HAS GEORGE OSBORNE BECOME THE TAX AVOIDERS' FRIEND?

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HAS GEORGE OSBORNE BECOME THE TAX AVOIDERS' FRIEND?

I was prompted to pose that question by a recent article in the Evening Standard.  It was not by George Osborne, it was by Russell Lynch but, on the assumption that as Editor of the Evening Standard, Mr Osborne would hardly include in the paper anything to which he was violently opposed, I think it a reasonable assumption that the article has Mr Osborne’s editorial blessing.  This also assumes of course that he is really the editor and not merely engaged as a figurehead with someone with greater journalistic experience actually editing the paper; or merely there to do Mr Lebadev’s bidding and it is really the Russian government that calls the editorial shots; or is kept well away from the City pages (in which the full-page article appeared) and allowed only to edit the gossipy bits of the paper.

I should also admit that Mr Lynch’s article does not actually say, “Hurrah for tax avoidance, long live tax avoiders everywhere”.  Indeed, it does not actually mention the dreaded phrase at all.  “It is headed “Suicide watch”; “the preventable tax timebomb” looming for freelancers”.

If this worries freelancers, I should say immediately that there is actually no tax timebomb for the vast majority of freelancers.  There are tax problems for some because HMRC seems suddenly to be looking at many personal service companies and contending that they fall within an anti-avoidance provision that applies where a person’s services are lent out by a company and the person would have been an employee of the end user had he contracted direct with that person.  These rules, known colloquially as IR35, were introduced in 1999 and until recently HMRC seems to have been almost unbelievably lax in policing them.  Their sudden interest is creating a lot of worry, as they do not simply attack the current year; they go back for fur years and present the worker with what is sometimes an enormous supplementary tax bill.  There is a growing scandal because it appears that the BBC and similar quasi-government bodies encouraged people to use companies so as to shift the liability to tax from themselves to the worker.  But that is not what is worrying Mr Lynch.  After all, the distinction between employed and self-employed is one of the great mysteries of life.  These freelancers genuinely believed themselves to be freelancers and are shocked that HMRC is suddenly seeking to treat them as employees of the BBC or the NHS or, indeed, HMRC who are one of the largest users of freelance IT people in the country.

No.  What concerns Mr Lynch is the “loan charge” that will become payable on 5 April 2019.  What concerns Mr Lynch most of all is users of a particularly nasty tax avoidance scheme that was promoted by a number of scheme merchants mainly based overseas out of the reach of HMRC.  I will call such people promoters.  The promoter would advertise on the web or on journals read by freelancers.  The adverts were along the lines of, “Don’t be a mug.  Why should you pay tax?  We have a way to let you get your earnings completely tax-free”.  They would probably then explain that for every £1,000 employees earn, £200 or £400 (depending on the employee’s level of income) goes in tax;, on the first £30,000 or so another 12% goes in National Insurance and above that, 2% goes in National Insurance.  That means that out of his £1,000, the employee is left with around £500-700.  Under the tax avoidance scheme, the promoter would make a charge of, say, 15% to run the scheme leaving the worker with £850.

I don’t always agree with HMRC – indeed sometimes I think I don’t often agree with HMRC – but I agree with their mantras on tax avoidance that if it sounds to good to be true it probably isn’t true, and that tax avoidance schemes rarely work and can cause the user a lot of aggravation as HMRC aim to pursue them right up to the Supreme Court.

And so to the loan.  Mr Lynch explains, “Employers could pay salaries into a trust, set up by the promoter, which then mostly paid the employee in the form of loans, which were tax-free as they were not deemed income or earnings at the time.  The “loans” were never intended to be paid back”.  I will come back to that in a minute, but first Mr Lynch’s explanation of why he thinks HMRC (or possibly the government) are acting unreasonably in seeking to collect the tax that people sought to avoid.  “In March 2016, the Government delivered a bombshell on what it deemed disguised remuneration.  HMRC would now levy a tax charge on the loans, which were now to be treated as taxable income”.  We have an odd system in this country of which Mr Lynch appears unaware.  Neither the Government or HMRC impose taxes; that is wholly down to Parliament.  The legislation that he complains about is in Schedule 11 of the Finance (No 2) Act 2017.  Debating the provision, Anelisise Dodds said “the Opposition wants to see changes in this area because abuses have been clearly documented”.  She later said, “However these measures come after a long period of relative inaction, at least in the areas where this legislation is focussed.  This has meant that many people believed the arrangements they entered into were legal and did not constitute tax avoidance.  The April 2019 charge in these circumstances could, some have opined to us, cause significant problems, for example, to individuals whose situation has changed such that they no longer have the funds to meet the tax charge.  How will the Minister ensure that this measure will not cause hardship or injustice to individuals who planned on the basis of previous arrangements, and how will that be balanced against the clear and pressing need to prevent the abuse, which the measure is targeted at?”  The Minister responded, “We will certainly be looking at individuals who may have entered into these kinds of arrangements as far back as 1999.  Critically, they have until 2019 to clean those arrangements up, if they wish to.  If the schemes are legitimate and above board, they have no reason to be concerned because those schemes will stand the tests we have met.  Let us be clear about what we are looking at; clear tax avoidance”.  He later says, “The Hon Lady asked how we will meet our objectives …  She gave the example of people struggling to pay after being clamped down on.  HMRC often confronts that circumstance in its lime of work.  People who are concerned about their ability to make a full payment of tax on time should contact HMRC at the earliest opportunity.  It considers all requests for time to pay individually, based on the customer’s financial circumstances”. 

I assume that this explanation satisfied Ms Dodds, albeit that it now appears not to satisfy Mr Lynch and, presumably, his editor, Mr Osborne, as neither she nor anyone else called for a vote and the legislation was simply approved by the relevant parliamentary Committee.

Let me get technical for a bit.  The avoidance scheme never worked.  The law says that salaries are taxable as income.  Indeed if Mr Lynch is right when he says that the “loans” [his parenthesis] were never intended to be paid back, they were never loans at all; they were pretend loans, as a fundamental attribute of a loan is that it has to be repaid.  Pretending something is a loan in order to mislead HMRC is not tax avoidance; it is fraud! In which case Mr Lynch and, I assume Mr Osborne, are not championing tax avoiders; they are championing tax evasion!

There is no doubt that the loan charge is retrospective.  Parliament does not like retrospective legislation, but the previous Labour government made clear in 2004 that future legislation to combat PAYE and National Insurance avoidance schemes would be applied retrospectively to 2004.

Mr Lynch does not want these tax avoiders to be made bankrupt.  Nor do I.  Nor actually does HMRC; it wants the tax that has been avoided and interest for the period that the country has been deprived of use of the money.  The loan charge is in fact fairly generous as it effectively allows tax relief for the fees paid to the promoter, which would not have attracted tax relief at all had HMRC attacked the scheme when it was entered into.  Furthermore, HMRC have been pleading for people to come forward and settle the tax before next April, because they can then agree a time to pay arrangement.  Curiously Mr Lynch mentions none of this.

What he seems to want is for those tax avoiders to be let off the amount they owe because they have spent the money.  Most people would find that an extraordinary proposition.  It was not their money to spend; it was our money, us the compliant taxpaying public.  I do not recollect the Evening Standard ever having asked for tax to be excused in relation to celebrities who were faced with heavy tax bills because they entered into other tax avoidance schemes that did not work.

Mr Lynch does not explain why he believes that those who do not try to avoid their tax (or more accurately in many cases, are not able to try to avoid their tax) should contribute to the running of the country but those who seek to avoid their responsibility to do so should be absolved from having to pay.  It is hard to see how such a proposition equates with fairness – if indeed Mr Lynch thinks that fairness ought to apply in tax matters.  Perhaps Mr Osborne will allow him a little more space to explain this to the compliant taxpayers amongst his readership.

Of course, if “freelancers” have used tax avoidance to obtain a higher standard of living than they were entitled to, they are going to have to tighten their belts to find the money to pay the back-tax.  But why should we be sympathetic to that?  There are millions of people who would like a better standard of living, but most do not seek to achieve that by avoiding their responsibility to contribute to the running of the country.

ROBERT MAAS