HOW FAIR IS THIS?

 

BLOG 229

 

HOW FAIR IS THIS?

 

Treasury Ministers (of all political persuasions) are constantly telling us that the UK has a fair tax system and it is unacceptable for taxpayers to seek unfairly generous treatment by seeking to rely on the letter of the law, when it is clear that the wording does not properly reflect the intention of Parliament (which of course nowadays means the parliamentary draftsman interpreting the wishes of Treasury and HMRC civil servants, as MPs rarely challenge the wording of Finance Bills).  I do not myself favour artificial tax avoidance (which in practice rarely works so is more accurately described as attempted avoidance), but I see it as a moral issue.  I support the rule of law and if others see no moral bar to relying on the wording of the law where it conflicts with the intention of the legislation, I do not question their right to do so.

 

But morality ought to work both ways!  If Ministers and HMRC exhort people to follow the spirit of the law rather than the letter of the law, it is surely incumbent on them to do the same.  It is hypocritical for HMRC to excoriate tax avoiders who rely on the letter of the law, while at the same time resorting to the letter of the law in order to collect tax that is clearly not due on the basis of the spirit of the law.

 

The recent First-tier Tribunal decision in Michelle McEnroe and Miranda Newman is a case in point.  These two ladies set up a company in which they each owned 50%.

 

Happily, their venture was successful and they were able to sell the company for £8 million on condition that at the time of sale it was free from debt.  Unfortunately, it was not free from debt.  It owed Allied Irish Bank £1.1 million (roughly).  The purchaser paid the ladies’ solicitors the £8 million, £1.1 million to be used to repay Allied Irish Bank, leaving £6.9 million for the shareholders, which they duly paid to them.  The two ladies duly paid capital gains tax on the £6.9 million.  I suspect that they were both entitled to Business Asset Disposal Relief which halves the tax on the first £9 million, so I imagine that they paid getting on for £1.2 million in tax.

 

“Not enough”, said HMRC!  The agreement says sale for £8 million.  If the two ladies voluntarily paid Allied Irish Bank (“voluntarily”, of course, in the context that they had warranted that the company was free from debt and would be sued by the purchaser if it was not), they are of course entitled to do so.  But there is nothing in the CGT legislation to allow them to deduct such a voluntary payment.  We want CGT on £8 million.  So please hand over another £440,000.

 

The First-tier Tribunal said that its role is limited to interpreting the sale agreement.  That says £8 million.  There is no ambiguity about it, so HMRC win.  I hope the ladies appeal, because there is a fallacy in that decision, namely that what the ladies agreed to sell for £8 million was a company free from debt and what they actually sold was a company with £1.1 million of debt.  If instead of paying off the £1.1 million, the solicitor had handed the full £8 million to the shareholders, and the purchaser then claimed £1.1 million back under the warranty that the company would be free of debt, the sale proceeds for CGT purposes would have been £6.9 million because a payment under the warranty would have been the settlement of a contingent liability for which the law does allow a deduction.

 

But I am not writing this to criticise the FTT.  I am not even criticising the solicitors (if there were solicitors involved), as such a contract would normally provide that the shares will be sold for £6.9 million, and the purchasers shall procure that the company repays its £1.1 million debt to Allied Irish Bank.  My concern is that HMRC wanted tax on £8 million in circumstances where the two ladies received only £6.9 million, and it was clear that they would never get the extra £1.1 million.  Not only did HMRC want an unjustified £440,000, but they wanted it so badly that they were prepared to defend the ladies’ appeal to the Tribunal to make sure that they got it.

 

In the old days, an Inspector of Taxes argued his own case before the Tribunal; there was (in theory at least) no intervention by anyone else within HMRC.  This is no longer the case.  When a taxpayer appeals an HMRC decision, the HMRC Officer hands over the conduct of the case to an appeals specialist.  Accordingly, when HMRC defend an appeal, it is not a rogue Officer on a frolic of his own; it is a considered opinion by someone else within HMRC (often by two other people as when you make an appeal, HMRC offers you a review by HMRC’s review department and I would have expected these two ladies to have accepted such an offer).

 

As a taxpayer, are you pleased that these two ladies have been told to pay £440,000 that in any remotely fair tax system they would not owe?  After all, the more that HMRC can obtain unfairly, the less the Chancellor has to increase tax on the rest of us.  If so, why not write to HMRC and congratulate them on screwing these two hard-working ladies?  I’m sure they will pass on the congratulations to the two or three (or possibly more) officers who partook in the decision to go to the Tribunal.

 

As a taxpayer, I’m not pleased myself!  I’m ashamed that we have a tax system that permits our tax authority to act so unfairly.

 

 

ROBERT MAAS

A Reminiscence From 2042

 

BLOG 228

 

A REMINISCENCE FROM 2042

 

 

You won’t know my pal, George.  George is in his 80’s now.  A good 20 years younger than me.  He had a reasonably productive life having built up George’s Widgets and sold it for £600,000.  He’s spent most of that £600,000 (well some of it because he gave a lot of it to charity) and is now living off his State Pension and a £20,000 pa private pension, but his needs are modest and he owns his own house so he’s enjoying his retirement.

 

Or at least he was until the letter came.  It was from HMRC demanding that George pay them £3,426,296.80.  George came to me in tears.  I’ve never seen him cry before in all the years I’ve known him.

 

I started to read the letter.  It said that back in 2024, George had bought plastic packaging from a company called Megapackaging plc.  George could not immediately recognise the name, but it then came back to him.  He explained that in 2024, before he switched to cardboard, he sold his widgets in plastic bags containing 6 widgets each.  He vaguely remembered a salesman from Megapackaging offering him plastic bags at a price that undercut his then existing supplier.  Always one for a bargain, George had given him a trial order, then another order and then began to use Megapackaging as a preferred supplier.  However, they let him down badly in 2026, so he stopped buying from them.

 

Well, apparently, so HMRC say, Megapackaging went bust owing a large amount of plastic packaging tax (whatever that was, because of course plastics went out of use in the 2030s).

 

So what’s that got to do with George?  HMRC are saying that they think that George did not do adequate due diligence when it ordered its plastic envelopes from Megapackaging.  George says he treated them like any other supplier.  He gave them a small order as a test.  They delivered a quality product and didn’t push to be paid quickly.  He remembered that his purchase ledger clerk was very finicky and insisted on looking up Megapackaging at Companies House and looking at its website.  They were a good supplier until they messed up a big order in 2026 and George dropped them.

 

I read on.  HMRC are saying that it was not sufficient for George to satisfy himself about Megapackaging.  He should have investigated the people they bought their plastics from.  Apparently, one of them, Cheapco Ltd, was a crook – or at least that is HMRC’s view.  I find it hard to believe that, even in the semi-primitive days of 2021, Parliament would have held George responsible for Megapackaging, a large public company, not having discovered that one of its suppliers was a crook (if indeed it was).

 

But all that was almost 20 years ago.  That is ancient history.  George cannot possibly be bankrupted now in his retirement because he did not think 20 years ago that he needed to investigate the supplies of Megapackaging plc.

 

Then I looked at the legislation.  There it was in black and white, Finance Act 2021, Sch 9, para 6(2) “in a case involving a loss of tax brought about deliberately by R or P” HMRC can give a secondary liability and assessment notice to R up to 20 years from the end of the accounting period for which R was liable to pay the tax.

 

I started to worry on George’s behalf.  I worked out that R can be George if P is Megapackaging.  So can George be R?  Sch 9, para 21 says that he is if he is acting in the course of a related business (which George was as Sch 9, para 21(a) says that a business which is supplied with plastic packaging components produced by the registered person is a related business) and he knew or ought to have known that P had failed to pay plastic packaging tax which he was liable to pay.  I began to relax.  Surely P is Megapackaging.  Sadly, No!  P is any person who is liable to pay the tax.

 

So what HMRC is saying is that as George did not do sufficient due diligence on Cheapco Ltd, he is liable for the tax that Cheapco evaded.

 

Can that be right?  I remember the Boston Tea Party slogan from 1773, “No taxation without representation!”.  Surely that still held good in 2021?  630 odd MPs would not vote to impose a clearly unreasonable tax charge on George in 2042?  Of course not!  Or is that right?  How many of them read the 400 plus pages of the Finance Bill before voting to pass it?  Fortunately the Wayback Machine still gives me internet access to 2021.  I see that the Finance Bill was published on 11 March 2021 and was approved by the House of Commons on 24 May 2021.  That is about 12 weeks.  So how many of the MPs who voted to impose this tax charge that is going to bankrupt George knew what they were doing?  I’d like to think all of them because I think that the spirit of 1773 lives on, but I suspect none of them because I am unbelievably naïve.  I probably need to grow up and recognise that the meaning of democracy in 2021 had nothing to do with MPs doing what they thought to be in the best interests of their constituents such as George.

 

And where were the professions, such as the ICAEW and the CIOT?  Did their members urge them to protest against this clear unfairness?  I’m ashamed to say that I was one of them.  I did not study the Finance Bill so did not identify George’s plight until it was too late.  I could say that I was in my 70’s and reading the Finance Bill from cover to cover (which I did in my 30s) was then beyond me.  But I cannot hide behind that.  George’s plight arises because 17 years ago in 2021, I along with most of my professional colleagues, did not make the effort to care about him!

 

ROBERT MAAS

Widespread Gross Negligence

 

BLOG 227

 

WIDESPREAD GROSS NEGLIGENCE?

 

 

When I joined the Institute of Chartered Accountants in 1965, it was a members’ organisation.  In theory it still is, but it doesn’t feel like it.  It feels like an institution that exercises control over its members.

 

This was brought home to me by a recent article in Accountancy Age (our online version of the Sun) headed “Sole practitioner excluded after widespread gross negligence”.  The article was written in conjunction with a Solicitor who specialises in professional disciplinary cases and what caught my eye was the closing comment that “Had Mr Dyer been better advised, a more favourable outcome may well have been achieved”.  Surely gross negligence is a very serious matter and legal advice cannot somehow reduce the seriousness.

 

The ICAEW publishes a summary of disciplinary cases, so I looked it up.  Mr Dyer, a sole practitioner in Nottingham, qualified in 1969, which means he is well over 70.  Most accountants that age who are still in practice tend to be semi-retired, not actively looking for new clients, but continuing to service a few long-term clients who have been with them for years.  I would expect Mr Dyer to fall into that category.  There had been no previous complaints about him to the Institute and the complaint in question was not a complaint by a client but a complaint by the Institute itself.  Furthermore, Mr Dyer admitted all the complaints against him, which normally attracts leniency from a Tribunal as it reduces the length of the hearing.  The complaints were:

 

1.      That he had not complied with the Institute’s Client Money Regulation account when the Institute first investigated him in 2016. He no longer handles clients’ money at all, so these were very historic failures.

 

2.      He did not carry out proper risk assessments under the Money Laundering Regulations.  The Institute (or the ICAEW as it now brands itself) takes it role as a regulator very seriously as it is afraid of losing its right to regulate its members.  As it is unlikely that Mr Dyer took on many new clients, this probably boils down to that he did not carry out periodic risk assessments on clients that he had known for years and was probably very close too.  I suspect that the reality is that he did so unconsciously, and his real sin was that he did not document that he had done so.

 

3.      He prepared accounts for a limited company that did not reflect the format prescribed by Financial Reporting Standard FRS 102.  It was noted that he did not use accounts production software (I suspect that he is digitally challenged like me) and had he done so most of the mistakes would not have occurred.  It is noteworthy that Companies House do not seem to have complained.  Nor does the client concerned, who was probably pleased to get accounts that he could understand, appear to have done so.

 

So, it appears that, like many of my generation, Mr Dyer is not very good at documenting what he does and keeping up to date with modern standards.  There appears to be no suggestion that he is not a good accountant in other respects or that his clients have any concerns over his competence.  There is no suggestion that any of his clients have been disadvantaged.

 

Yet the Tribunal decided that “any order which allowed Mr Dyer to retain his membership would damage the reputation of the profession and would not be adequate to protect the public”.  What public?  It is likely that Mr Dyer’s clients are happy with his work and will continue to use him whether or not he is a Chartered Accountant.  It is unlikely that anyone who is not a client would have sought to become one.  Before looking at this case, I had never heard of Mr Dyer and I suspect nobody else has other than his long-term clients.  So how does throwing him out of the Institute protect the public?  Indeed, how would anyone have associated Mr Dyer FCA with “the reputation of the profession” prior to the disciplinary hearing?

 

When the ICAEW was a member’s organisation, someone in the Institute would have had a quiet word with a good practitioner in Nottingham and asked them to see if they could help Mr Dyer to apply current standards.  Today, they hide behind GDPR and claim that they cannot reveal his plight to another practitioner without breaching GDPR – that is not of course the case as they could have asked Mr Dyer if he wanted them to link him up with another practitioner.

 

I feel very sad.  I do not think that stripping of his membership and, I suspect, as a result, his dignity, an old man who has practised conscientiously to the best of his ability for over 50 years but as he aged has not kept fully up to date, is either necessary or appropriate to protect my reputation as a Chartered Accountant.  On the contrary, it seems to me to emphasise how little the ICAEW today cares about its members.  That is not to say that those who transgress should not be disciplined.  But in a situation where an old man is struggling to cope with the modern world, a little sympathy and assistance would not have gone amiss.

 

 

ROBERT MAAS