WHAT COMPACT?

 

BLOG 211 

WHAT COMPACT?

  

I was fascinated by an exchange on the web the other day.  I subscribe to a website called Nextdoor, which I thought was a local group, but sends me things from miles away so I must have been wrong.  In any event, someone posted an item the other day that strange markings had appeared on the road at the end of my street.  A local Councillor explained that they were creating new Healthy Neighbourhood schemes to stop cars passing through residential roads.  Typical Labour-controlled Brent, I thought trying to thwart the government’s pleas to find alternative ways to get to work other than public transport.  Why no consultation, and what a ridiculous idea, most of my neighbours seem to have thought, until the Councillor came back with the information that it is not a Brent scheme.  It is being financed direct by the government which is forcing councils to implement it immediately.  Typical Conservative government, I thought, one hand not knowing what the other is doing.  Now another Councillor has said it is nothing to do with the government.  It is being imposed on us (and paid for) by the Mayor of London and TFL.  Typical politicians, they disrupt our lives but don’t even know at whose demand they are doing so.

 

But I digress.  Our lives have all been disrupted by Coronavirus, but I have now started going back into the office again.  My local station is on the Metropolitan line and I can get a tube into Aldgate from where I walk to the office.  I am fascinated that coming into town the trains are fairly empty.  People observe social distancing very well; a lot of people will stand rather than sit next to an existing passenger.  Coming back, they are too as far as Finchley Road, about two-thirds of my journey, but at Finchley Road the trains get so crowded that social distancing goes by the board completely.  I think the reason is that at Finchley Road the Metropolitan line has an interchange with the Jubilee line, but before the pandemic I had not noticed a crush there.

 

The thing I do notice is people’s interpretation of wearing a mask.  Some people seem to think it important to cover one’s chin, but dangerous to let the mask cover your mouth or nose.  I noticed a new phenomenon last week.  Some people seem to have learnt that covering your mouth is important as long as you allow the virus to exit your nose.

 

This is not actually what I intended to write about; it’s just letting off steam.  One consequence of staying at home is that I have stopped reading the Evening Standard and  instead on my train journeys am reading the technical articles that I normally save up until I take my annual trip to Chicago (which I will miss this year).  I was reading an article by a tax partner of EY on Off-Payroll working.  The type of clients I deal with are very different to EY.  They tend to deal with the big companies that use the workers, which is what interested me in the article.  What staggered/infuriated me was the author’s comment: “The 30-year growth of the contractor market, and its approach to tax risk, allowed a broad compact among workers, their clients and society to develop.  This is a compact with which most people were comfortable, and which is best defined by the formula: career flexibility + self-employed status + higher daily rate = lower job security + no benefits + no incentive pay.   The Off-Payroll working rules broke this compact by ignoring a profound difference in appetite for tax risk between the parties, effectively allowing the client to impose their approach to risk on the worker without granting the worker any additional rights in return”.

 

I must live in a parallel universe to the author.  In my universe, well over 30 years ago, the big computer companies decided that, whatever the government wanted, they did not want to get involved with PAYE and NIC for computer specialists that they needed only on a relatively temporary basis.  They accordingly told such people that if they wanted to work for them, they would have to form a company and the computer giant would engage that company to provide the worker’s services to it.  Later, other companies saw that a great way to protect themselves against the risk of PAYE and NIC and began to engage workers through personal service companies (PSCs) too.  In 1999, the then government became worried at the loss of NIC and introduced the IR35 rule which treated the PSC as making a deemed salary.  This was a crazy solution as it gave the fee payer, who in most cases was competent to apply PAYE, immunity from doing so and switched the obligation to the PSC.  This created an avalanche of companies that would only engage contractors through a PSC.  Who could blame them?  Unfortunately, in most cases owners of PSC were either incapable of determining whether the IR35 rules applied or gave themselves the benefit of the doubt and concluded that they did not.  HMRC also realised that it was difficult and time-consuming to police IR35 so opted not to deploy the resources to do so.  Off-payroll working was designed to replace IR35.  However, the Chancellor panicked when he realised that Off-payroll working could be very burdensome to small businesses that use sub-contractors and exempted them.  This ended up with a complete mess.  From next April, some engagement of PSCs will be within IR35, some will be within Off-payroll working and some within neither.  The owner of the PSC will still be incapable of applying IR35 correctly and HMRC will still not have the resources to police it.

 

In my universe, there is no compact between client and worker.  The client has said to the worker if you want to work for me, you must do so via a PSC.  The worker has not considered the EY partner’s equation (I will not embarrass him by naming him).  He has considered only a different equation namely work = feed my family.

 

Back in the EY partner’s universe there are a few puzzling problems with his equation.  Firstly, the compact says nothing about either PSCs or IR35 or Off-payroll working.  In the absence of those elements, the compact will still work after 5 April 2021.  Self-employed tax status still gives career flexibility + higher daily rate and still suffers from lower job security + no benefits + no incentive pay.  Off-payroll working changes nothing.  Indeed, it has no application to self-employment at all.  So EY partner can stop worrying.  Can stop worrying, that is, if he really believes his compact.  I suspect though that many of his clients actually adopt a different equation, namely if you are prepared to take off of me the tax risk of my not being able to accurately identify if you are self-employed, I will pay you a greater amount than if I were to engage you (which incidentally I am not prepared to do so it is a case of accepting my deal or not working for me).

 

It is clear from the succession of Tax Tribunal cases, that the BBC put that proposition to its freelance workers.  Many of those would have been very happy to be employed by the BBC, but were not given the option of employment.  Virtually all of them would have been happy to have been taken on by the BBC as a self-employed person but were not given that option either.

 

Many, if not most, nurses and doctors and IT consultants and building industry workers would also be happy to work as a self-employed individual but have been denied the opportunity to do so.

 

It is not a question of who is willing to take the tax risk.  The government opted to require the client, the user of the labour, to take the tax risk.  Pre 1999, most were prepared to go along with this.  In my view, it was the right place to impose the risk because the client is normally a large organisation (or at least a larger one than the PSC) and can afford advice to quantify the tax risk (which does not exist at all if the company does not use contractors) and decide whether that risk is an acceptable price to pay to avoid the onerous obligations that would arise from employing the worker.  Indeed, the concept of tax risk is itself a misnomer.  The risk is actually that the client is either unable to determine whether what the worker will do factually constitutes employment, or is prepared to treat the worker as self-employed in disregard of the facts.  I suspect that in many cases the so-called risk is not even that.  Rather it is that the client is unwilling to apply the law to his employees while the government allows him to shrug off his responsibility on to someone else by engaging such employees through the medium of a PSC.

 

I do not blame companies for doing that.  However, that is pure tax avoidance.  It is not reasonable to seek to disguise tax avoidance by pretending that there is a compact between two parties with equal bargaining power.  That rarely reflects the facts!

 

ROBERT MAAS

DON'T CONFUSE JIM HARRA WITH HMRC

 

BLOG 210

 

DON’T CONFUSE JIM HARRA WITH HMRC

 

 

I have subscribed for a long time to the magazine, Private Eye.  I like a lot of the cartoons.  It is good at investigating journalism, but I find myself increasingly questioning many of the views expressed in the magazine, particularly on HMRC which often appear to me many years out of date.

 

One good example is an article in the back (the In the City page) of a recent issue that starts, “HM Revenue and Customs was unusually quick to question whether two of boy wonder Rishi Sunak’s gimmicks to boost spending – the £1,000 per furloughed job retention bonus and the £10 “eat for Britain” dining out voucher – were value for money”.

 

Actually, HMRC did not question anything.  Jim Harra, in his role as Principal Accounting Officer to HMRC, wrote two formal letters to the Chancellor of the Exchequer which basically said, in relation to both schemes,

 

a)     there is a sound policy rationale for the proposal,

 

b)      however, as the scheme is being introduced quickly, there has been no time to obtain information to evaluate the value for money of the proposal,

 

c)      in any event, there is huge uncertainty about what the scheme will cost and what it will achieve,

 

d)      accordingly, I am unable to say whether or not it will turn out to be value for money,

 

e)      as I have a personal responsibility to ensure that HMRC uses its resources appropriately, I need a written instruction to proceed,

 

f)       I consider it entirely appropriate for you to make a judgement to proceed in the light of the economic impacts of COVID-19.

 

The Chancellor duly gave the appropriate directions pointing out that there are broader issues that he can take into account, but that Mr Harra cannot, and that there are clearly compelling economic reasons for introducing the scheme.

 

As HMRC’s traditional role is to collect money, not to hand it out – and where it does hand it out it does so as agent of the Department for Social Development – I would expect Mr Harra to write such a letter every time the Chancellor imposes a role on it that involves paying out money to the public.

 

What amused me was that the article went on to suggest that “similar questions involving far bigger numbers should be asked about the Treasury-backed Bank of England COVID-19 corporate financing facility (CCFF)…”.  Its gripe seems to be that many of the companies applying for CCFF loans are overseas companies with UK operations and it is hard to see the benefit to the UK economy of lending money to foreign companies.  Whilst I would not dissent from that proposition, the UK is bound by the EU rules on free movement of capital and the prohibition of State aid not to single out UK companies for favourable treatment.  From 1 January next, we will be able to do so.  It is sad that we cannot currently.  What I find amusing is that for the last couple of years, Private Eye has incessantly berated people like me who would like the UK to be free of ridiculous EU bureaucratic rules as being thick idiots unable to see that we have been brainwashed by the Chinese government into wanting to leave the EU, and who will instantly regret our foolishness come February.

 

Of course, I do not have a crystal ball.  I have no idea whether we will end up with a trade deal with the EU (Indeed, I fear that if we do, it will not be an attractive one), or whether the UK can survive as a trading nation as it did for several hundred years before 1973, without the benevolent aid of the EU, but I am very confident that in the medium term the country can indeed do so.

 

 

ROBERT MAAS

FIGHTING FOR JUSTICE

 

BLOG 209

 

FIGHTING FOR JUSTICE

 

 

When I started in tax, there were two Appeals Tribunals, the General Commissioners and the Special Commissioners.  There was then a right of appeal (on a question of law only, as now) to the High Court.  The General Commissioners, who heard the vast majority of appeals, were laymen.  Complex appeals went to the Special Commissioners, who were lawyers.  Most accountants thought the system worked well, but lawyers did not.  The problem was that the General Commissioners often determined an appeal on the basis of commonsense and their own sense of fairness, which was not always in accordance with the law.

 

The current system merged the General and Special Commissioners into the First-tier Tribunal (FTT) and gave a right of appeal on a question of law to a new Tribunal, the Upper Tribunal, which has a similar legal standing to the High Court.  A big difference though is that every hearing of the FTT is chaired by a lawyer – and the lawyer often sits alone, although he can be accompanied by one or two other members some of whom are lawyers and some of whom are laymen.  It was anticipated that this would create consistency.

 

In general, there is no cost regime in the FTT but the Upper Tribunal, like the High Court, can require an unsuccessful party to pay the winning party’s costs of the appeal (albeit only of the appeal to the Upper Tribunal).  This is the case even if the taxpayer wins before the FTT and it is HMRC that appeals.  A taxpayer in such circumstances either has to accept the risk of a heavy, unquantifiable amount of costs against him if the Upper Tribunal reverses the decision of the FTT, or has to discard his FTT victory and agree to pay tax that the FTT has held he does not owe.

 

It is therefore unsurprising that individuals do not appeal many cases to the Upper Tribunal, particularly where there is not a large amount of tax at stake, as there is a fear that HMRC’s costs of losing may well significantly outweigh the tax saving in winning.  This is a shame, because reading many FTT decisions I get the impression that the pendulum has swung far too far in favour of HMRC, insofar as whilst a legally biased Tribunal will give proper weight to the law, it can also give too much weight to the law and too little consideration to the facts.  The law does not function in isolation.  The role of the Tribunal is to discern the facts and then consider how the law applies to those facts.  Many lawyers claim little skill in maths, so this can be a particular problem where the facts have a mathematical slant.

 

Those musings were prompted by the decision of the Upper Tribunal in Heather Jones.  Ms Jones is one of that, sadly rare, category of an unrepresented taxpayer who felt that she had been so unfairly treated by the FTT that she should argue her case (again in person) before the Upper Tribunal.

 

Ms Jones was made redundant from her job with Doubletake Studios Ltd on 31 October 2010.  Yes 2010, in tax matters the wheels of justice can grind very slowly.  It was agreed that the company would pay her a redundancy payment totalling £36,700 in four equal instalments.  She received three instalments of £9,175 and a fourth payment of £6,515.04.  There was a small problem with the £9,175s insofar as one of the three payments identified by the Tribunal was not a receipt at all; it was a transfer out of Ms Jones’ bank account, and the Tribunal did not pick up the actual payment at all, which does suggest a somewhat inadequate grasp of the principles of arithmetic.  But that is a by-the-way.  The problem is why the fourth payment was £6,515.04, not £9,175.  Doubletake Studios had not volunteered an explanation to Ms Jones and had subsequently gone into liquidation, so it was too late for an explanation.  Ms Jones said that the company must have deducted tax. 

 

The first £30,000 of compensation is tax-free and the excess is taxable.  In Ms Jones’ case the excess over £30,000 was £6,700.  Tax at 40% on £6,700 is £2,680.  The reduction in the payment was £2,660.96 which near enough made sense – after all the burden on Ms Jones is not to prove her case beyond all reasonable doubt; it is to show that it is more likely than not (i.e. greater than a 50% probability) that the £2,660.96 was tax. 

 

Unfortunately, the FTT did not ask themselves whether there was another reasonable explanation for the £19.04 difference between the two figures (such as that PAYE code numbers rarely result in a precisely accurate deduction or there could have been some other adjustment due).  They worked out that £2,660.96 was 39.7% of £6,700 and concluded that as it was not 40%, Ms Jones had not shown that it was more likely that it was tax than that it was anything else.

 

To be fair, HMRC said (correctly) that Doubletake Studios should not have deducted tax at 40%, but only at the 20% basic rate as the payment was made after the employment ceased.  They analysed the £2,660.96 as: basic rate tax due, £1,340 plus an under-deduction made earlier in the tax year of £310.40 = £1,650.40 and plus employee’s National Insurance, which should also have been deducted from the compensation, but could not get back to the £2,660.96.  Actually, there is no employee’s National Insurance on compensation as HMRC’s own manual (NIM 13132) makes clear, so their suggestion makes no sense at all.  But perhaps it is unreasonable to expect the Tribunal (which might be expected to try to help a litigant in person) to know that.

 

The FTT said that the taxpayer had not proved her case, but gave her 56 days to look for further evidence.  In that period, Ms Jones discovered an e-mail chain.  She had indeed asked the company why it had deducted the £2,660.96 and the company’s solicitor had responded that it was tax.  She triumphantly sent the e-mail chain to the FTT, which promptly dismissed this.  By then it had found the further £9,175 that it had missed first time round and concluded that the £6,515.04 was probably nothing to do with the compensation.

 

The Upper Tribunal thought that treating a £9,175 payment as a receipt was a serious error of law, as also was dismissing the e-mail chain so cursorily.  It at least showed that the £6,515.04 was part of the compensation, so how could the FTT simply dismiss it.  The Upper Tribunal accordingly set aside the FTT decision and remade it by deciding that Ms Jones had indeed shown that it was more likely than not that the entire £2,660.96 was tax.

 

The Upper Tribunal also pointed out that the assessment on Ms Jones was a discovery assessment and, as such, it was for HMRC to prove that the assessment had been validly raised.  Although the FTT had correctly said that this burden was on HMRC, it had not gone on to consider what proof HMRC had put forward (which was none, as they had not addressed the issue), so there was no evidence on which they could in law have decided that the assessment had been validly raised.

 

This looks to me a prime example of the FTT having been so pre-occupied with the law that they gave little consideration to the weight of the facts in determining whether the taxpayer had shown that it was more likely than not that the deduction was tax.

 

I applaud Ms Jones for persevering in her belief that she did not owe tax even to the extent of taking the risk of costs in the Upper Tribunal.  I am delighted that her persistence won through.

 

 

ROBERT MAAS