ramifications and broader consequences for the individual and their family.  Leaving aside the fact that HMRC do not have (and probably never will have) the resources to address every taxpayer individually, it is not clear how HMRC are expected to identify who is evading tax so as to decide on the right personal motivation to use.  If HMRC could identify evaders they would not have a need to commission research reports on understanding evasion.

I hope that HMRC feel that this report represents value for money.  As a taxpayer, I do not!

ROBERT MAAS

WHATEVER HAPPENED TO OPENNESS AND HONESTY?

BLOG 181

WHATEVER HAPPENED TO OPENNESS AND HONESTY?

One of the things for which I will also remember Gordon Brown and his henchwoman, Dawn Primarolo was the politicisation of HMRC.  Prior to that you could, by and large, rely on HMRC press releases and other official publications to explain tax in a factual and honest manner.  Now HMRC seem to see one of their roles as being to preach the political messages of the government of the day.  If that makes what they say misleading or even inaccurate, the truth is subjugated to the message.

Since returning from my annual visit to Chicago at the beginning of September (happy, as the Cubs were doing well and in fact won the National Baseball League Central for the second year running, albeit they did not manage to win the National League Pennant this time round) I have been busy with books, so have rather neglected by blog.  The new edition of my Taxpayer Rights book has now hit the bookshelves and I have nearly finished the updating of my Property Tax book, so I have had a chance to catch up a bit on my technical reading.  Perhaps it is having to read several weeks of HMRC press releases together that has concentrated my mind on just how unhelpful (technically) these have become.

One example is making tax digital (MTD).  Both HMRC and the Chancellor announced that only businesses with a turnover above the VAT threshold will have to keep digital records and only for VAT purposes, and only from 2019.  They reassuringly say that the government will not wish to widen the scope of MTDFB (for business) beyond VAT before the system has been shown to work well and not before April 2020 at the earliest.  What is misleading about that?  Well, the main reason that HMRC want businesses and landlords to keep records digitally is that they believe it will improve record-keeping.  The quarterly reports they also want are likely to be fairly useless to HMRC, other than as evidence that the taxpayer is in fact maintaining digital records.  So what exactly is the difference between the digital records one needs for VAT and those one needs for income or corporation tax.  Nothing, other than that the VAT records also have to record VAT.  Accordingly not widening the scope until the system has been shown to work well is meaningless.  Everyone (except very small businesses) will be required to keep digital records from 2019, not only for VAT but for other tax purposes too, because all the records that are needed for income and corporation tax are also needed for VAT.  All that has been deferred is the final step of pushing the button to tell the computer program to send a report to HMRC.  But no-one would guess that from the HMRC PR.

Or what about employee benefit trusts (EBT).  HMRC say in a blog post of 17 August in relation to the Supreme Court decision in the Glasgow Rangers Football Club case, “The decision stated any payment made through an EBT should be considered a taxable income as opposed to a loan”.  That is very clear isn’t it?  Except it is not what the Supreme Court said at all.  What it said is that earnings from an employment is income of the employee irrespective of whether it is paid to the employee or a third party.  That means that where an EBT makes a loan, one needs to consider as a question of fact whether the payment is earnings or something else, such as a loan.  In the Rangers case, the evidence was that the money was already earnings before it went into the EBT.  But it by no means follows that any payment from an EBT is earnings.  And even where it is earnings, fascinating questions arise as to who is liable for the tax and whether HMRC may be out of time to collect it.

Then there is the “HMRC guide to tax on payments for image rights”.  This states, “Employers must ensure that all payments made to their employees comply with published guidance for the type of payment made”.  Surely not!  It must comply with the law.  We have not yet reached the stage where the law is irrelevant and we must do whatever HMRC tell us to do.  Admittedly, a lot of HMRC employees do seem to believe that we have reached that HMRC nirvana, as they keep quoting HMRC guidance to us instead of the law.  Fortunately, the Courts still believe in the rule of law.  It is also questionable whether HMRC’s assertion that a payment for the use of an individual’s image rights is taxable as professional income.  That may well be what they would like the law to be, but it is hard to see how, if CBW were to pay me to put my photo on their website (which they are obviously unlikely to do), that is not income from my asset, image rights, whereas if they pay my company to allow them to use my photo, that then magically becomes income from exploiting the image right.  I appreciate that HMRC would like the law to be different, but that cannot justify issuing guidance to ignore it.

My latest gripe is HMRC Guidance on “self-reporting” tax evasion facilitation offences”.  This is for companies to report on their own behaviour where they’ve failed to prevent the facilitation of a tax evasion offence.  Facilitating a tax evasion offence is now a crime for a company or partnership.  To commit the crime, (a) someone must have actually committed the criminal offence of evading tax, (b) that someone must work for the company (not necessarily as an employee), and (c) the company must be unable to show that it had systems in place that would have prevented the crime occurring.  As the only defence is to show you have systems in place, self-reporting seems wishful thinking.  All you can report is that you didn’t install adequate systems, i.e. you can plead guilty to the offence and hope the Courts show mercy.  Of course what HMRC really want you to tell them about is the evasion offence.  They warn you that it can be a criminal offence to volunteer incorrect information and suggest you seek legal advice before saying anything to them.  They say “only provide the information that you already have.  For your own safety, don’t try to find out more information so you can send an e-mail”.  What on earth does that mean?  Unless a person has been convicted or has admitted tax evasion, I have no way of knowing whether he has evaded tax, because one element of the crime is his thought process.  So how can I ever self-report unless I first confront the individual with my concerns?  The money laundering rules allow me to question the individual to decide whether I am suspicious that he has evaded tax, before I need to report that suspicion (albeit, once I or someone has reported it, I can no longer risk tipping him off that a report has been made).  And what does “for my own safety” mean.  I am hardly going to seek further information from someone I think is going to get violent and, although over the years I have met many people who have evaded tax (because part of what I do is to help them to confess to HMRC), I have never had a situation where I feared for my safety.  And whatever prompted HMRC to decide to allocate resources to issue non-statutory guidance on something that well-informed companies are unlikely to do and to word that guidance in such a way as to deter people from actually coming forward?  It’s good to know they have the resources to waste!

ROBERT MAAS