FIDDLING WHILE ROME BURNS?

BLOG 196

FIDDLING WHILE ROME BURNS?

Philip Hammond seems to be taking his cue from the Emperor Nero whose reputed response to the sack of Rome was to pick up his fiddle and amuse himself while ignoring the chaos around him.

On 20 June, Mr Hammond gave his customary annual speech to the City of London at the Mansion House dinner.  He started by thanking the outgoing Governor of the Bank of England and continued: “And for me, too, there is now just a hint of uncertainty as to what the future may hold”.

If there was a hint of uncertainty before the speech, it seems doubtful if there was still one by the time he sat down.  It will be astounding if the future for him holds anything other than political oblivion.

For his speech gave the appearance of his being unaware that Theresa May has resigned as Prime Minister, that there is a leadership contest in progress between Boris Johnson and Jeremy Hunt as to who should lead the Conservative party, and that both contenders have publicly stated that the Conservative party is unlikely to have a future unless they deliver Brexit by 31 October.

This was a speech that firmly nailed his Remainer colours to the mast.  A speech that made clear that if the Conservative party was headed towards a hard Brexit, he would vote against it.  He did not actually go as far as to say, “Better a Jeremy Corbyn government and the UK remaining within the EU, than an independent Conservative led Britain”, but that was the clear impact of his speech.

How about, for example, “My approach to Brexit has been shaped by the simple observation that no one, however passionate their views on Europe, voted to be poorer – so a successful Brexit is  then yes eyes of the electorate must be a Brexit that protects Jobs, Businesses and living standards” and later

“As I said in the Spring Statement, if we leave the EU in a smooth and orderly way, the fiscal headroom I have built up means an incoming Prime Minister will have scope for additional spending or tax cuts …  But there is a caveat: a damaging “No Deal Brexit” would cause short-term disruption to our economy, soaking up all the fiscal headroom we have built and more …  and while fiscal and monetary policy interventions could help to smooth our path to a post-No Deal Brexit economy, both would only be temporary … and neither could prevent the economy being permanently smaller, than if we leave with a deal.  So there is a choice: either we leave with No Deal … or we preserve our future fiscal space – we cannot do both”.

There are an awful lot of assumptions here disguised as facts.  Firstly, people voted in the referendum on the question Parliament chose to ask them.  It is disingenuous to now say, in effect, I can ignore what the people voted for as we deliberately asked them the wrong question.  Unlike apparently, Mr Hammond, I neither possess a crystal ball nor the ability to read the minds of my fellow citizens.  But I suspect that many people did indeed vote to be temporarily poorer in order to escape the increasing all-encompassing grip of the EU Commission and its monolithic bureaucracy over more and more aspects of our lives.  Indeed, I suspect that most realised that leaving the EU would create a temporary problem, but felt it worthwhile to accept that.

I also suspect many would take issue with “a damaging No Deal Brexit”.  No one, including Mr Hammond, has the faintest idea of what will happen if we leave the EU without a deal.  Of course, I suspect that, faced with a choice of Deal or No Deal, most would prefer a deal provided that it is on vaguely satisfactory terms.  But if the signals from Brussels are to be believed, that choice is unlikely to be available.

Of course the EU is an important market for EU goods and services.  But there is no reason to believe that without a deal that market will completely dry up.  Nor is there reason to believe that if imports from Europe falter because we impose high tariffs (which we are extremely unlikely to do) UK producers will not sell more in the UK.  It also needs to be borne in mind that 53% of UK exports of goods and 75% of exports of services are not to the EU.  We currently sell to Asia around 50% of what we sell to EU countries and Asia, particularly China, is a growing market.  And do EU manufacturers actually want to impose high tariffs against us?  We buy from the EU around 4 times what we sell to them, so a No Deal Brexit will cause problems for them as well as us.

And if, as many believe, there are huge untapped markets for British goods outside Europe, it is by no means clear that a Deal with the EU which commits us to excluding from the UK, say, US goods because they conform to US rather than EU regulatory standards, is really in our best interest.  I don’t know.  But neither does Mr Hammond.

And if Mr Hammond is unequivocably opposed to a No Deal Brexit, whether a damaging or a non-damaging one, perhaps he ought to explain why he has spent so much of taxpayers’ money over the last couple of years preparing for the eventuality.

The second factor that prompted this article was a parliamentary statement on 25 June by Jesse Norman, the Financial Secretary to the Treasury.  He tells us that “the government will publish draft clauses for the next Finance Bill … on Thursday 11 July 2019, along with accompanying explanatory notes, tax information and impact notes … and other supporting documents”.

This looks like another way to waste taxpayers’ money.  It is a safe bet that, come the next Budget, it will not be either Mr Hammond or, indeed, Mr Norman, who delivers it.  It is also a fairly safe bet that whatever Brexit may bring, it will not be “Business as Usual”, so the next Chancellor of the Exchequer will need to bring in a Budget that reflects the new circumstances.  That Budget may or may not follow suggestions that Philip Hammond has previously put forward.  It seems more likely than not that it will not reflect his current intentions.  It is surely not reasonable for Mr Hammond to seek to tie his successor’s hands by trying to force onto him the many controversial ideas that he has threatened in the past.

ROBERT MAAS

TAX RELIEF FOR FILM INVESTMENT

BLOG 195

TAX RELIEF FOR FILM INVESTMENT

I was reading an article on Accounting Web the other day.  It started:

“In recent years, tax-saving schemes involving films have got their promoters into hot water and roasted unfortunate users in the newspapers.  So why is the British Film Institute tempting investors with tax relief to invest in British films?

Some might argue that, while there have been some cynical planners attempting to take advantage of loosely-drafted legislation, the finger of blame for this taxing issue might reasonably be pointed at the government of the time”.

Or perhaps it should be pointed at greedy investors.

1.      In 1992, as a result of lobbying by Harold Wilson introduced tax relief for investment in British Films.  When we joined the EEC, we had to extend this to EEC films as well.

2.      This worked well.

3.      Then promoters turned the relief into avoidance.  They arranged non-recourse borrowing (i.e. repayable only out of proceeds of sale of the film rights) for, normally, three times the investment so that the investor got back in tax relief most of the investment he had made in the film.  HMRC were not amused – but tolerated the gearing provided that the investment was limited to a period of 15 years.  The scheme worked by purchasing a film and leasing it to a distributor.  It deferred tax.  In return for the up-front tax relief, the investor obtained taxable rental receipts over the next 15 years (but he did not actually receive the cash as it was used to repay the loan; he only paid tax on it).

4.      Then some promoters amended their schemes to terminate the contract early so the taxpayer ceased to be entitled to the rentals (and the tax bill).  HMRC became very unhappy.

5.      In 2006, the government retargeted the relief.  Instead of giving tax relief to the investor, it gave it to the film production company.  That should have been RIP film schemes.  Films are very risky investments.  Investors are generally risk averse.  Accordingly if the new style film relief was to compensate the production company for taking the risk, there was no room for passive investors.

6.      But that would have put a lot of promoters out of business.  So they sought to find a way to enable investors to benefit from the new relief in defiance of the government’s intent to move it from the investor to the coalface.  The result was the film production partnership.  The partners were the investor (but as the partnership was a limited liability partnership they were insulated from risk beyond the amount of their investment).  The partnership bought a virtually completed film and leased it to a distributor.  This largely eliminated the risk on the investment itself.  Old style gearing with non-recourse borrowing also continued to cover any residual risk.

7.      HMRC took the view that the essence of a trade is risk, and as the partnership was insulated against risk activities, it did not qualify as film production.  To date, the Courts and Tribunals have agreed with HMRC.

8.      The result is that the investor is left with no tax relief but the continuing right to income over the next 15 years (or whatever) on which he will be taxable, but will not see the money as it is used to repay the loan.

9.      Investors are suing the scheme promoters.  Some high-profile investors claim to have thought that they were doing a public good by investing in the British film industry.  As far as I am aware, no-one has asked them, “What investment”?  It is not readily apparent how putting £100,000 into a tax scheme to generate £100,000 of tax relief is an investment, let alone an investment that benefits the British film industry.

10.  Ever since EIS was introduced in 1994, some people have set up film production companies and raised EIS finance.  As the film tax relief is obtained by the production company, not by the investor, such companies comply with the government’s policy to aim to assist the film industry.

11.  Sadly, most such companies have gone bust!

12.  The BFI seems to be wanting to attract EIS investment which it will co-invest into film productions via a new company.  This seems a very sensible move.  It is a world away from the aggressive tax avoidance devices described at 6 to 9 above.

The answer to the question posed by the author of the Accounting Web article is accordingly that the BFI is tempting investors not with film tax relief, but with the general small business EIS relief in order to help make British Films.  It has no interest in insulating rich investors from tax.

ROBERT MAAS

IS THIS THE SORT OF TAX AUTHORITY YOU WANT? - PART 10

BLOG 194

IS THIS THE SORT OF TAX AUTHORITY YOU WANT? – PART 10

In my last blog, I wrote about fairness.  One of the least fair parts of the tax system is the penalty regime.  Many accountants think that penalties are designed as a second way to raise tax revenue.  I don’t.  In general, the penalty regime tries to be fair.  But fairness relies on HMRC discretion.  Some years ago I started a petition on the No 10 website to allow HMRC not to collect tax when it would be unfair to do.  It was a flop.  A lot of tax specialists told me that they could not sign it because they did not trust HMRC with such a discretion.

Most penalties contain a let-out.  No penalty can be charged if the taxpayer had a “reasonable excuse” for doing (or, more likely, not doing) the thing that gave rise to the penalty.  There is no definition of a reasonable excuse.  These are two ordinary English words.  Everyone has his own perception of what is a reasonable excuse.  Here are two cases where I believe that HMRC’s perception is completely incompatible with what most people think.  They are cases where HMRC chose to spend our, i.e. taxpayers’, money to pursue a taxpayer in what I feel are wholly unreasonable circumstances.  Do you agree, or do you think it money well spent and that the two Tribunals were unduly lenient in not enforcing the penalty?

The first is Pokorowski.  Mr Pokorowski was a self-employed electrician formerly living in a house share in London E17.  In April 2014 he went to Poland.  When he returned he could not find work, he exhausted all his savings, was evicted from his house, and all of his belongings were thrown into the street and lost or stolen.  He lived on the street until, happily, in January 2017 he found hostel accommodation and later that year found a job and was able to move to permanent accommodation.  What has that to do with tax, you are probably thinking?  Well in April 2015, HMRC sent a notice to Mr Pokorowski at the E17 address asking him to file a tax return for the year to 5 April 2015.  It does not take a genius to realise that he never received the notice and, even if he had done so, would have had other things on his mind than filing a tax return.  On 8 July 2017, Mr Pokorowski very conscientiously filed his 2014/15 tax return.

HMRC promptly issued him with penalty notices for £1,600 because he had not filed the return by 31 October 2015.  Mr Pokorowski claimed that being homeless throughout the period April 2015 to October 2017 gave him a reasonable excuse for not having filed his tax return.  I think that receiving the notice to file was probably a reasonable excuse too.  Not in HMRC’s eyes though.  They are entitled by law to send the notice to the taxpayer’s last known address.  They had done so.  They (on behalf of you and me) were therefore entitled to their pound of flesh, (sorry I meant £1,600 of penalties).  In their eyes, Mr Pokorowski had not acted reasonably.  Between April 2014 and April 2015, he should have begged for enough money to make a telephone call, gone to a local library and looked up HMRC’s phone number and called them and told them he was no longer in E17 and given them the location of the doorstep or park bench he was currently sleeping on.  Instead he worried about eating and finding somewhere to sleep, when he obviously ought to have prioritised his tax obligations.  Actually had he called HMRC, it would not have helped.  E17 would still have been his last known address but as the next night he would probably have slept somewhere else, so the notice to file would then still have gone to the wrong doorstep.  He would have had to find that night’s doorstep first and then given HMRC its address.  Of course he earned nothing during the tax year 2014/15, but in 2009, Mr Osborne convinced Parliament that having no income should not absolve a taxpayer from penalties for not having filed a tax return.

The Tribunal fortunately held that Mr Pokorowski had a reasonable excuse.  The judge commented “HMRC’s decision to pursue Mr Pokorowski for penalties in the circumstances of this appeal is a scandal.  For HMRC to expect a homeless person to keep HMRC up-to-date with their address is ridiculous – and just needs to be stated to show its absurdity”.

Is this just one HMRC Officer being wholly unreasonable?  I think not.  The HMRC Officer who argued the case was not the one who issued the penalty.  There were probably others involved in escalating the case from the original Officer to HMRC’s Appeals Unit, yet no one within HMRC seems to have thought it absurd.

The second case is Corrado.  Mr Corrado entered into a tax avoidance scheme.  HMRC challenged it and Mr Corrado accepted it did not work and agreed to pay the tax.  Indeed, he actually paid it.  He had claimed a tax refund of £128,986, but HMRC did not repay it.  As a result, after having foregone the refund, the tax he owed HMRC was £16,580 and that is what he paid - in agreement with HMRC, it should be added.

The snag is that HMRC had issued a follower notice.  This is a special procedure in relation to tax avoidance schemes.  When HMRC win a tax case, they can write to taxpayers who have used a similar scheme requiring them to correct their tax return to give effect to the HMRC victory.  To correct his tax return, Mr Corrado had to sign two HMRC forms, one of which was to confirm that he owed tax of £191,803.  Mr Corrado objected to signing a form saying that he owed £191,803, when all that he actually owed was £16,580.  Being unwilling to make such a false declaration landed him with a penalty notice for a £58,326 penalty.  The Tribunal held that Mr Corrado was theoretically liable for the penalty as he had not corrected his tax return in accordance with the statutory procedure.  However, unlike HMRC, it thought that he had a reasonable excuse for not having done so.

As a taxpayer, I think that HMRC acted unreasonably in raising penalties in both of these cases.  The law does not require them to seek a penalty.  It authorises them to do so but they have a discretion not to do so.  They cannot do so if they believe that the taxpayer had a reasonable excuse.  I cannot myself see how any reasonable person could have thought that both of these taxpayers did not have a reasonable excuse.

I do not know how much taxpayers’ money was expended by HMRC in pursuing these two cases.  Thankfully, they were both argued by HMRC staff; they did not pay for outside barristers.  Whatever the figure may have been, it was too much.  As a taxpayer I did not want HMRC to spend my taxes on pursuing either of these cases.  How about you?  Are you happy how they are spending our money?

ROBERT MAAS

DO WE HAVE A FAIR TAX SYSTEM?

BLOG 193

DO WE HAVE A FAIR TAX SYSTEM?

From time to time I have highlighted tax cases which I feel that HMRC should never have taken to the Appeals Tribunal.

Why do I do this?  There are two reasons.  The first is that HMRC is not, or should not be, an entity remote from us.  It is an organ of government.  Our government.  Its main role is to collect the taxes that our democratically elected parliament has imposed on us as the means to generate the income to finance the services that parliament perceives (rightly or wrongly) we want the government to provide to us.  The fact that it has volunteered to do other things – such as pay out some social security benefits and to collect student loans – are not its purpose; they are things that the Board of HMRC perceives that they can make money from to supplement the money that the government gives them to run the tax system.  I have no particular problem with them undertaking such commercial ventures, albeit that personally I would have preferred them not to do so as it distracts them from efficiently running the tax system.  Apologies if you disagree, if you think their administration of the tax system is a model of efficiency; I don’t!

But I digress.  As guardians of the tax system, HMRC are working for you and me.  They are providing what the government believe that we, as taxpayers, want.

What do you actually want from HMRC?  I want them to collect the tax that parliament has imposed.  But I want them to do so fairly.  I also do not want them to waste taxpayer’s money on pursuing either hopeless cases or cases where it is not reasonable for them to collect the last penny of tax or penalties because I perceive it unfair for them to do so.  That is obviously a bit controversial.  My concept of fairness may differ from yours.  It certainly differs from that of the government and I suspect differs from that of HMRC ,which to my mind surrendered its independence years ago, preferring instead to become a mouthpiece of the Blair government.

The second reason is that politicians are constantly holding out fairness as a lynchpin of our tax system.  But their conception of fairness seems to differ significantly from mine.

Do we have a fair tax system?  No, not in my view.  Perhaps that is a bit harsh.  We have a system that operates fairly in the majority of cases, but unfairly where the facts are a bit out of the ordinary.  I accept (albeit that the government does not appear to do so) that there is a conflict between simplicity and fairness.  A simple tax by definition is likely to operate unfairly where the facts fall outside the norm, as trying to cater for unusual situations requires more complex legislation.  Similarly, a fair tax cannot be simple because it needs to cater for unusual situations.  Up until the 1980s, the government tended to tilt the balance in favour of fairness.  Since then they have tilted it (consciously) in favour of simplicity.

Which do you want?  You cannot have both.  Personally, I would prefer a system that is complex but fair than one which is simply but unfair.  But then I’m a tax specialist.  What of the average taxpayer?  Parliament expects him to complete a tax return if asked to do so by HMRC.  Parliament have never grasped the nettle of whether he can be expected to find money to pay someone to help him.  (The Tax Tribunals have; there are a number of cases where they have penalised a person for not being able to (or choosing not to) afford to engage a tax specialist where he has entered into an out of the ordinary transaction).  Assuming these Tribunals are wrong and that parliament still expects a taxpayer to be able to complete his own tax return without assistance, that aspiration is a realistic one only if the legislation is simple and easy to understand.  So perhaps there is another balance to be struck; that between complexity and compliance costs.

As mentioned earlier, the government’s definition of fairness is different to what I (and I suspect you) perceive the word to mean.  It is clear that when they talk about fairness, they do not mean that the system ought to operate fairly in unusual circumstances.  They mean that persons in reasonably comparable situations ought to pay roughly the same amount of tax.  No, that is wrong.  If I am self-employed doing the same job as an employee for the same reward, they do not believe the two of us should pay the same tax – sorry they do, but instead of enacting that, they seem to enjoy having two taxing regimes with different outcomes and then enacting lots of complex legislation to determine which self-employed people they (or rather HMRC) believe deserve to be self-employed and which they believe should be taxed as if they were employees.  That is one reason why there is so much highly complex legislation.

But I digress.  The government’s view of fairness is that a person should adopt a two-stage approach.

1.      Apply the law to his situation.

2.      Consider whether parliament intended the law to apply in his situation or they simply couldn’t be bothered to try to cover that situation.

Fairness in government terms means that if at step 2 you believe that parliament intended to impose tax even though it chose not to in fact do so, you should construe the legislation as if it taxed you.  In other words, if in a particular situation you end up paying less tax than a neighbour in a similar situation, it is unfair to expect to be taxed according to the law.  Instead, you should volunteer to pay the tax that parliament inadvertently did not impose on you.

If you agree with the government definition, you should probably stop reading this blog.  I think it is wholly unrealistic and ignore it.

When I started this blog is intended to highlight two cases where I thought HMRC had acted unreasonably.  However you have probably read as much as you want in one go, so I will defer that to another blog.

ROBERT MAAS