JOURNALS OF ROBERT MAAS

2012-02-17T08:53:00.001-08:00

BLOG 122

I CAN ONLY MANAGE THIS ONCE A YEAR!

It was my birthday on Monday. I’m feeling very glad that they only come once a year, as it was one of those days that start badly and then gradually get worse. I got to my local station only to find that the Metropolitan line was suspended because of over-running engineering works. “Surely”, I thought “by 9am they should have sorted that out”. Fortunately I can get the Bakerloo line from another station a bus ride away. Unfortunately that had “minor delays” too, but after a bit of a walk I did manage to get a London Overground train into Euston. So half an hour late getting to work.

I had an evening lecture engagement in Lincoln. “Why not go a bit early and have a quick look around Lincoln”, I thought. East Coast trains thought otherwise. The plan was to get the 14.08 from Kings Cross, change trains at Peterborough and got to Lincoln at a quarter to five. After the train left Stevenage they announced that the connecting train for Lincoln had been cancelled and passengers should remain on the train to Newark to get a connection from there. They left it till a lot later to explain that the connection from Newark involved waiting at Newark for over an hour. Fortunately it had a warm waiting room and I had my kindle in my case, so I could sit and read.

Even more fortunately the train got me into Lincoln at 5.15, so I only lost half an hour – and of course my chance for sightseeing as I was due to lecture at 6pm. I thought that as time was getting short I had better get a taxi to the venue but there was a long queue and the walking instructions said it would only take 17 minutes, so I decided to walk. It was then I noticed that they started “walk north-west”. Sadly I had not brought a compass with me and did not have a clue which direction was northwest. However I could see the spire of Lincoln Cathedral and knew that the cathedral was next to the castle and the lecture venue was the other side of the castle. So I reasoned that if I made a beeline for the cathedral I would be OK.

And I was. Well, sort of. After a few minutes walk I came to a steep hill. The road bent left at the top. I decided to climb the hill as it did not look too long a walk. Sadly the bend was hiding a steeper hill, and, yes, the bend at the top of that was hiding an even steeper one. Fortunately there was a bench at the top of that, as by the time I finished climbing I felt ready for a heart attack! OK, I should have remembered that they used to build castles on top of the highest hill around. But I didn’t reckon on anyone finding a hill quite that high and quite that steep.

I got to the lecture venue at about quarter to six. I then discovered that the connector to the projector would not attach to my notebook computer (they were both male end and one needed to be female). So I’d have to manage without the slides. The organiser then asked if I really needed a microphone, as someone had walked away with the Copel mike and although they could give me a hand held one, I would have to hold it all the time as it did not have a stand. After all that hill climbing, all I really wanted was a drink – and to get my breath back – but I couldn’t see a bar so told him that I speak loudly so I could manage without. Thankfully after my talk he gave me a lift back to the station (using a route that involved no steep hills at all!) in good time to catch my train.

I’d got a travel bargain. The fare from Lincoln to London was only £6.95 (I love bargains – OK, I’ve got a mean streak). For this I had to change trains and change stations too. East Midland Trains would deliver me to Newark Castle station and I would then have a short walk to Newark Northgate station from which East Coast trains would take me back to London.

That looked fine when I booked. At 9.00 at night in a strange town it looked far less inviting. Indeed, when I discovered that the walk from one station to the other was not signposted, I began to wish that I’d paid the full fare to get a direct train from Lincoln.

There was a map of central Newark at the station, so I could see where Newark Northgate was. Unfortunately I am not very good at remembering maps. Fortunately I didn’t walk too far in the wrong direction before I found another map! Fortunately also the train companies had allowed almost an hour for the traveller to find Northgate station. I didn’t need that long. Fortunately that warm waiting room I mentioned earlier was still open. I am currently reading Bleak House on my Kindle. I was beginning to think that it must be in Newark! (OK, that’s unfair; if it wasn’t cold and I knew where I was going, I would probably have looked more closely at Newark and found it pretty).

I got home around 12.15am, which means that I must have passed the last of my birthday on the Metropolitan line somewhere between Finchley Road and Wembley Park. To be honest I wasn’t looking. I wasn’t even feeling that I was glad to see the end of the day. I was just longing to get home!

ROBERT MAAS

2012-02-15T06:14:00.001-08:00

BLOG 121

WHY THE FURORE?

It’s interesting to see that the head of the Student Loans Company (SLC), Ed Lester, is not employed by SLC but is loaned into SLC by his personal service company. Lots of people work for a personal services company that they own. Indeed the tax system recognises this. It contains specific provisions to ensure that the interposition of a personal service company between employer and employee does not avoid tax (except, perhaps to a minimal, acceptable extent). This is colloquially known as the IR35 legislation.

So why have the media made such a fuss about Mr Lester’s “tax avoidance device” (to quote The Guardian)? It is not a tax avoidance device at all; it simply shifts, with parliamentary approval, the obligation to apply PAYE from the SLC to the personal services company. Indeed it is actually probably in the public interest. Mr Lester (through his company) seems to have volunteered to pay the employer’s National Insurance contribution that SLC would otherwise have paid out of the money received from the SLC. Mr Lester has magnanimously donated this “tax”, to the nation.

I don’t know why the Guardian has got upset. I suspect probably because it does not understand IR35. However I think it was right to get upset but for the wrong reason. This is because it reports that, “HMRC has approved the arrangement”. I think it right that Margaret Hodge, Chairman of the Public Accounts Committee, is quoted as saying that the arrangement is “likely to be” examined by her Committee. Indeed, I would have much preferred her to pledge that it will examine it.

There is no statutory machinery for HMRC to “approve” such an arrangement. Furthermore, unless there is something very strange about Mr Lester’s relationship with SLC, I find it hard to understand how the IR35 legislation cannot apply. This legislation basically asks the question, “If Mr Lester had contracted direct with SLC and been paid direct by SLC, would he have been an employee of SLC?

To misquote an old saying, if something looks like an employment and quacks like an employment, it is probably an employment. If a person works subject to the control of a board and is an integral part of the line management of an organisation, that looks like an employment to me. Indeed, I would myself be hard put if I were asked to try to convince HMRC that it was not an employment.

So what should the PAC ask? Firstly it should ask whether HMRC did indeed “approve” Mr Lester’s arrangement and, if it did, why it did so. If The Guardian has got it wrong and HMRC did not approve it, it should ask whether HMRC intend to invoke IR35 against the arrangements and, if not, why it does not intend to do so?

It is vital that it asks these questions because HMRC from time to time takes cases before the Tribunals and the courts in situations where most disinterested observers would question why they have sought to enforce a law which is clearly unfair. HMRC’s stock response is that they have a duty to collect the tax that the law exacts. They have no power to introduce a concept of what is fair. Whilst I myself question whether this is right – as I think their general care and management power absolves them from collecting tax where to do so would be so unfair that other taxpayers might question the legitimacy of the tax system – I can understand their approach.

However it ceases to be understandable if HMRC adopt a policy that enforcement of tax is only for the little people; highly paid public servants need not pay the tax that the law requires.

I am even more concerned that The Guardian tells me that, “Lester who lives in Buckinghamshire, also receives £550 a week to pay for his travel and living expenses and cover his costs of getting to the company’s office in Glasgow”. That is fine if his personal services company puts it on his P11D and he puts it on his tax return and pays tax on it. But if not, I can see no circumstance in which, in accordance with the tax legislation, it is not taxable on him – or in which he, after discussion with his advisors, could realistically believe that it is not taxable on him.

I think it vital that the PAC investigates what has happened. It must do its job properly! If not, why should anyone have confidence that the tax system operates without fear or favour; that it applies equally to everyone?

ROBERT MAAS

2012-02-15T06:06:00.000-08:00

BLOG 120

TOO SMALL TO FAIL?

I noticed a headline recently in AccountancyAge.com (the profession’s online gossip column), “HMRC urged to meet with Portsmouth FC by PM”. Surely, I thought, HMRC is wholly independent of the government. It is outrageous for the Prime Minister to publicly tell it what to do. Then I thought that surely he wouldn’t do that, so I looked it up in Hansard. And yes he did. He called on HMRC “to meet the club so that it recoups the tax it is owed”. He added, “We must do everything we can to keep the friendly rivalry [between Portsmouth and Southampton football clubs] going”.

I’m a football fan. My club, West Ham United, got into financial difficulties. Two mad, millionaire businessmen, David Gold And David Sullivan bought it for far more than it was worth and have put a lot of money into it since. Mad, because commercially it would have been far more sensible to let it go into liquidation and buy the club, shorn of its debts, from the liquidator. I am grateful to the two Davids. But if they had not come along, I would not have expected taxpayers in Portsmouth, or in Manchester or Liverpool or anyone else, to give financial support to the club.

So why should the Prime Minister urge HMRC to talk to Portsmouth FC? It is a club that has been fighting off winding up petitions by HMRC since at least January 2010 (the last was issued on 24 January this year). Is Portsmouth FC too small to fail? It owes HMRC £1.6million, which is almost certainly VAT and/or PAYE. HMRC will have given this private company every opportunity to pay up prior to issuing its winding-up petition. I have never known them not consider a reasonable proposition for tax to be paid by instalments where cash flow projections show that the proposal is viable. HMRC know that if the club is wound up, they will have to write off most of the debt, as the footballing authorities have somehow created a system where, if a football club goes into liquidation, it has to pay the exorbitant salaries due to players and the huge transfer fees due to other clubs, before anyone else sees a penny out of whatever assets might remain.

Portsmouth FC may be important to Portsmouth as David Cameron suggests – although my recollection is that a lot of small businesses in Portsmouth have themselves been forced into insolvency because they did work for the football club and found themselves unable to recover the debt from it, so Portsmouth does not look that important to Portsmouth FC.

Personally I would have felt far comfortable if David Cameron were to ask HMRC to go easy on those very small businesses who suffer massive bad debts because bigger businesses ask them to do work knowing that they cannot pay for it. But as far as I am aware, he has not done so.

Indeed, when a very small business cannot pay its VAT or PAYE, in my experience HMRC get far more aggressive than if it cannot pay income tax or corporation tax because they claim (rightly, albeit unrealistically) that a business receives VAT from its customers, and deducts PAYE from salaries, as a trustee for HMRC, so they are not entitled to use such money towards their own running costs.

David Cameron however, apparently, has no compassion for very small businesses that incur bad debts. Let them go to the wall! I am not sure what he does have compassion for. He did not urge HMRC to talk to Woolworths or to Peacocks or to any other of the companies that have become insolvent over the last couple of years. It is only on behalf of Portsmouth FC that he urges leniency. Indeed, HMRC have also issued a winding-up petition against Heart of Midlothian FC and he has not urged HMRC to talk to them, even though, unlike Portsmouth, they have not already been talking to HMRC for the last two or three years over which HMRC have clearly lost patience – and I suspect have suffered a succession of broken promises.

Portsmouth has a population of around 207,000 people of which on average around 14,400 or around 7%, seem to regularly support Portsmouth FC. I would not myself have though that 7% suggests even that the club is important to the residents of Portsmouth as a recreation in these tough times. Edinburgh’s population is over twice that of Portsmouth so logically, if Portsmouth FC is vital to Portsmouth, Heart of Midlothian FC should be doubly important to Edinburgh, yet Mr Cameron has not urged HMRC to talk to Hearts.

So why does David Cameron want to urge HMRC to talk yet again to one private company in a provincial town? After all he is intent on separating retail banking from merchant banking so that in future no bank is too big to fail. It is some time since I looked at the statistics, but my recollection is that the vast majority of winding-up petitions are served by either HMRC or another government body. What is so important about Portsmouth FC that he should so want to single it out for special treatment? Is Portsmouth FC too small to fail? Or too important to the local economy to fail? Surely not! So why is Portsmouth different to Hearts? Surely it can’t be because Portsmouth has a Conservative MP and Hearts does not? Surely the Prime Minister puts the interests of the country before those of the Conservative party?

The real answer, I imagine, is that the Conservative MP for Portsmouth North asked him to call on HMRC to help Portsmouth FC to survive, and he didn’t have the guts to tell her that a business that pays salaries that it cannot afford, and as a result incurs massive debts, does not deserve to survive. That would have been honest. Indeed it is probably in the best interests of Portsmouth FC to be put into liquidation and for it to be resurrected freed of its massive debt burden (the administrator of its insolvent parent company has said that he will sell it only to someone who has £100million of finance available to pay for/put into the club). But that might lose a few votes for the Conservative party at the next local elections, so why not ask the taxpaying populace for forbearance so as to help the Conservatives?

ROBERT MAAS

2012-02-13T05:42:00.001-08:00

BLOG 119

WHAT MAKES YOU ANGRY?

What gets you really really angry? My secretary probably says that with me it is the long letter from HMRC that disagrees with the highly convincing argument that I put to them.

She may be right! But I think it is waiting to pay for my groceries when the person in front insists on using a credit card to settle his £2.40 bill. Often he keys in his number too quickly (OK, I do it all the time on those rare instances when I use my credit card) and has to start again. Sometimes the credit card doesn’t work and he tries again with a different one. Why does the world seem to have such a hatred of good old legal tender? I generally shop with those blue bits of paper which the shop accepts are worth £20. Why can’t the rest of the world do that for trivial amounts?

Now I know the answer to that question. AccountancyAge.com has explained to me that Dave Hartnett, the Parliamentary Secretary to HMRC, their top technical guy, says that paying cash is “diddling the country”. They go on to say that Dave has warned that “paying a builder or cleaner in cash will result in deeper government cuts to public services”. I am unclear whether paying Tesco or Asda in cash will, in Dave’s view, result in similar cuts. Is cash now wholly unacceptable? Is paying in cash as criminal as smoking cannabis or exceeding the speed limit or murdering my neighbour? (Don’t worry Charlie and Vince, I don’t intend to do it).

Or have HMRC lost touch with reality? Is everything that we do in life now wholly unacceptable unless we can provide independent third party evidence as to whether, and why, we did it?

Are we now in a society where tax rules our lives? Where we should not do anything at all without considering whether it might have tax consequences? Without documenting everything that we do just in case HMRC may want to question whether we are “diddling the country”?

That seems to be Dave’s world. I sincerely hope that I’m not forced to join it!

ROBERT MAAS

2011-12-21T05:05:00.000-08:00

BLOG 118

WHAT IS TAX AVOIDANCE?

I don’t know the answer to that question. I thought that I did! I see it as when someone enters into artificial transactions that create a tax effect that parliament did not envisage when it enacted the relevant legislation.

Using that definition I do not personally espouse tax avoidance. Nor does Graham Aaronson QC who has recommended that the government introduce a GAAR (General Anti-Avoidance Rules) that is targeted as such transactions. Unlike Graham (I think, from reading his report) I do however recognise that not everyone is opposed to tax avoidance. Accordingly I have no difficulty in informing clients of what is on the market if asked. I think it unprofessional to seek to impose my own moral outlook on clients who may have a different concept of morality than I do.

Indeed I am not sure even that I am opposed to tax avoidance. I feel uneasy about it but think it a consequence of parliament having enacted reams of tax legislation with virtually no debate and having given MPs little or no opportunity to consider its implications. If parliament chooses to treat the citizenry with complete contempt – which is surely the only rational reason for passing laws that MPs do not understand and have, in the main, little or no inclination to try to understand – I have a sneaking sympathy for those who seek to adhere to the constitutional concept that one has to abide by the laws that parliament enacts, not try to guess what laws it would have enacted had it bothered to think about it. Accordingly if parliament chooses to enact legislation that gives rise to unexpected consequences, I find it hard to criticise those who choose to exploit those statutory consequences.

Where ill-considered law imposes tax in situations that no right minded person could conceive that parliament or anyone else could have intended, HMRC tend to shed copious crocodile tears and explain that, whilst they recognise the unfairness, they have a statutory duty to enforce the law that parliament has chosen to enact however unreasonable the result may be and however unlikely it may be that parliament intended to impose tax in such circumstances.

Indeed under the last government I started a petition on the 10 Downing Street website asking the government to give HMRC power to decide not to enforce unfair laws. Sadly, I only garnered a couple of hundred signatures, which was not enough to achieve the change that I wanted.

But I digress. My point is the saying that, “What is sauce for the goose is sauce for the gander”. If HMRC and the government want to enforce unfair laws against taxpayers, I find it hard to criticise taxpayers who similarly seek to enforce laws that most of us consider unfair to the general body of taxpayers. I think that tax either ought to embody a concept of fairness or fairness ought to be irrelevant. A concept that the law should somehow be unfair in its application to taxpayers but fair in its application to the State is anathema to me.

But I should get back to my initial question. This was prompted by a recent article in The Times headed, “Stamp Duty”: Only the best will do for the super-rich, especially if you don’t have to pay tax”. Actually I don’t think it was about stamp duty at all. It was about stamp duty land tax. However, whilst I regarded The Times as a newspaper of record under Lord Thomson’s ownership, I no longer expect it to be unduly concerned about getting facts right.

The thrust of the double page spread devoted to this “story” was that if someone buys shares in a company that owns a property, one pays whatever tax parliament feels it appropriate to impose on a transfer of shares, not the tax that it feels appropriate to impose on a transfer of property. I do not myself find it odd that different transactions should have different tax consequences. Nor do I consider that I am avoiding tax if I choose to enter into transaction A whereas I would have paid more tax had I chosen to enter into transaction B, which has different tax consequences.

For example am I avoiding VAT when I buy my zero-rated lamb chop my zero-rated cauliflower and my zero-rated carrots and cook them at home paying only 5% VAT on my gas usage, whereas if I had chosen to eat out I would have had to pay 20% VAT on the entire cost of my meal? If so, I am one of those hated tax avoiders, because I eat in a lot more than I eat out.

If I am not a tax avoider, why should someone who buys shares in a company that owns a property be a tax avoider because a purchase of shares attracts stamp duty of 0.5% (or is exempt from stamp duty in the case of a non-UK company) whereas a purchase of a property attracts tax at up to 5%? Is there really a difference between parliament having chosen to tax meals I cook myself differently from meals I eat at a restaurant and parliament having chose to tax purchases of shares differently from purchases of property? I freely confess that I cannot see one. Yet if The Times feels that it should devote two pages to castigating those who choose to buy shares, why does it not equally castigate those who choose to cook at home rather than eat out and pay VAT? It surely cannot be simply because The Times itself encourages such VAT avoidance by printing cookery recipes at the weekend!

All that I can think of is that tax avoidance is not about tax at all; it is about envy. We, or perhaps, to be precise, Times journalists, are motivated more by jealously than by morality. It is not so much about avoiding tax as about the rich being able to “avoid” tax in ways that journalists cannot afford to do.

ROBERT MAAS

2011-12-09T08:11:00.000-08:00

BLOG 117

DRAGONS’ DEN – NOT A GUIDE TO BUSINESS VALUATION?

I recently read an article in “Taxation” magazine that included, “no doubt we have all been surprised at the valuations that various entrepreneurs have placed on their businesses in the Dragons’ Den. Clearly, there is an area where, as accountants, we can assist our clients”. It also indicated that Dragons’ Den demonstrates that to secure finance or investment, a company needs some key features, namely good management, enthusiasm, a compelling product or service and potential market size.

I am note sure that I agree with either statement. I admit to watching Dragons’ Den but I see it as entertainment, not as a business video manual. The rules of the Den are somewhat odd. The entrepreneur cannot refer to his accounts; he is expected to remember the figures for the last five years. The amount of money he wants to raise is fixed; if the Dragons think he needs more, they cannot offer it to him. The entrepreneur is expected to go on his own (or with one or two others) he cannot bring along his accountant, lawyer, chief accountant and the rest of the team that most investors expect to be involved. If a Dragon makes an offer it must be accepted or rejected on the spot. I cannot recollect a Dragon ever agreeing to accept the deal on offer. Surely, in at least some cases, that deal must have been based on the advice of an accountant. Accordingly one could draw an inference that accountants are not actually very good at valuing businesses.

One could equally draw the inference that conventional valuation methods do not bear much relationship to the real world. I am fascinated by how little financial information the Dragons normally want. They ask for turnover and sometimes for gross profit and net profit, but do not normally seem to care what expenses have been charged in arriving at the profit figures – or indeed how much the proprietor is taking out of the business.

But the figures seem largely secondary to them. The sort of things the Dragons are interested in are the following. If the entrepreneur has a new product, is it patented and if so how secure is the patent? What is the risk that a major company could produce a competing product? What is the likely market? What is the profit per item? How long has the entrepreneur been trying to sell the product? How has he tried to sell it? Does he know who his competitors are and their prices?

The Dragons will form their own judgement as to whether they are likely to make a reasonable return on the investment and how quickly. They seem to invest on the basis of that judgement. However they rarely invest as a passive investor. Similarly, the entrepreneurs are rarely looking for a passive investor. They are looking for someone who will bring their skills and connections to the table along with their money.

Accordingly Dragons Den is not really about selling stakes in companies. It is primarily about finding a business partner who is prepared to devote some time and resources to help develop the business. That may well be why the Dragons are rarely, if ever, prepared to agree the deal that is on the table. The stake in the business that the entrepreneur is prepared to give up may well be predicated on a valuation of the business – although in many cases it seems doubtful whether much attempt at a valuation has been made. However the Dragon approaches the deal from the basis of the return he wants on his money and the value that he believes that he personally can create for the business.

Neither has much to do with the sort of valuations that accountants produce, which are formulaic and often take little or no account of the factors that draw the Dragon to a business. Indeed, normally the Dragons each place a very different price on the business from one another.

I also doubt that the programme demonstrates a need for good management, enthusiasm, a compelling product or service, and potential market size. Of course these are all important factors, but not as important as the Dragon’s own perception of the potential of the business.

I doubt actually that the programme demonstrates anything – except perhaps how difficult it is to turn an idea into a profitable business if the entrepreneur does not have a business background.

ROBERT MAAS

2011-12-05T09:10:00.000-08:00

BLOG 116

DOES DAVID GAUKE SEE US ALL AS CROOKS?

Have you noticed that under David Gauke’s tutelage HMRC no longer recognise that many people who set up new businesses are not financially, or even mathematically, sophisticated. Whatever people thought of Dawn Primarolo, I do not think she could be accused of lacking humanity or not being capable of putting herself in the shoes of the man or woman in the street, who make up the vast majority of taxpayers. For all her faults (and to the tax advisor community she had many) she did seem to recognise that some taxpayers:

- make mistakes
- pay rather more attention to developing their businesses than completing their tax returns
- do not fully understand the tax laws (Neither do most tax advisors in many areas, albeit that there is a statutory fiction that everyone is deemed to know the law and albeit that Ms Primarolo introduced harsh new penalties on those who do not understand their statutory obligations. The number of tax cases that reach the tax Tribunals and the Courts might be said to call into question whether the MPs who introduce tax laws fully understand them either, but that is another question)
- shy away from simple mathematics – including totting up their turnover on a monthly basis and keeping a running twelve-month total of it.

However I am sceptical whether David Gauke does so as, under his oversight, HMRC seem to have taken to describing as such people as “cheats” – who of course, in the main, did not have the benefit of the Oxford University education that us taxpayers (or our parents) provided for Mr Gauke. The use of such a disparaging – and inaccurate – term to describe honest taxpayers trying to cope with a complex tax system seems to me wholly unreasonable and unfair. I notice that the latest HMRC press release headed, “VAT cheats have one month to come clean” goes on to describe such people as “VAT rule-breakers”, which I suppose is a bit less aggressive than “cheats” but still carries with it a connotation of deliberately breaking the rules, whereas in many cases the taxpayer is either ignorant of the rule, or aware of it but ignorant of the fact that his turnover has triggered its application.

Of course, there are indeed a number of tax cheats who either know that they owe tax but have chosen to opt out of the tax system, or who do not know that they owe tax because they have opted out of the system, so are indifferent as to its intricacies. I hope that HMRC chase them with the full vigour of the law.

Actually, though, HMRC are not doing that. At the same time as they label as criminals honest taxpayers who are doing their best and failing, they are offering attractive deals to real tax criminals to come clean and escape the punishments – including most of Ms Primarolo’s penalties – that parliament felt appropriate to impose on such people.

Sadly, to many of us who spend our lives coping with the tax system, under the Coalition HMRC seem to have moved from collecting the right amount of tax at the right time (which was their slogan under the previous government) to collecting as much money as possible in the shortest possible time with little regard to what is due and to how much of what they do collect is tax and how much is penalties. Personally I am worried stiff (as a citizen of what I had believed to be a parliamentary democracy) that much of what HMRC extract from frightened taxpayers under the label of penalties is little more than extortion money because they constantly claim penalties in circumstances where legally none is due.

Wouldn’t it be good if Father Christmas were to give David Gauke an understanding of the common people, many of whom do not even know where Oxford is let alone have the intellectual ability to study there? He might then be able to tell HMRC that people less educated than their mandarins may fail through ignorance as much as they may, indeed, be crooks.

Sadly, though, I no longer believe in Father Christmas!

ROBERT MAAS

2011-11-11T09:13:00.001-08:00

BLOG 115

IS THIS THE SORT OF TAX AUTHORITY YOU WANT – PART 6

HMD Response International is a small charity. As it has a few employees it has to file a P35 (end of year PAYE return) by 19 May each year. It engages a Chartered Accountant to do this. The accountant filed the 2009/10 return on 16 May 2010. Unfortunately HMRC say they never received it. On 27 September 2010 HMRC issued a penalty notice for £400 (£100 because the return was not filed by 19 May, £100 because it was not filed by 19 June, £100 because it was not filed by 19 July and £100 because it was not filed by 19 August). The accountant immediately sent HMRC a copy of the return – so the company would only incur a further £100 penalty because it was not filed by 19 September. He asked for the penalties to be cancelled in the circumstances. HMRC said, “No”. He asked for an Internal Review. The reviewer upheld the penalties. So the accountant took the appeal to the First-tier Tribunal.

The Tribunal was scathing! “In our judgement, the appellant is entitled to rely upon the common law duty of a public body to act fairly not just in its decision-making process but also in administering its statutory powers. We are in no doubt that such a body does not act fairly when it deliberately desists from sending a penalty notice, for four months or more, knowing that the effect will be to impose a minimum penalty of £500 on somebody whose sin may amount to no more than oversight or forgetfulness. We should also add that when HMRC sent the result of its review to the appellant on 30 March 2011, it made it clear that it had undertaken the review process on the basis that, for the appellant to show that it had a “reasonable excuse” … it needed to demonstrate that there had been some exceptional event beyond its control that had prevented it from sending its return on time. As a matter of law, that is not the correct test and is totally misleading. Thus HMRC misdirected itself in law. Parliament has said that an appellant must demonstrate that it has a “reasonable excuse”. These are ordinary English words in everyday use. They must be given their ordinary and natural meaning. If Parliament had intended to say that an appellant must prove some exceptional circumstances, it could and should have said so. It did not choose to do so. Instead it used the expression “reasonable excuse” which HMRC has quite wrongly sought to elevate to something more onerous than the test specified by Parliament”.

And later, “We asked Miss Weare [for HMRC] whether she accepted that if a person genuinely and honestly believes that a successful online filing has been completed that might amount to a reasonable excuse … She agreed that such circumstances would amount to a reasonable excuse. We take the view that she was entirely correct to do so. We are equally sure that those circumstances could not possibly be described as exceptional. That is a simply illustration of why the exceptionality test propounded by HMRC is, as a matter of law, wrong. We should also add that HMRC sets out that it runs a “structured programme to enable penalties to be issued regularly throughout the year … Thus, HMRC deliberately waits until four months have gone by and does not issue the first interim penalty notice until, as in this case, September of the year of default. By that time a penalty of £400, being four times £100 per month, is said to be due … We appreciate that HMRC takes the stance that it … has no obligation to issue any reminder. However, we have no doubt that any right-thinking and fair-minded member of society would consider that to be unfair and falling very far below the standard of fair dealing and conscionable conduct to be expected of a manifestation of the State that is empowered to issue penalties as a means of ensuring compliance.

There can be no logical reason whatsoever for HMRC to delay sending out a penalty notice for four months so that, in effect, a minimum penalty of £500 will be levied … Its computers could be set to issue a penalty notice at any time after 19 May in each year; but it chooses to wait until mid/late September in each year.

HMRC is a manifestation of the State. It is no function of the State to use the penalty system as a cash generating scheme … In our judgement it would be a very simple matter for HMRC to set its computer settings so that a default or penalty notice is sent out soon after 19 May in any year, instead of some four months later. That fair approach might generate less penalty cash for the State, but it would be fair and conscionable as between the taxpayer and the State (acting by HMRC) …

It has long been part of the common law of this country that manifestations of the State must act fairly and in good conscience with its citizens. In our judgement there is nothing fair or reasonable in setting a computer system so that it does not generate a penalty notice until four months have gone by … thereby ensuring that a penalty of not less than £500 will be due. We are in no doubt that the computer system could easily be set to generate a single £100 penalty notice soon after the 19 May in each year. That is the course that a fair manifestation of the State, acting in good conscience towards the citizens of the State, would adopt”

I have quoted at length from the Tribunal decision because their strictures reflect my own view.

I am not wholly convinced that their decision in the taxpayer’s favour is correct in law though. Will HMRC have the nerve to take it to appeal? I expect so! Past Tribunal decisions suggest that HMRC is rarely protective of its staff where it believes that blaming a staff failure will enable it to collect money.

And actually in this instance I do not want to blame HMRC. I want to blame parliament. In virtually every Finance Act since 2008, parliament has given HMRC more and more powers. It has substantially increased the penalties on taxpayers who get things wrong (other than if they can demonstrate that they took reasonable care). I think that this is the first case that shows how HMRC have chosen to exercise their new powers.

I hope that it reflects what your MP expected when he or she voted to give the powers to HMRC!

ROBERT MAAS

2011-10-31T09:58:00.000-07:00

BLOG 114

VINCE CABLE’S VAT PENALTY

I have received an e-mail from AccountancyAge.com summarising a report from the Sun. This reports that business secretary, Vince Cable, had to pay around £15,000 (the Sun actually says up to £25,000) in back-taxes and a £500 penalty for failing to register for VAT.

After that the article becomes fairly confused. It is unclear whether the penalty arises under the old system introduced by the then Conservative government in 1972 or the new system of penalties that apply from 1 April 2010 that was introduced by Schedule 41 to the Finance Act 2008 after consideration by the Finance Bill Committee of which Dr Cable was a member. I suspect that it is partly a penalty under the old system and partly one under the new as the article indicates that Dr Cable’s failure to comply with the VAT legislation came to light only when his accountants prepared his 2009/10 tax return, which must have been after the new rules came into force on 1 April 2010.

A penalty of £500 represents a penalty of under 3½% (or 2½% on the Sun’s figure).

Under the old rules, the maximum penalty was 5% of the tax. Under the new, it is anything between 0% and 30%. I have been specialising in tax for over 45 years and have never come across such a tiny penalty. Many congratulations to Dr Cable’s accountants for having agreed such a tiny figure.

However the purpose of this posting is not to congratulate his accountants but rather to point out that when Dr Cable endorsed the new penalty system (which is far harsher than the old) he obviously had in mind that a maximum of 30% should in most cases mean well under 5%. It would be highly hypocritical if he thought he was voting for a penalty of 30% on the average taxpayer, but only 3½% on himself. I have no reason to believe that Dr Cable is a hypocrite.

What I do know is that Parliament has laid down that a taxpayer cannot shrug off his responsibility to register for VAT by relying on another person, such as his accountant. It is also obvious that, as a participant in the Finance Act 2008 debates, Dr Cable should have been well aware that very harsh penalties would apply to those who ignore their VAT responsibilities. Obviously he is not even in a position to claim that he was not aware of such responsibilities.

I believe that we are all equal before the law. I imagine that Dr Cable incurred the minimum penalty by registering for VAT within 9 months of the date that he was due to register – although I again congratulate his accountants for having prepared his tax return so early in the tax year, assuming that is the case.

If anyone ought to be aware of his obligations towards the State, it is surely someone like Dr Cable, a long serving politician who not only has achieved a ministerial position by whose role embraces looking after small businesses. I do not believe that Dr Cable would have accepted a 3½% penalty if he did not believe that it was the appropriate tariff for someone like him whose business turnover fluctuates and who is too busy to set up the necessary system to monitor it on a day-to-day basis. He must surely believe that it is the right figure.

Accordingly the purpose of this article is primarily to exhort readers to challenge any HMRC claim for a penalty in relation to failure to notify liability to tax that is more than 3½% of the tax concerned. Dr Cable must surely represent the benchmark of those who are well aware of their tax obligations but not prepared to create the necessary recording systems to alert them to comply with that obligation. Indeed, the appropriate penalty for most taxpayers who notify late must surely be significantly less than Dr Cable’s 3½%.

Do I feel sorry for Dr Cable? No – except to the extent that (apart from himself) the only people who ought to have known of his discretion are HMRC and his accountant, both of whom owe him a duty of confidentiality, so someone seems to have let him down. I do feel sorry for Mr Chen (whose penalty was reduced by only 25%, not Dr Cable’s 50%) and Mr Yorletta (who was given no discount on his 15% penalty despite having acted “entirely honestly”) who were the plaintiffs in the most recent VAT late registration cases before the tax appeals Tribunal and for the other taxpayers who registered late and received a lower discount than Dr Cable.

Personally, I think that the system is unfair for small businesses (such as Dr Cable’s journalism) albeit that it has existed since 1973. It requires a taxpayer to monitor his turnover and to register within 30 days of it exceeding the registration limit. I think this unreasonable. Most small businesses (or rather micro-businesses, as when I talk of a small business I think of someone with far less than £1m of turnover whereas when Mr Cable talks of a small business I suspect he thinks of one with £25million turnover) rely on their accountant in financial matters. However they cannot do this with VAT registration, as the accountant normally comes on the scene up to two years after the event; he will not be aware of anything within 30 days of it occurring. Only the taxpayer is in a position to monitor his turnover.

I care about small, micro-businesses. I do not think that Dr Cable does. If, like Dr Cable, I had been on the 2008 Finance Bill Committee that increased the penalty for late registration, I would have tabled an amendment to provide for no penalty for a small business that registers up to a year late. That would conform with the expectations of those who understand small businesses and know that the best person to monitor turnover is the business’ accountant but that he will not know the figures until many months later. I would also have opposed the steep increase in the maximum penalty (from 5% to 30%) where registration is under 9 months late as being unreasonably harsh on small businesses. As far as I can see, Dr Cable did neither of those things.

The law being as it is, what sort of person has an excuse for late registration that deserves significant mitigation of the penalty? Is it an MP who, as such, should surely be aware of the obligations that Parliament imposed on him; who two years earlier sat on a parliamentary Committee that introduced swingeing increases in the penalties for late VAT registration; and who was the spokesman on tax for the Liberal Democrats and as such needed to be familiar with tax law; who is clearly an intelligent man with degrees from both Cambridge and Glasgow University? Or is it Mr Chen who took over a Chinese take-away near Sheffield and did not realise that he had to take account of the vendor’s turnover to determine when he needed to register; or Mr Yorletta who ran two businesses both with turnovers under the registration limit and did not realise that he had to aggregate the two?

Make up your own mind. I know what I think!

ROBERT MAAS

2011-09-28T05:31:00.000-07:00

BLOG 113

HOW CHARITABLE?

HMRC have issued a guide on Gift Aid for School Charities. When I saw it I thought, “What a good idea!” When I read it I thought somewhat differently.

It really splits into two parts; a baby’s guide to Gift Aid and whether Gift Aid applies to common types of appeals for funds by schools. That made me wonder who it is aimed at. Surely a charity already knows about gift aid and does not need the baby guide. The people who might need it are parent groups that launch an appeal to raise funds to help their children’s school and do not know that if they form a charity – which is easy and cheap to do if they use the Charity Commission’s draft trust deed – they can use gift aid to increase the amount available to the school. Sadly it is not aimed at such people.

The second bit is useful to school charities – or, at least, would be if it were a lot less controversial than it appears to be. Suppose, for example, the school charity agrees with the school a “non-uniform day” under which pupils (or their parents) who make a donation do not have to wear school uniform on that day. The guide says that the payment will not qualify for gift aid. It is unclear, to me at least, why not. It may be fun for the child not to have to wear uniform for one single day during the school year, but I find it hard to categorise it as a benefit. I find it even harder to envisage that, even if I am wrong, it is a benefit that can be valued and has a value of more than 25% of the donation (or more than £25 if the donation exceeds £100).

I equally find it hard to believe that if a school charges low fees to attract a mix of social classes and asks parents to consider a voluntary donation to the school, and without the donations the school would make a loss, the donations are “school fees dressed up as donations”. They seem to me to be a way of saying to parents that if you value the school environment and can afford to do so, please consider a donation so that we can continue to attract pupils whose parents are less well off. Again if that is a benefit, I find it hard to see that it has any monetary value to the children (or parents) of those who make donations.

However this is apparently so wicked that “schools that enter into such unacceptable arrangements risk losing entitlement to all charity reliefs, not just Gift Aid”. To say that I am staggered at this is an understatement. However it is your taxes as much as mine that gift aid passes to charities, so perhaps you agree that social cohesion is a wicked concept (in the old meaning of “evil” rather than the new one of “desirable and up to date”).

And what about a “library club”. Suppose the charity says, “We want to fund a new school library; if you donate a minimum of £50 to the library fund your child can be a member of the library club that has access to the library”. “No”, say HMRC “that is not a charitable donation, it is a payment for services”. I find it hard to agree with that. I suppose that having a right to use a library could be construed as a service but I find it hard to categorise the donation as consideration for that right. It seems to me much more likely that the right is a subsidiary benefit from the donation. If so, I find it hard to value it at over £12.50 (the permissible benefit for a £50 donation) when the child can borrow the same books for free from his local authority library. Of course, in reality the child is more likely to use the school library, which is convenient, than the local authority library which is less convenient. It may be that being encouraged to expand one’s mind by reading is regarded by George Osborne as so valuable a benefit that it should be taxed. I wonder whether Michael Gove agrees!

Suppose a parent gives his child’s school £1,000 to buy computer equipment but says that when the school eventually wants to scrap it, he would like the opportunity to consider buying it back instead. We all know that £1,000 of computer equipment today won’t be worth £25 in ten years time when it has passed through the hands of 10 classes of school children. But HMRC say gift aid cannot be claimed if it is even suggested that donations could lead to the ownership of the equipment. They go on to say that “there should be systems in place to prevent non-educational use of this equipment”. What does this mean? That if teachers occasionally use school computers to access their personal e-mails, the donation of the fund to buy the computer is not a charitable gift? That if children use the school computer to go onto Facebook it is not a charitable gift? Surely encouraging school children to increase their computer literacy is educational.

I have ended up with a feeling that this “guidance” is not intended to be helpful; it is intended simply to save HMRC time by discouraging school charities from making valid claims that HMRC might challenge. It also gives the impression of having been written by a jealous and disgruntled parent who believes that, if his or her child does not go to a school where parents are encouraged to help the children of those less fortunate, it is unreasonable for the government to allow any tax relief at all to such schools, so it is up to HMRC to correct this by administratively cutting down the scope of gift aid.

ROBERT MAAS

2011-09-16T08:33:00.000-07:00

BLOG 112

THE US COOLS ON IFRS?

I have just returned from my annual trip to Chicago. I go every year to attend the Midwest Accounting and Finance Showcase, which updates me on US tax. Don’t ask why, it’s a long story! I enjoy going though. Better, I discovered about ten years ago that if I stay in the US for a couple more weeks I can attend the Chicago Jazz Festival too.

The Showcase met its usual high standard (so did the Jazz Festival but that’s not my topic for today), but as I’m not really interested in Illinois State tax I was at a bit of a loss as to what to do on the second day. So I went along to a talk on IFRS for SME’s given by Marion Powers of Kellogg North West University. I went to her talk on International Financial Reporting Standards (IFRS) a couple of years ago and found it hilarious – it was mainly about how IFRS could never work in the US, so I thought that IFRS for SME’s (Small and Medium-sized Enterprise) would be equally amusing.

Interestingly it wasn’t! Indeed Marion thinks that IFRS for SME’s is very similar to US GAAP (Generally Accepted Accounting Principles) which somewhat took me aback. The reality is that most small businesses in the US do not use US GAAP at all; they use a cash basis with modifications to meet the tax legislation so that the accounts can serve as the tax return too.

The big stumbling block to the adoption of IFRS (and IFRS for SME’s) in the States is that US GAAP allows stock to be valued on a LIFO basis, i.e. sales are matched with the latest purchases, not with the earliest acquisitions as in the UK. This defers profit in times of inflation. LIFO is not permitted under IFRS (or IFRS for SME’s) so a switch will give rise to huge taxable profits in many businesses for the transitional year.

Marion also updated us on whether the US is likely to adopt IFRS. The answer seems to be that it is unlikely to do so. IFRS has the support of major investment houses but apparently of very few others. The US standard-setter, The Financial Accounting Standards Board (FASB) seems to have lost much of its enthusiasm for IFRS. Talk is now of “condorsement”. Under this the US would endorse the use of IFRS but would keep the bits of US GAAP that IFRS does not cover. The US would also keep FASB for a transitional period of 5-7 years. During that period FASB would be “the voice of the US” in making representations to the International Accounts Standards Board (IASB) and during that period would aim to incorporate IFRS into US GAAP in stages. Apparently that is how Japan adopted IFRS starting in 2005 and becoming fully IFRS compliant only this year.

Marion pointed out that few countries have actually adopted IFRS in full. Most, like the EU, have not adopted all of it or have amended the bits they don’t like. Only 16% of countries use pure IFRS. Accordingly the original dream of a universal accounting standard is just that, a dream that is unlikely ever to be achieved.

Marion thinks that the SEC will permit the use of IFRS by US companies but not require it. Currently only about 6% of US companies use IFRS. The SEC is due to decide later this year.

I also noticed an article in “Accounting Today” by two academics, Paul Miller of the University of Colorado and Paul Bahnson of Boise State University. They titled their article “To the SEC: Don’t throw in the towel by changing FASB to FARSB and creating a FARCE”. This is a critique of “condorsement”. They suggest that it will turn the FASB into the “Financial Accounting Rubber-Stamp Board” (FARSB). FARCE stands for “Financial Accounting and Reporting Cannot Evolve”. The two Pauls say “condorsement” is not merely deplorable but also potentially illegal because it is tantamount to abdicating the SEC’s statutory responsibility for creating reporting standards … The FARSB Proposal would take away the commission’s powerful status as the “300-pound gorilla in the room” when it comes to standard-setting. Even though the SEC has no explicit formal role in FASB’s process, it does monitor and, on occasion, nudge the board through well-established back-channel communications. Having FASB automatically “condorse” everything will deprive the commission of that power and reduce it to being only one of many national regulators with little or no influence on the FASB. As a result the commission would no longer be in compliance with its congressional mandate to establish reporting standards”.

Actually it appears that the real problem is that the two Paul’s do not like either US GAAP or IFRS. They want companies to “satisfy today’s enhanced hunger for knowledge by applying 21st century technology to implement continuous reporting that publishes information weekly, daily and even more frequently”.

Accordingly they believe that “even though current GAAP and IFRS might be the best existing standards, they do not produce high-quality financial statements and must be replaced with new standards that produce rational and useful information. Therefore this move to neutralise FASB will not lead to significantly more useful financial reports… Subjecting FASB to “condorsing” IFRS is a questionable, even contemptible, end run around long-standing statutory protections for US markets. It will not achieve progress because it will preserve today’s incomplete and grossly inadequate financial statements in suspended animation”.

Strong words – and depressing one’s too! In effect they are saying that the US system (which let’s not forget facilitated the Enron fraud) is so superior to anything else in the world that it would be a tragedy to adopt worldwide standards because that would mean that people like the English, French, Germans, Canadians, Australians and similar backward countries would have an input into future changes in accounting standards, which would dilute the brilliance of US standard-setters that stand head and shoulders above those in the rest of the world (although they would of course still have an input into developing IFRS).

I find this depressing because I think it worrying that, in the shrinking modern world, US academics can adopt such an insular position and not accept that the US, like everyone else, can benefit by pooling its knowledge and systems with others.

ROBERT MAAS

2011-08-19T03:42:00.000-07:00

BLOG 111

WHAT SORT OF TAX AUTHORITY DO YOU WANT? – PART 5

Ms AZ is a self-employed qualified massage therapist. In February 2003 she was the victim of a vicious robbery that left her with both physical and psychological injuries. Her bank cards were stolen and the contents of her bank accounts were systematically emptied – even going into substantial unauthorised overdraft. It took the bank two years to sort out the account. Part of the money stolen was funds she had set aside to pay her tax. Ms AZ became homeless, relying on the kindness of acquaintances or sleeping on the floor of the clinic where she worked. She was told that she was not eligible for state benefits.

In December 2006 Ms AZ had a 2¼ hour meeting with HMRC officers, which she felt unhelpful and unsympathetic to her position.

In March 2009 a psychiatrist diagnosed Post Traumatic Stress Disorder (PTSD) and gave a prognosis that PTSD drags on chronically. He commented in his report, “Ms AZ has continued to work out of necessity, despite PTSD, since the attack. Many patients with her degree of symptoms would have discontinued working”.

You have probably guessed by now that HMRC – on behalf of you and all of the rest of us taxpayers – felt that neither the robbery nor the PTSD provided Ms AZ with a reasonable excuse for filing her 2002/03 or 2007/08 tax returns late or for not paying her tax for 2002/03 – 2008/09 on time. You may be as staggered as me to learn that after all that she had been through the State (you and me through our agents HMRC) demanded not a pound but a pound and a quarter of flesh. She may have been mugged, she may have become homeless, but that was no excuse for paying her tax late. Accordingly the State was entitled to exact a penalty for such unreasonable behaviour. And what does a psychiatrist know about PTSD? Whatever the quack may say, in HMRC’s view it cannot possibly be a good reason for not filing one’s tax return and paying one’s tax on time.

Sadly, the First-tier Tribunal agreed with HMRC (apart from accepting that Ms AZ had a reasonable excuse for her late filing for her 2002/03 tax return). Fortunately her accountant was so horrified that he took her case to the Upper Tribunal. The Upper Tribunal has replaced the jurisdiction of the High Court in tax appeals from 2008. Accountants have a right to appear before the Upper Tribunal, which they do not have in the High Court. The Tribunal is largely composed of High Court judges. I have not myself taken a case before the Upper Tribunal and would think very, very hard before doing so. I would have to feel very strongly about the issue. I accordingly admire Ms AZ’s accountant, Peter Torino of AIMS Accountants. I admire him even more for winning. The Tribunal threw out all of the penalties. As a taxpayer, I find it very satisfying that, even though the State was dismissive of Mr AZ’s predicament, the law is there to bring fairness into play.

And here’s another case of an accountant being so incensed about HMRC treatment of a taxpayer that he fought for justice. In this case the accountant is Michael Stubbs of Ingenhaag LLP. HMRC had raised a “discovery” (i.e. out of time) assessment on the estate of Mr Atkins. Mr Atkins had been a Lloyds underwriter. It is well known that some years ago members of Lloyds made some injudicious contracts that lost a lot of money. They now adopt a cautious basis of accounting (approved by HMRC). Mr Atkins completed his tax returns in accordance with HMRC guidelines. HMRC’s manuals tell their staff that they need to open a protective enquiry before the “enquiry window” closes, as money is often received late that then needs to be related back to an earlier year. Before the enquiry window for 2007/08 closed, Mr Stubbs noticed that a protective enquiry had not been opened on Mr Atkins. He wrote to HMRC pointing this out. HMRC did not open an enquiry. In March 2010 the executors received a large amount of money that related back to 2007/08. They told HMRC. HMRC then purported to “discover” that tax for 2007/08 had been under-assessed. Unfortunately they can only make a discovery if the return was incorrect. Mr Atkins return was not incorrect. Undeterred, HMRC nevertheless geared up to take the executors to the Tribunal. Just before the appeal was heard they withdrew their assessment.

If I were cynical, I would have thought that they were seeking to bully the executors; that they knew they did not have an arguable case and hoped that the executors would pay up because they would be too scared to go to the Tribunal. However I am not cynical. I also know that HMRC have a published Litigation and Settlement Strategy that says that they will not normally take a case to the Tribunal unless they believe they have a more than 50% chance of winning. I therefore accept that HMRC sincerely believed that they had an arguable case even though the Tribunal said, “The only defence that I can see … is the quite extraordinary point … The under-assessment was entirely due to HMRC’s error in not following their own guidelines … I consider that the respect in which the sub-section (2) defence might technically be said to have been applicable is so ridiculous and unjustified …”

So why did this case catch my eye? Because Mr Stubbs did not simply walk away when HMRC withdrew the assessment. He asked the Tribunal to award costs against HMRC for all the time that he had wasted preparing for the Tribunal hearing.

The Tribunal had power to award costs only if HMRC had “acted unreasonably in bringing, defending or conducting” the appeal. The Tribunal gave Mr Stubbs his costs.

But even that is not what caught my eye. What caught my eye is that the State – you and me through our representative HMRC – could not even be bothered to send someone along to the Tribunal to defend our/their actions. They wrote to the Tribunal and apologised for withdrawing the assessment very late. When I took my first ever appeal before a Tribunal many years ago, we settled the case in the middle of the hearing. The Inland Revenue’s lawyer told me that we would need to go back to the Tribunal and ask it to settle the appeal on the terms I had agreed. He would do all the talking but I needed to be there as it would be disrespectful to the Tribunal for me not to turn up.

I think that was very sensible advice. The Inland Revenue has now been absorbed into HMRC. It still seems to me good advice. Indeed not to turn up when one knows that the other side is going to be there and argue its case seems to me to verge on contemptuous of the Tribunal. But perhaps I’m just old-fashioned!

ROBERT MAAS

2011-08-17T05:47:00.000-07:00

BLOG 110

NATIONAL SALARY INSURANCE

In order to keep my knowledge up to date I read a lot. In particular I read a lot about tax and other things that are vaguely related to tax. Every so often I come across an idea that is so good that I want to share it with others.

National Salary Insurance is an idea put forward by Graeme Cook in a paper for the Institute of Public Policy Research (IPPR). Mr Cook is concerned that currently Job Seekers Allowance is at a flat rate of £67.50 a week. He thinks this a miserly amount to tide people over when they lose their job and are looking for a new one.

So do I. I hadn’t realised that it is so low. Indeed in the context that the State believes that a pensioner, who normally no longer has to support children and is likely to have repaid his mortgage, should receive £100 a week State pension, it is obscenely low.

Mr Cook’s idea is very simple. He suggests that for the first six months of unemployment, Job Seekers Allowance should be 70% of the individual’s average earnings subject to a cap of £200 a week, with the extra £132.50 a week (or whatever the excess over £62.50) being repayable when the individual gets back into work.

Mr Cook says that around 60% of people who claim Job Seekers Allowance are unemployed for less than three months and 80% for less than six.

Under his scheme the maximum loan is £3,445. Repayment would be by deduction from salary in the same way as with student loans. A person would not start repaying until he earns more than the primary NIC threshold (currently £139 a week). Mr Cook does not say a lot about repayment but it might be sensible to base this on a percentage of earnings in excess of £139 with the individual having an option to repay more quickly. Repayment at the rate of £20 a week would clear the loan in a little over three years; at £30 it would take a little over two. If a person became unemployed again before the loan was repaid, he could get the £200 figure again but only for such a period as would limit his total loan to £3,445.

Mr Cook has analysed the new Job Seekers Allowance claims for 2010 between different occupations. There were 3.8 million claims. The median average earnings for all claimants was £388 per week, so a £200 cap leaves a significant incentive to find a new job fast. £200 is 70% of £286 (or £14,872 p.a.). However Mr Cooke seems to have ignored tax. He envisages the £200 being tax-free. Earnings of £14,872 would attract roughly £1,480 income tax and £840 NIC giving a net figure of £12,552 or £241 a week so £200 would be 83% of net earnings. However I don’t want to quibble about the arithmetic. The important thing is the concept.

Interestingly, Mr Cook’s analysis shows that the median wage in most occupation is well over £286 a week. The £286 figure would give 70% of earnings to only 1.35 million of the 3.8 million claimants, although another 1 million were on around £300 a week. Accordingly a £200 figure would still leave most claimants struggling financially.

The scheme would also provide a fairly strong incentive to find a new job. I believe that average earnings is currently around £25,000, or £480 a week. Taking off income tax (£3,505) and NI (£1,950) leaves £19,045 or £366 a week. Accordingly a person on average earnings would experience a drop in net income from £366 to £200 and, if he was still unemployed after six months, to £62.50. The six-month period gives time to adjust; the risk of the subsequent drop to £62.50 (plus of course means-tested benefits as appropriate) gives a powerful incentive to find a job in the six-months window.

Of course if a person is never re-employed, the State will suffer a bad debt in respect of the loan. But if 80% of people find new work within the six-months window – and some of the other 20% will find work subsequently – this is probably not a massive burden on the State.

I think that this is a great idea. Unfortunately the IPPR is a left of centre think tank, so I doubt that it’s ideas generally find favour with Mr Osborne. However this is not yet another way for do-gooders to spend taxpayers’ money. It is a sensible solution to the real social problem of unemployment pushing families into poverty. As such I hope that someone can persuade the government to look at it. If you want to know more about Mr Cook’s National Salary Insurance, you can download his paper for free from the IPPR website, www.ippr.org

ROBERT MAAS

2011-06-30T09:23:00.002-07:00

BLOG 109

HMRC – BAD LOSERS?

Mrs Jennings built a log cabin. Well not actually with her own bare hands; she used a builder but because he could not fund the purchase of some of the materials, Mrs Jennings bought these herself. A log cabin is a dwelling for VAT. Accordingly Mrs Jennings qualified as a “DIY housebuilder” for VAT purposes which entitled her to claim back the VAT on the cost of the materials.

At least it normally would have done so, but in Mrs Jennings case the planning permission said that she could not occupy the cabin during February and that the cabin could only be used for holiday accommodation.

The VAT legislation on holiday accommodation is a little odd. If a developer builds and sells such a building, he has to charge VAT. If a customer buys land and asks a builder to construct the building on it, the builder does not have to charge VAT as his work is zero-rated. It seems that the other 40 people who built log cabins alongside Mrs Jennings, like her, bought the site and instructed a builder to create the cabin but that, unlike Mrs Jennings, they used builders who could afford to finance the cost. Accordingly they paid no VAT on their building work, including the cost of the materials included therein. Mrs Jennings asked HMRC for the VAT back on her purchase of materials. “No”, said HMRC, “the DIY Housebuilder scheme aims to put you in the same position as a developer not as in the same position as your neighbours who engaged builders – even though that is what Mrs Jennings in fact did in addition to buying the building materials – and a developer could not zero-rate his sale of a cabin”.

Mrs Jennings felt aggrieved and went to the Appeals Tribunal – or to be precise, sent Mr Jennings along to argue the case on her behalf. The Tribunal held that Mrs Jennings was entitled to have her VAT refunded. They did so in 2009 and I had assumed that, elated with their victory, Mr and Mrs Jennings have lived happily ever after in traditional fairy story manner.

But sadly this is not a fairy story; it is the real world. When Mrs Jennings sought to claim the fruits of her victory, HMRC demanded that she produce a VAT invoice to support the VAT reclaimed. Mrs Jennings produced a document on the supplier’s letter-heading, which bore its VAT number, confirmed that they would deliver the logs, and set out the price and the VAT. It started, “statement for the payments we have received … and to confirm the outstanding balance that will be required”.

“Sorry”, said HMRC, “You have achieved merely a pyrrhic victory; we don’t have to repay your £15,712 VAT because that is not an invoice. The law is perfectly clear; no invoice, no repayment”.

Back went Mr & Mrs Jennings to the Appeals Tribunal. The Tribunal judge listened to the arguments on both sides, and sent everyone away while they considered the position. He then looked up the word “invoice” in his dictionary, which defined it as “a statement identifying a supply of goods or services, the amount payment for them and the time when payment is to be made”.

But that is precisely what the document that Mrs Jennings holds does, said the Tribunal. Therefore it is an invoice. Therefore Mrs Jennings is entitled to her VAT.

Can Mr and Mrs Jennings now live happily ever after? I hope so. But I’m not too sure. The Tribunal said that the document is an invoice, not that it is a VAT invoice. If HMRC were so mean as to force Mr and Mrs Jennings back to the Tribunal again, they could feel “third time lucky” and have another go at holding onto Mrs Jennings’ money.

After all, it is at least five years since HMRC publicly set out their mission as being to collect the right tax at the right time, so perhaps it no longer holds good. Indeed I have just keyed “mission statement” into HMRC’s search engine and the result page gives no indication whatsoever that it is any longer anywhere on HMRC’s website.

Many people feel that the current mission statements seems to be “to collect all the money that we can, without worrying too much about what is legally due, and to hang on as long as possible to anything that might belong to someone else”. I’m sure that is not right though – well, reasonably sure!

ROBERT MAAS

2011-06-30T09:23:00.001-07:00

BLOG 108

NO, THEY HAVE NO SHAME!

People are always saying to me, “Surely HMRC’s behaviour in this case has been so embarrassing that they won’t want to take it to the Tribunal.

I generally explain that if HMRC have a choice between foregoing tax and being publicly embarrassed they go for the embarrassment every time.

The First-tier Tribunal case of McMullen Holdings is a good example.

McMullen applied through its accountants, Moore Stephens, to register voluntarily for VAT on 8 April 2008. They did not receive their VAT registration. Moore Stephens called HMRC. They then called again, and again, and again … Moore Stephens say that most of the calls were unanswered. On some occasions the call was answered; on those occasions the person who answered said that he wasn’t dealing with the matter but someone would call them back. Guess how often they were called back? That’s right, nil times! Moore Stephens wrote to the Registration Unit on 1 September 2008 asking when their letter of 8 April would be dealt with. Further telephone calls ensued, again either unanswered or eliciting an unfulfilled promise to call back.

On 6 April 2009 Moore Stephens submitted a second application for registration with a covering letter recounting the above history and saying that the company no longer wanted to register voluntarily; they were now required to register as their turnover had exceeded the registration limit. This galvanised HMRC into action. They registered the company for VAT with effect from 1 April 2008.

They also said that they had no knowledge of either of the letters of 8 April 2008 or 1 September 2008 and had never had a single phone call from Moore Stephens. As far as HMRC were concerned the company had applied for registration nine months late and were liable to a penalty of £4,936.

Moore Stephens pointed out that they had had a similar problem in registering with another client in 2009-2010 and HMRC had written to Moore Stephens in response to a complaint on that client, “Unfortunately your client’s application had been misfiled and has not yet been found by the Wolverhampton registration team. I am very sorry that you were promised call backs from a number of caseworkers within the registration team and they failed to do so”.

HMRC also admitted that the Joint VAT Consultative Committee (the minutes of which are on public record) had been expressing disquiet about problems with VAT registration from sometime in 2008.

The Tribunal were therefore faced with having to decide between HMRC’s claims that they record everything meticulously and were confident that they had received not a single letter or phone call prior to 6 April 2009, and Moore Stephens’ evidence that they had written twice and phoned constantly during that period. Who was to be believed in circumstances where it was well known that HMRC had major problems with the registration system and had admitted in another case that the registration office had lost letters and not kept promises to phone?

Not really surprising that it preferred the Moore Stephens version! But surely very surprising that HMRC insisted that the Tribunal should be called upon to decide between the two conflicting stories in circumstances where they had already put on record that their registration process was unreliable at the time concerned. (It is much improved now!).

ROBERT MAAS

2011-05-27T03:16:00.001-07:00

BLOG 107

DEFINE “EFFICIENCY” IN HMRC LANGUAGE

There was an interesting snippet in Accountancy Age the other day.

HMRC are apparently sending out threatening letters to businesses.

The letter says that the outstanding tax debts have been transferred to HMRC’s Destraint Department “to list your goods so that they may be sold at public auction”. The letter does not say how much is owed but advises the business to call a specified telephone number or pay the full outstanding amount immediately.

Apparently in many cases the amount owed is “nil”. So why should HMRC write to honest taxpayers who owe nothing threatening to seize and sell their goods? They never did this when Dawn Primarola was the responsible Minister. Is David Gauke, the responsible Coalition Minister, so anti-small businesses that he has instructed HMRC to put them all out of business?

HMRC told Accountancy Age that the letters are “automatically generated”, are sent out when there “has not been a nil-payment submission” and are being sent out “because HMRC was becoming more efficient in chasing debts”.

“Automatically generated”, of course, means that there is a computer involved. We all know that computers do odd things at times. There’s a saying in the IT world “garbage in; garbage out”, which I think means that if one programs a computer to demand money whenever it does not receive a return, it is going to issue lots of demands to people who have omitted to make a return because nothing is due. HMRC like to call us all “customers”, as if we have a choice of whether or not to deal with them. If I was a customer of a business that threatened to distrain on my goods when I owed them nothing, I would go ballistic. But I suppose customer service does not really matter to HMRC because the law forces us to put up with whatever idiocies they choose to throw at us.

I don’t really know what a “nil-payment submission” is. I think it is to do with PAYE. HMRC expect to receive a payment from every employer every month. They ask employers to let them know if no payment is due for a month. However, as far as I am aware, there is no statutory requirement to do this. It is wholly voluntary. Accordingly the threat to seize and sell a person’s goods is probably HMRC’s way of trying to persuade everyone to volunteer! “If you don’t voluntarily do as HMRC tell you, we will make your life hell until you do. The Coalition do not believe in the concept of civil servants. You will do as you are told. You must order your life according to the dictates of HMRC, not the law”.

I cannot even start to speculate how HMRC believe that wasting taxpayers’ money to send out letters threatening distraint for non-existent debts is evidence of their “becoming more efficient”!

ROBERT MAAS

2011-05-20T04:40:00.000-07:00

BLOG 106

WHAT SORT OF TAX AUTHORITY DO YOU WANT – 5

From time to time I come across a tax case where I think that HMRC have acted so unreasonably that it amounts to an abuse of power. As a taxpayer I want them to act fairly; I do not want them to use the law to deprive taxpayers of money to which any right-thinking person would think they are entitled.

The case that has infuriated me is the First-tier Tribunal decision in Simpson & Marwick v HMRC. This concerns VAT bad debt relief.

The bad debt relief is given by European law and Article 90 of the VAT Directive (formerly Article 11(C) of the Sixth Directive). This provides that, “in the case of total or partial non-payment … the taxable amount shall be reduced accordingly under conditions which shall be determined by the Member States … 2 … Member States may derogate from paragraph 1”. In the UK s 36, VATA 1994 provides for bad debt relief and enables HMRC to make regulations in relation to the relief. They have done so by Regulations 165 – 172J of the VAT Regulations 1995. Regulation 172(3) provides that where a purchaser does not pay the full price for a supply, the relief is calculated as VAT on the proportion of the unpaid amount which the unpaid proportion bears to the consideration for the supply. For example suppose the sale price was £100 plus £17.50 VAT and the purchaser paid only £50. The unpaid amount is £67.50. The bad debt relief is £17.50 x 67.50/117.50 = £10.05 – which is of course the VAT at 17.5% on £67.50. This is fair. It prevents a taxpayer claiming that the full £50 relates to the purchase price and the unpaid amount is £50 purchase price plus £17.50 VAT. The business and the State share the loss proportionately.

But what happens where the customer is insured? The supply is to the customer. However what normally happens is that the insurance company pays the bill if the insured is not VAT registered. If the insured is VAT registered, it pays only the non-VAT element of the bill leaving the customer to pay the VAT direct to the supplier on the basis that the customer can recover that VAT as input tax so it is not part of its loss. It does this because HMRC told it to. So what happens if the customer does not pay the VAT? The supplier has received the full payment for the supply but none of the VAT. This is very different to the payment on account example above where the payment on account cannot be attributed to either the supply or the VAT. Where it is clear that what is unpaid can only be the VAT, logically bad debt relief ought to be given for the full amount of that VAT.

Which brings us to Simpson & Marwick. They are solicitors who act mainly in relation to insurance claims. Although they are instructed by the insurance company, it does so (in HMRC’s view at least) on behalf of the policyholder on whose behalf Simpson & Marwick work. In 1985 the British Insurance Association told the Law Society and the Law Society for Scotland that it had agreed with what was then Customs & Excise that a solicitor should address a tax invoice to the customer requesting payment of an amount equal to the VAT and stating that the balance of the account will be paid by the insurance company. It should also send a copy of the invoice to the insurance company endorsed to say that the policyholder has been asked to pay the VAT amount and the insurance company should pay the balance.

VAT Notice 700/18 states at para 3.11, “What if the debtor’s insurers pay? … for convenience the insurer may pay you direct. If the insured is VAT registered the VAT exclusive amount is usually paid. If the customer does not pay you the VAT element, you can only claim relief on the actual balance written off. Any payment is to be treated as in paragraph 3.2”. Paragraph 3.2 states that payments should be allocated to the earliest supplies. The general restriction where a customer pays part only of a bill is dealt with at paragraph 3.13.

Simpson & Marwick suffered a great many bad debts in relation to the VAT element. They claimed full relief every year from 1985. They had a VAT visit every three years and HMRC were happy with what they were doing - until 2007 that is. In 2007 they had another VAT visit and the HMRC Officer “suggested to the firm” that they were claiming the wrong amount and should be claiming only 17.5% of the VAT. Simpson & Marwick telephoned the VAT National Advice Service who told them that the full amount of the VAT only invoices could be reclaimed under the bad debt procedure. The Officer who had done the VAT visit then wrote to Simpson & Marwick confirming her view that they could reclaim only 17.5% of the VAT only invoices. Simpson & Marwick again called the National Advice Service which again told them that they were right to claim the full amount.

Eight months later HMRC raised an assessment on Simpson & Marwick for £322,843, being the 82.5% of the VAT bad debt relief they had claimed in the previous three years (the statutory three-year cap prevented them from going back further).

By the time the case reached the Tribunal Simpson & Marwick seem to have concluded that the law was against them. I think this a shame as it is by no means clear to me that the EU Directive allows the UK to “determine conditions” only to repay 17.5% of the VAT lost (and the EU published list of derogations do not show a UK derogation from Article 90). The Tribunal case was argued by a QC so I imagine that they were advised that they did not have a legal leg to stand on. Instead they claimed first “legitimate expectation” and secondly the Human Rights Act. The Tribunal dismissed both claims with alacrity. It decided that Simpson & Marwick had claimed the wrong amount; they had produced no evidence that HMRC were ever aware that over the 22-year period it had claimed the wrong amount and so they could neither have had a legitimate expectation of getting a greater repayment than provided for by law, or a “possession” of a claim to a greater repayment than provided for by law.

I have no problem with the decision. My concern is that Simpson & Warwick seem to have acted throughout on the basis of paragraph 3.11 of the HMRC notice and their telephone advice from HMRC. They were caught up in an unusual situation where Customs & Excise had introduced an extra-statutory basis of dealing with VAT on insurance claims in conjunction with the British Insurance Association which Simpson & Marwick was effectively forced to go along with. This basis seems hugely detrimental to Simpson & Marwick as without it they would probably have chased the customer for payment with greater vigour – and it is likely that many customers had ignored their invoices as they wrongly believed that they would have been fully paid by the insurance company.

Furthermore in 1978 the then Treasury Minister, Robert Sheldon, told parliament that Customs & Excise would not collect back tax where they had given a clear and unequivocal ruling on VAT in writing that turned out to be wrong. In 2011, unlike in 1978, HMRC rarely give any rulings in writing; they encourage taxpayers to deal with them through telephone helplines, but even though they record calls to the helplines they have consistently refused to extend the protection that this “Sheldon principle” gives taxpayers to reflect their current mode of working.

Most of all, the current approach of the Courts to tax legislation is to apply a purposive interpretation, i.e. to seek to discern what parliament intended to do and try to interpret the law in accordance with that. It is highly unlikely that when the relevant VAT Regulation was first promulgated anyone imagined that Customs might introduce a non-statutory system whereby the liability to pay the VAT and the remainder of the bill falls on different people. It does not seem to me to conform with the clear purpose of needing to lay down a rule to deal with part payments by a single person, to apply that rule also to the situation where two separate payments fall to be made by different people, one of whom pays and the other of which does not.

HMRC normally shed copious crocodile tears where they act unfairly and claim that they have a statutory obligation to enforce the law and, much as they would like to be fair, parliament prevents them from doing so. This of course ignores the fact that HMRC’s care and management powers enable them “to formulate policy in the interstices of the tax legislation, dealing pragmatically with minor or transitory anomalies” (R on the application of Wilkinson v CIR), which is what this seems to me to be. Furthermore if the law approaches legislation purposively, HMRC surely ought to adopt the same approach in deciding what claims to pursue.

ROBERT MAAS

2011-03-25T03:48:00.000-07:00

BLOG 105

BRING BACK THE GENERAL COMMISSIONERS?

A couple of First-tier Tribunal decisions on penalties caught my eye recently. They are both decisions of Judge Anne Redston and both were dealt with under the Default Paper cases procedure.

Simple cases are allocated by the Tribunal to the Default Paper route. Under this route HMRC set out their statement of case in writing, the taxpayer is entitled to send a written response to the Tribunal (with a copy to HMRC) and the Tribunal decides the case based on those two documents (and any attachments to them) without a hearing. The taxpayer is entitled to ask for a hearing. If he wishes to do so he must do this when he submits his response to the Tribunal.

The idea is partly to save money by eliminating “unnecessary” hearings on minor matters (the taxpayer often did not bother to turn up to hearings before the General Commissioners but simply sent them a letter setting out his case) and partly because some taxpayers are likely to be more comfortable in making their case in writing.

The downside is that the taxpayer only has one chance to make his case and in doing so may not realise what is or is not important.

Heronslea Ltd v HMRC was concerned with a penalty for a late return under the construction industry deduction scheme (CIS). HMRC take CIS very seriously and seem to automatically demand the maximum penalty when things go wrong. In this case Mr Clifton, the owner of Heronslea, had explained that he had posted the return due on 19 June 2009 “in good time so as to meet the deadline”. HMRC did not receive it though until 22 June. It is up to the taxpayer to displace a penalty. Judge Redston cancelled the penalty. She pointed out that the Interpretation Act provides that service of any document “is deemed to be effected by properly addressing, pre-paying and posting a letter containing the document and, unless the contrary is proved, to have been effected at the time at which the letter would be delivered in the ordinary course of post”. As she believed Mr Clifton, she set aside the penalty (albeit that there were previous late returns where HMRC had accepted a succession of excuses as reasonable).

Alan German v HMRC was concerned with a penalty for late submission of a tax return. Judge Redstone upheld the penalty, albeit very reluctantly. The decision begins, “Mr German is an elderly, disabled unrepresented taxpayer who has been taxed via the PAYE system for many years. In the 2007-08 fiscal year he changed employers and too little tax was deducted from his PAYE income”. Here the Interpretation Act worked against the taxpayer as HMRC showed that they had posted a tax return to him, but he had not completed it. The decision quotes that Mr German had said that some of his mail during 2008 may not have been delivered because “a local woman was found guilty having not posted mail and hid it outside where it was damaged”. Judge Redston does not seem to have regarded that as proof that delivery had not been effected, although as HMRC had issued a duplicate return in April 2009 it did not matter unduly. Mr German eventually made an appointment to attend his nerarest HMRC office on 5 January 2010, where they told him what he needed to do, and he ultimately submitted his return on 5 March 2010.

I have concerns about HMRC forcing an elderly, disabled taxpayer to visit them rather than send someone round to talk to him. I share Anne Redston’s concerns that where there is an error in calculating PAYE by an employer it is normally the employer, not the employee, who is required to bear the consequences of his error and to pay the tax, but where there is an error by HMRC (in issuing an incorrect Code number) the taxpayer is expected to bear the consequences of HMRC’s error. I am also sad that HMRC chose to impose penalties (and surcharges for late payment of the tax) on an elderly disabled person who appeared clearly confused about why he should owe tax.

However that is not the purpose of this note. My concern is that in the Heronslea case, Judge Redston said that “HMRC state that all CIS returns are date stamped on the day of receipt and this date is then recorded on the HMRC computer. However, the Tribunal were not provided with the date-stamped CIS return, nor a computer print-out showing the date of receipt, nor any evidence, in relation to the particular HMRC office concerned, as to procedures for opening the post and logging it. The Tribunal thus had evidence … to support HMRC’s case that the return was delivered late”.

I do not have much sympathy for HMRC, who can surely be expected to know what they have to prove. I have a lot of sympathy for Mr German though. Judge Redston pointed out that, “while penalties and surcharges can be susceptible to an insufficiency of funds reasonable excuse defence in accordance with the Steptoe principles, there is insufficient evidence before the Tribunal as to Mr German’s financial situation to allow the Tribunal to consider this argument. Lack of funds therefore does not excuse Mr German from the penalties or surcharges”.

Being a pedant, that is not quite right. Lack of funds may well excuse him in law. What actually does not excuse him, as “an elderly, disabled, unrepresented taxpayer” is that he did not have a good enough understanding of tax law to have appreciated what he needed to put in his letter for the Tribunal to enable it to consider his excuse. Judge Redston similarly said that, “it is possible that Mr German’s disability, or the pain killers, which lead him to be forgetful, might provide him with an alternative reasonable excuse. But Mr German did not put this forward to the Tribunal. I therefore cannot consider it …”.

I am a big fan of paper decisions. I know that a lot of people will be prepared to write a letter to the Tribunal but will be too scared to turn up and explain their case. Accordingly I believe that in the General Commissioners era many people did not pursue their appeals because they were too scared to do so and they were not aware that, if they wrote in, their letter would be considered, albeit possibly in the context that the Commissioners would already be uptight that the taxpayer had not bothered to turn up. (I should stress that I do not believe that would have happened; I am simply saying that the system created a perception that it might).

On the other hand these two cases raise a question in my mind as to what extent under the paper track justice is actually done! It may well be that Mr Clifton and Mr German would not have turned up to a General Commissioners hearing and that the result would have been the same. On the other hand, the General Commissioners sit locally. In theory the First-tier Tribunal is entitled to do so where necessary but the appeal form does not say this; it simply asks, “Please state if you have a preference for the hearing of your appeal to take place, if practicable, in any particular city or town”. It does not invite the taxpayer to say, “Because I am disabled I need the hearing to take place in a part of London that is within two miles of where I live”. The appeal form does say, “If you or anyone coming to a Tribunal has a disability or a particular need, please set out the details below” but this seems to be asked in the context of the venue needing to be able to accommodate the disability; not in the context of the disability needing to determine the locality of the venue.

I do not know what information is given to a taxpayer when his case is allocated to the Default Paper category. The explanatory booklet, “At your hearing” which gives some guidance about evidence says, “Please note that if your appeal is in the Default Paper category, the information provided in this booklet does not apply”, so Mr German might reasonably have concluded that the advice given there was irrelevant to him The booklet, “Making an Appeal” says “Default Paper cases, by their nature, are generally decided by the Tribunal after reading the Notice of Appeal and the other written material provided by you and HMRC. Default Paper cases are dealt with without a hearing, though you may ask for your appeal to be decided at a hearing”. There is no indication there that you may be disadvantaged without a hearing and ought to at least consider asking for one.

Will you really be disadvantaged? I think that if Mr German had turned up for a General Commissioners hearing on his case, the Commissioners would have explained to him the meaning of “reasonable excuse” and why they did not have enough information to decide if he had one. They would then have asked him to explain orally whether there was a reason why he did not have the money to pay the tax – I suspect it may well have been because the tax bill was wholly unexpected and he had little or no savings, but that is simply a guess – and whether his pain killers affected his memory. In the light of the amounts involved they might well have accepted his explanation. Alternatively they would probably have explained to him what further documents they wanted to see (e.g. a summary of his assets and liabilities and income and outgoings, and a letter from his doctor) and adjourned the case for a month to give him time to provide them.

Anne Redston is a friend of mine. I think that If Mr German had asked for an oral hearing she would have done the same. In theory she could herself have imposed an oral hearing on Mr German when she read the papers had she realised that the information they disclosed was inadequate for her to ensure that she fully understood Mr German’s case. But she would have had no means of knowing whether he would have turned up for such a hearing and I suspect that, judicially, she would not even have been entitled to explain to him precisely why she felt that an oral hearing would be sensible. I also suspect that, judicially, once she had started to consider the case in detail, she could have turned it into a hearing; the rules do not seem to me to allow even a judge to change track in midstream.

I think that these two cases highlight two major problems with Default Paper appeals. By excluding oral evidence, they exclude the opportunity for the Tribunal to assess the veracity of the taxpayer (or of the HMRC Officer) so forcing the Tribunal to look for confirmatory evidence. They also prevent the Tribunal from telling the parties what sort of confirmatory evidence it feels that it needs.

I think that practitioners should think twice before allowing an appeal to follow the paper track. That is not of much help to unrepresented taxpayers though, as they are unlikely to read this article. I think that there is a need to enable the Tribunal to call for further paper evidence once it has started to consider the case. There may also be a need for a Tribunal guidance booklet on the evidence standard to which the Tribunal works and the minimum information that a taxpayer needs to produce to have a chance of meeting that standard.

ROBERT MAAS

2011-03-21T03:28:00.001-07:00

BLOG 104

DO YOU EARN A SALARY OR A REMUNERATION PACKAGE?

I am prompted to ask this question by an article in last Friday’s Times, headed, “Summer of strikes feared as pensions lose “gold plating””. The headline does not seem to me to have much, if anything, to do with the article, but, as I believe that the Times has gone downhill over the last 20 years, that does not surprise me unduly.

The article is in fact about Lord Hutton’s report on civil service pensions. It explains his proposals and also that George Osborne said that he would consider them carefully. That seems to me to be an advance on Chancellor Brown, who always seemed to accept reports he had commissioned without question, as though doing so relieved him of the need to make difficult decisions.

Are Lord Hutton’s recommendations fair? I don’t have a clue. I suspect that no-one else, including Lord Hutton and George Osborne, has a clue either. That is because, in my view, he was asked the wrong question. He was asked to “conduct a fundamental structural review of public service pension provision and to make recommendations … that are sustainable and affordable in the long term, fair to both the public service workforce and the taxpayer”. The question that I think he should have been asked is to consider whether the remuneration package of public sector workers is fair in comparison with people doing comparable jobs in the private sector. I do not see how fairness can be achieved without making such a comparison. To compare pension provision for public service workers with what is sustainable and affordable to the taxpayer is like comparing apples and pears. That is in effect saying that if the country cannot afford to treat civil servants fairly should there be some sort of compromise so both sides suffer a degree of unfairness.

Which brings me to remuneration packages. The remuneration package is the price that an employer is prepared to pay to obtain the services of an employee. In many cases the package will simply consist of a cash salary. In others it will be made up of several elements. For example, there may be a salary, a pension contribution, access to a subsidised canteen, health insurance, a round sum expense allowance, and a company car. It would surely be ridiculous in such a case to look solely at the cash element of the package and ignore the rest. Yet that is what the government – and the press – seem to be doing with civil servants. The Times tells me that a 52 year old part-time cook supervisor in Wolverhampton is “earning about £10,000 a year and expects to retire on about £3,000 a year”. This is incorrect. She is earning a remuneration package consisting of (at a minimum) salary and the provision of the right to a pension. I think that the cost to a private sector employer of providing her with a pension of £3,000 p.a. is likely to be in the region of £4,000 p.a., in which case she actually has a remuneration package of £14,000, not £10,000.

However we cannot assess whether this is fair as we have to guess at the package because the government, for all its talk of transparency, does not disclose the value of the lady’s remuneration package – the pension element needs to be calculated actuarially and I suspect the she may also get free meals while at work. What is clear is that it is not possible to compare the £10,000 cash element of her remuneration package with the cash element of the remuneration package paid by, say, Serco to someone doing a similar job, as we do not know the value of the other elements of the remuneration package of either, and the mix of benefits is unlikely to be identical.

I am puzzled how Lord Hutton can seriously talk about fairness in the context of civil service pensions without putting the pension into the context of the worker’s remuneration package.

ROBERT MAAS

2011-03-18T07:34:00.000-07:00

BLOG 103

Q: WHEN DOES “SIMPLIFICATION” MEAN “MORE REGULATION”?

A: When David Gauke, the Exchequer Secretary to the Treasury, is involved. I was reading over the weekend last October’s debates on the Finance (No 2) Bill. (Yes, I’m a bit behind with my reading but there’s an awful lot that I try to read).

David was explaining to the Finance Bill Committee, Clause 8 (which is now section 8 of the Finance (No 3) Act 2010). This gives HMRC power to regulate the time at, and manner in, which people who are required to deduct tax from certain interest payments have to account for it to HMRC. I thought his explanation worth sharing. To assist those not used to parliamentary language, I have put my plain English interpretation in square brackets.

“I am sure that the Committee is united in working to ensure that tax forms are as accessible and convenient as possible … HMRC has carried out a lot of work on customer segmentation and it is important that the customer segmentation that it has identified as being willing and able is as big a part of the population as possible [HMRC has divided taxpayers into those it believes want to comply but don’t know how, those that want to comply and try their best, and those that don’t want to comply]. There are many who are willing, but not necessarily able to comply, as they would like. HMRC must engage with such people and ensure that the payment of taxes when they are due is as accurate, accessible and convenient as possible …

The aim of the clause is to provide a regulation-making power for payment of interest. The current procedures can be difficult for taxpayers to use. [The procedure was that the taxpayer had to write a letter to HMRC saying that he had made a payment of £X of interest to Y, he had deducted tax at 20% and was enclosing a cheque for the amount deducted]. For example, at present, the procedures state that the taxpayer must send an account of payment to HMRC without delay, without specifying what “without delay” means or in what form the account must be sent [which as far as I am aware has not given rise to major difficulties for taxpayers but did of course mean that it was very difficult for HMRC to impose a penalty if people were a bit tardy or did not provide all of the information that HMRC want].

With the new regulation-making power in place, it will be possible to modernise the old procedure [“modernise” is a great synonym for “complicate”]. For example it will be possible to provide a bespoke form, and consideration can be given to aligning the procedures with the equivalent rules that apply to companies for which there are long-established regulation-making powers [Actually there aren’t. For companies the rules are set out in primary legislation, but David obviously does not feel it reasonable to ask parliament to spend time on legislating for mere individuals. That can be left to HMRC. The rules on companies, incidentally, are that they have to make quarterly returns]. Any regulations made under the power will be subject to consultation and an impact assessment [We don’t know if we are going to make regulations; it is simply that the Coalition feels it important to give the appearance to citizens that the State is all powerful so it is important that HMRC are seen to have very extensive powers even if they don’t actually want to use them. This will indicate to citizens that anything HMRC want to do is probably authorised by parliament].

… It is precisely because we are mindful of the need to have regard to the convenience of the taxpayer that the regulation-making power is needed. Without it, it would not be possible to improve the current procedures in this area, provide certainty for taxpayer or reduce compliance burdens”.

[I really like that last bit. We have a legal myth that citizens know the law. In tax this myth is actually a State cudgel, as if taxpayers know the law and don’t make their tax returns in accordance with the law, that surely means that they have not taken care to get the return right and should be charged a penalty to encourage them to study the law more thoroughly. Be that as it may, Mr Gauke wants to “reduce compliance burdens” by requiring a citizen not only to know the law, but also to know the regulations and, instead of simply writing a letter to HMRC, to download a form from HMRC’s website (and even HMRC staff tell me not to use the HMRC search engine as is easier to Google what I want from their site), fill it in and send it to HMRC].

The sooner the electorate brings back Labour the better if the Big Society actually means more and more regulation of things that even Mr Brown and Mr Blair trusted us to work out for ourselves.

ROBERT MAAS

2011-03-11T09:05:00.000-08:00

BLOG 102

WHERE IS LORD CARTER?

The main accountancy bodies have asked the government to defer the compulsory filing with HMRC of accounts and tax computations using iXBRL, which is due to come into effect from 1 April this year. The government has refused.

That probably means very little to most readers. I should therefore explain what the row (albeit the professional bodies would probably recoil at my describing this as a row) is all about.

In 2005 the then government asked Lord Carter of Coles to look at electronic filing of tax returns. Lord Carter recommended that this should become compulsory (subject for a minor exception) for all companies from 1 April this year. However he added a very important proviso that it should be compulsory only if HMRC were sufficiently advanced by that time that the software could cope with it.

The row hinges on that proviso. HMRC say that their software is robust and can cope with it. However they were tardy in getting to the stage where they could provide to software houses the specification that the commercial software that most accountants use needs to meet.

David Gauke, the government Minister responsible for HMRC, in rebuffing the professional bodies, said that his understanding is that all of the software houses bar one can meet the 1 April date, and that one has promised to have an interim solution in place by 1 April.

No problem then? Well, my understanding is that the one is Sage. If you have never heard of Sage, imagine the government saying that all internet search engines have to identify on screen contract details for the owners of the website that one enters, and that everyone can do it other than Google. I suspect that most people would say that the whole thing is a waste of time without Google.

Well, Sage is the Google of tax software! It is ridiculous for anyone to suggest that there is a robust system for electronic delivery of corporation tax returns if Sage are not on board.

Yes, Sage have an interim solution. But what is an interim solution? I suspect that it is something that can cope with the simple 80% of returns but cannot deal properly with the other 20%. I should stress that the other 20% are not necessarily major companies with complicated affairs. Most of them are likely to be tiny companies that happen to have entered into a one-off transaction which is a bit out of the ordinary.

Lord Carter was of course an advisor to Gordon Brown at the time of his report. Gordon asked him to implement his recommendations, which he accepted in full. I do not know whether George Osborne asked Lord Carter to continue with the task. I think that David Gauke’s response to the accountancy bodies put up two fingers to the integrity of Lord Carter. If George Osborne sacked Lord Carter, I am surprised that he has not publicly protested the decision not to delay compulsory e-filing until the electronic world is able to cope with it. If Lord Carter is still the government’s guru for electronic tax filing, I am shocked that he has not publicly protested this decision, as I think it utterly undermines the cornerstone of his recommendations.

ROBERT MAAS

2011-03-07T02:38:00.000-08:00

BLOG 101

WHOSE TAX IS IT?

The First-tier Tribunal held in the case of John Price v HMRC that roller blinds are building materials for VAT purposes. Accordingly Mr Price, a do-it-yourself builder, was entitled to recover the VAT that he had paid for such blinds when constructing his house.

HMRC subsequently put out an HMRC Brief which caught my eye. This says, “HMRC’s view remains unchanged in that roller blinds (and other “window furniture”) are not “building materials” and will not be changing its policy. The Tribunal Chairman did not hear any evidence on the point of what is and what is not a “building material” for VAT purposes but reached his conclusion as a matter of judicial notice, that is, as a common sense fact”.

The First-tier Tribunal is not a court and its decisions do not create precedents. HMRC are therefore entitled to ignore them. Their practice in relation to VAT seems to be to tell people that they are ignoring a decision if they think that other people will use it to reduce their VAT bills but to leave people guessing in most cases whether or not they intend to follow a decision. So there is nothing unusual in HMRC saying that they propose to ignore a Tribunal decision.

What caught my eye was the statement that, “the Tribunal Chairman did not hear any evidence on this point” HMRC were represented at the Tribunal. Did the Chairman put his hands over his ears. I doubt it. It is far more probable that he heard no evidence because HMRC chose not to present any to him. It seems to me outrageous for HMRC to, in effect, say, “We chose not to explain why we do not think roller blinds are building materials, so the Tribunal could not take account of our views because we hid them from him. Because of this we are entitled to ignore his decision as it took no account of our views”.

I do however quite like the bit about the judge reached his conclusion as a commonsense fact”, which is a further reason why HMRC think that it must be wrong! Everyone surely knows that commonsense is alien to VAT.

HMRC go on to explain, “It has never been HMRC’s policy that the zero-rate should apply to all goods that were incorporated into residential property by builders during its construction”. In the past HMRC have often told me that they do not make the law; their role is simply to enforce the law. If HMRC do not make the law, I do not understand how HMRC can have a policy on what should be zero-rated. Surely only people who make the law can have such a policy.

Actually in the John Price case the Tribunal decision recounts that, “HMRC rejected the claim in relation to the roller blinds because they considered that they were not “building materials”

… I accept that the roller blinds have been incorporated in the building in question in the course of the construction works – in argument Mrs Orimoloye [Counsel for HMRC] informed me that HMRC accept that VAT on curtain rails are eligible for refund on this basis”. Publication VAT 431NB is the notes to the claim form. It states “Goods (Building Materials) you cannot claim for: … curtains, blinds, carpets”. Notice 719, which is the detailed guidance for do-it-yourself builders, says, “Articles accepted as being “ordinarily” incorporated in a building are listed below. This is not a complete list: … curtain poles and rails”.

So what do HMRC really think? The HMRC brief states firmly that, “roller blinds (and other “window furniture”) are not “building materials” yet VAT 431NB includes blinds in the category of building materials, albeit not ones ordinarily installed by builders, and Note 719 says that curtain poles – which I would myself have thought of as “window furniture” - not only are building materials but are building materials ordinarily installed by builders. Poor Mr Price surely cannot be criticised for having decided from all this guidance that roller blinds are very different to simple blinds and much nearer to building materials than curtain poles. As Alice said, “Curiouser and curiouser”!

ROBERT MAAS

2011-03-04T08:13:00.000-08:00

BLOG 100

ARE YOU AN OFFSHORE TAX DODGER?

I have just finished reading an HMRC Press Notice entitled, “New penalties for offshore tax dodgers”. It quotes Exchequer Secretary to the Treasury, David Gauke, having said, “The game is up for those going offshore to evade tax”.

Leaving aside the fact that, assuming that he has been accurately quoted, his State comprehensive school education seems to have left him with a poor grasp of English – those “going offshore” will actually have no liability to UK tax to evade as they will cease to be UK resident, whereas I suspect that he actually has in mind those staying here and investing money offshore – the references to tax dodgers and tax evaders hides the fact that Mr Gauke intends to heavily penalise those with a limited grasp of the UK tax system who have the misfortune to be born in one country rather than another. Not by accident, I should add, but deliberately! Read on. He is personally aware of the issue of such people as he himself raised it when in opposition.

What HMRC’s colourful language is presaging is that Mr Gauke has decided to introduce from 6 April this year the enhanced penalties in relation to offshore income that Mr Darling rushed through parliament without debate in the dying days of the last government. Although these penalties were not debated by parliament, they were alluded to last April on the Second Reading of the Finance Bill both by Mr Gauke himself and by Mark Hoban, who were the lead speakers for the then opposition. Mark Hoban, now the Financial Secretary to the Treasury, said

“Clause 36 … has been criticised by the Low Incomes Tax Reform group about the impact that it could have on unrepresented low-income taxpayers. Let me quote from its representations. “Many unrepresented taxpayers who will be caught by these provisions actually come from overseas territories, which are likely to be placed in categories 2 or 3. Will a Ghurkha be affected because we do not have a double taxation agreement with Nepal? Will a nurse coming from a West Indian island without the “correct” HMRC designation be affected disproportionately? Is every mistake in relation to a source of income or gains in their home country to be penalised at one-and-a-half or double the normal rate, simply because of where they come from?” The Financial Secretary will no doubt be aware of the experiences of the Minister for Borders and Immigration and the Under-Secretary of State for Defence … They have both come off worse after locking horns with the Ghurkhas. Does he want to be the Ghurkhas’ third scalp? We need to think carefully about how those on low incomes are going to be able to comply with them”.

Sadly the then Minister, Sarah McCarthy-Fry did not have time to respond to any of these questions. However in winding up for the Conservatives, David Gauke himself said, “My hon. Friend also talked about clause 36, which relates to penalties in respect of offshore income, and might affect the nationals of countries with which we do not have tax information exchange agreements. He also highlighted the position of the Ghurkhas who have settled here, and raised the prospect of Joanna Lumley turning her attentions to Treasury Ministers; they may or may not find them an appealing thought … We will let those clauses through. Tackling avoidance is a perfectly reasonable intention – we have no difficulty with it – but we make a commitment that we will listen to representations made by professional bodies on the technical and practical implications of the Bill, and if appropriate return to those matters”.

Since taking over responsibility for tax matters, Mr Gauke has not actually sought representations on the Finance Act 2010, so there may have been nothing for him to listen to – I, along with others, I suspect, had assumed that he would give further thought to the representations that had already been made. In any event his “listening” period is clearly now over. He has not thought it appropriate to return to this matter but has gone ahead with introducing Mr Darling’s legislation.

The reason for the references above to categories 2 and 3 is that, where a country is in category 2 any penalty for failure to disclose income from that country will be at 1.5 times the normal rate, and where the country is in category 3 it will be at 2 times the normal rate.

I have no sympathy for those who evade tax. However I have a great deal of sympathy for those who do not understand tax and are, in effect, penalised for their ignorance. Assuming that the undisclosed income is picked up by HMRC, not by the taxpayer, there will be a minimum penalty where a category 2 country is involved of 22.5% of the tax and for a category 3 country, 30%. Mr Gauke has now revealed that he has in fact put Nepal into Category 2. In the West Indies, Anguilla is in Category 1, the neighbouring islands of Barbuda and Antigua are in Category 3, the next island, Guadeloupe, is in Category 2 with, the one next to that, Dominica is in Category 3. Next to that is Martinique (Category 2) and then Barbados (Category 3). The category into which a country falls depends on the scope of the exchange of information provision that HMRC has negotiated with the tax authority of the country concerned. The poor taxpayer of course has no control over what treaties his government enters into. Nor does he have control over the order in which HMRC choose to negotiate treaties – I suspect that Category 3 Caribbean countries are there not because of a reluctance to exchange information but because HMRC has not yet got round to asking them to negotiate a new treaty, as they do not have the resources to deal with many at a time.

You may be thinking the worries are a bit far-fetched. Is a low paid worker in the UK really likely to keep their savings in Dominica? Yes. The nurse or bus conductor who came to England from Dominica some years ago probably sends his or her surplus money back home to help the family and to save for retirement. When the nurse came to England the interest on such savings was not taxable. Now it is because the nurse or bus conductor is likely to be one of those nasty non-doms. The law was changed in 2008 to tax non-doms on worldwide income, whether or not it was remitted to the UK, unless the non-dom pays a fee of £30,000 p.a. to defer paying the tax on overseas income until it is brought into the UK. It is most unlikely that the average nurse or bus conductor is aware that they were affected by this change or will have the resources to pay a £30,000 fee.

But, sadly, coming here to work hard in David Cameron’s Britain apparently labels you as a tax dodger if you dare to send money home.

ROBERT MAAS

2011-02-28T06:05:00.000-08:00

BLOG 99

WHEN IT COMES TO GOVERNMENT “IMPROVEMENT” MEANS “DETERIORATION”

When it comes to Government “improvement” means “deterioration”. That is my recollection of Hutber’s Law, a principle formulated by a former City Editor of the Sunday Telegraph.

I do not know if Martha Lane Fox (the Government’s digital champion) is aware of Hutber’s Law. She certainly seems to know how to operate it though!

I received an e-mail before Christmas telling me that Martha and the Minister for Cabinet Office (who seems to prefer to remain anonymous so that Martha can take the flak single-handed) have announced that “HMRC are putting together a package of measures that will make it easier and quicker for businesses to deal with the tax authorities using online services as the norm … From August 2012 the online channel will be the mandatory way to register for VAT, with other channels being closed … And from 2013 it will become mandatory for business customers to tell us online when they start their business activity for the purposes of Self Assessment and Corporation Tax. Employers will also be expected to use the online channel to obtain their PAYE scheme number and to ensure that they can operate PAYE accurately from the first pay day”.

Thanks a lot, Martha! I see from the internet that we only missed out from sharing the same birthday by three days – and of course the 40 years head start I have been given on you. I suspect what you really mean is that if us old fogeys are not prepared to embrace the internet age and ditch our reliance on pen and ink (yes, they really do still produce ink for me to put in my fountain pen) we shouldn’t be allowed to run businesses. We should leave it to the thrustful, entrepreneurial, modern people like you.

I don’t really mind you thinking that. Obviously I also think that you are wrong but that’s by the way. What I resent is your being so patronising. Forcing me to do something that I do not want to do clearly cannot make it either “easier” or “quicker” for me. It can certainly make it both easier and quicker for HMRC if taxpayers can be turned into a homogeneous population whose affairs can be fed onto an HMRC conveyer belt with little or no human intervention. So why don’t you just say that your real interest is computers and that people don’t really count in your book; Bow to the mighty computer or get out of business?

Also how do you expect people to recognise when they “start a business activity”? I have been a practising accountant for more than 40 years and I often can’t identify when that happens. I don’t know what happened when you co-founded lastminute.com. It may well be that you and your colleagues all threw in your jobs, sat down together and brainstormed about a possible new business venture. If so Martha, you need to realise that is not how most businesses start. Most start because a hobby gradually becomes a money-making activity, or because people start using the skills from their day job to help friends in their spare time and when they are made redundant offer those skills more generally, or even experiment with something with friends and when they realise it works offer the concept more widely. In all of these situations I do not have the faintest idea when the business starts. In retrospect I can see that it has become a business, but if you ask me to pinpoint the day it started, I have to admit defeat.

I accept, Martha, that I may be exceptionally thick. You may be right in believing that in all of the above situations the taxpayer will have no difficulty in identifying the day the hobby/helpfulness/experiment or whatever drifted into becoming a business. I have no reason to believe that you are an unreasonable person. I am happy to assume that in advising the government to mandate taxpayers (presumably under the pain of a financial penalty if they get it wrong) to tell HMRC online when they start their business activity, your personal experience of setting up lastminute.com was that you and your partners did not experiment with the idea while you had a day job but resigned from your jobs with no idea whether or not the idea might work, and then developed the website and tried to interest your friends in the idea. However that is not how most small businesses start. In most cases it is extremely difficult to pinpoint when the business started. There is also a technical tax uncertainty as to when a business starts. For example I think that lastminute.com started at the earlier of when you or a colleague first began to develop the website and you first tried to interest a theatre in the idea. Others would say the business did not start until your website was up and running.

ROBERT MAAS

2011-02-07T09:56:00.001-08:00

BLOG 98

OLDHAM’S FAT TAX?

I recently wrote about Illinois’ weird use tax. Jill has drawn my attention to another strange tax. Perhaps I’ll start to collect them! This time is what last Wednesday’s Metro called Oldham Metropolitan Borough Council’s proposed “fat tax”. This is apparently a hypotheticated tax, i.e. the proceeds will not go into Oldham’s council tax pool but will be used specifically to fund healthy eating campaigns and litter-picking.

I do not know how real this proposal is. I cannot find any reference to it on Oldham’s website. Metro (and the Daily Mail) may well have picked it up from the previous days Manchester Evening News, which ran a similar article the previous day. It may have simply been a council official “winding up” a journalist. I note however that Mail Online has a fuller story, so it may well be true.

Apparently the proposed “tax” is a charge of £1,000 p.a. on “takeaway” businesses. Curiously restaurants such as most branches of MacDonalds which have sufficient seats for customers to eat in the restaurants will be exempt. A “fat tax” that excludes burger restaurants sounds a bit odd. Accordingly the tax seems aimed more at raising funds for litter clearance than at healthy eating. The Metro informs me that “Town hall bosses say they are being forced to act to curb the glut of fast food joints taking over town centres and because of the obesity epidemic sweeping the country”.

The Manchester Evening News reports that “the Council will consider exemptions for takeaways – like cafes and smoothie bars – that can prove they sell healthy food”. The “tax” is apparently aimed at kebab shops, pizza places, curry houses and fish-and-chip shops. I must admit I am a bit puzzled that pizza and curry are apparently not regarded as healthy foods. I am also intrigued as to how an exemption will work. Will a restaurant have to sell only healthy food or mainly healthy food or some healthy food. Most sandwich shops sell crisps as well!

The story has certainly spawned a lot of readers’ comments. The Mail Online has 149 when I looked (including one as far afield as Massachusetts, USA, “just another government gimmick to grab some quick cash. Any excuse will do”). The Manchester Evening News had 103.

I do note however that in Oldham a licence is required for an awful lot of businesses including, for example, in addition to the expected ones, animal health and welfare, boatman, body piercing etc, chaperones, child entertainment, cooling towers, dog breeding, dog supervision, hairdressers, highway work, motor salvage, riding establishments, second-hand goods, street cafes, and street trading, so this may simply be a new licence fee for the right to operate a takeaway.

ROBERT MAAS

2011-02-01T09:07:00.001-08:00

BLOG 97

IS THIS THE ODDES TAX EVER?

You may think that the UK is a past master at finding new things to tax but, if so, you don’t realise how lucky you are. I’ve just received an e-mail about the Illinois use tax. This is probably the oddest tax that I have ever come across. It has been in existence since 1955 but has apparently been in the nature of a voluntary tax up to now. Presumably because of these straitened times, the Illinois tax authorities have now decided to get tough. They have introduced an amnesty on interest and penalties from 1 July 2004 – which I assume must be as far back as they can go in collecting the tax. If a taxpayer pays the tax due for those past years, the Illinois Department of Revenue will not seek interest and penalties (unless someone who uses the amnesty is found to have under declared the tax due). Incidentally, Illinois has also raised the rate of State income tax by a massive 66% from 3% to 5% which perhaps demonstrates how desperate it is for tax revenues. For 2010 onwards the Illinois General Assembly has made it easier for individuals to pay their use tax by putting an line on the Illinois income tax return for taxpayers to show the tax due. This reads “Use tax on internet, mail order or other out-of-State purchases from UT Worksheet or UT Table in the instructions. Do not leave blank”.

Yes, that’s right. Use tax is a tax on all out-of-State purchases. It is the difference between the US State tax actually paid on the purchase in the State of purchase and the Illinois sales tax rate of 6.25% (1% on food and medicines). For example when I go to Chicago I often visit an Outlet Mall in Wisconsin where the sales tax is 5% and there is no tax on food. If I were a Chicago resident I would have to pay Illinois use tax of 1.25% on the items I purchase in Wisconsin and take back to Chicago. If I buy goods in Michigan or Iowa, both of which have a 6% sales tax, I would have to pay Illinois use tax of 0.25%. If I were to visit London I would pay Illinois use tax at 6.25% on the items I buy here and take back to Chicago as the VAT I pay here is not a US tax.

So how does the Illinois Department of Revenue know how much use tax a person owes? Well Illinois residents are supposed to keep their invoices and till receipts! I suspect most don’t. So, it appears, does the Department of Revenue as if a person does not know the amount of all of his purchases he can account for use tax on an estimated amount. This depends on income. A person with income of up to $10,000 is deemed to have spent $48 and to owe use tax of $3. A person with $100,000 of income is deemed to have spent $832 and to owe use tax of $52. Over $100,000 the estimated use tax is 0.0625% of income, i.e. the person is assumed to spend a hundredth of his income outside Illinois.

These estimated figures look very low. So what do the tax authorities do to check that the actual tax figure due is not significantly greater than the estimate? I do not know, but they have just said, that “Illinois is focusing upon collecting this tax”, so if I visit Wisconsin when I go to Chicago this year, I will be on the look out for tax police when I cross the Illinois State border!

They have also pointed out that, “The Illinois Department of Revenue can assess use tax owed by taxpayers who do not pay voluntarily. For taxpayers who do not have records to document their use tax liability, the department will estimate liability. Taxpayers have the right to refute the department’s estimates”.

Of course we already have a sort of use tax in the UK insofar as we charge VAT on goods brought into the UK for private use in excess of £390 other than on purchases from within the EU where there is no limit on the amount of purchases that can be brought in. A use tax on that exempt amount on the goodies that we bring back from our holidays outside the EU would raise a lot of money. I hope that George Osborne does not work that out.

ROBERT MAAS

2011-01-17T09:29:00.000-08:00

BLOG 96

WHAT DO TAXPAYERS THINK ABOUT THEIR TAX BILLS?

The US IRS Oversight Board has recently released its annual Taxpayer Attitude Survey. The Oversight Board was set up some years ago by Congress when there was a concern that the IRS was abusing its powers. Its role is to look for ways to protect taxpayers from such excesses. The Taxpayer Attitude Survey asks some interesting questions and produces some fascinating answers. The statistics are given for the last 8 years so it is possible to see how attitudes have changed.

In 2003, 17% of taxpayers thought it acceptable to cheat on their income taxes, 5% as much as possible and 12% a little here and there. In 2010, only 8% thought it acceptable to cheat a little here and there but the as much as possible figure remained fairly constant throughout the 8 years. 87% of Americans feel it unacceptable to cheat on their income tax. However when this is broken down, only 69% agree that it is every American’s civic duty to pay their fair share of taxes although another 28% mostly agree with that statement. The 10% difference presumably feel that other people ought pay their fair share! Curiously when taxpayers were asked whether they should just have to pay what they feel is a fair amount of tax, 10% felt they should and another 17% mostly agreed with that statement. So 87% feel cheating is wrong but only 73% feel that they ought to pay what Congress decides! When asked whether taxpayers have a personal responsibility to report anyone who cheats on their taxes, 35% thought they did not.

When asked how important it is to taxpayers that the IRS takes steps to ensure that all taxpayers pay what they owe, 83% thought it important that the IRS chase low-income taxpayers, 95% thought it important they chase small businesses, 95% wanted them to chase high-income taxpayers and 98% felt it important that the IRS cracks down on companies.

When asked what influences taxpayers to report honestly, 64% were largely influenced by fear of an audit, 34% by a belief that other taxpayers were reporting honestly, 66% by the knowledge that third parties were reporting the income to the IRS and 92% by their personal integrity. Curiously 6% said they were very little influenced by their personal integrity and 2% did not know whether this influenced them or not!

Taxpayers were also asked what the IRS should do to help them get their tax right. Roughly 80% felt a toll-free telephone helpline was very important although less than 60% said they would use such a helpline. Similarly with the IRS website, around 70% thought it important that the website provides information but only about 52% said they would actually use it.

A statistic I find astounding is when asked how long people would be prepared to hang on the telephone to wait to speak to an Officer, 46% said up to 5 minutes, another 27% said 6 to 10 minutes and a further 24% said 11 to 30 minutes. 2% were prepared to hang on for up to one hour and 1% for over an hour. I find it hard to imagine that UK taxpayers would be so tolerant.

38% of taxpayers were very satisfied with their interactions with the IRS and another 39% fairly satisfied. However 32% felt that the IRS devotes too much of its resources to enforcement and not enough to customer service. 58% felt that the IRS ought to receive extra funding for enforcement activities and 61% felt it ought to receive extra funding to assist more taxpayers over the phone or in person.

From 1 January 2011, it is illegal for anyone to be paid to assist with the preparation of a Federal Tax Return without being registered with the IRS – and from the middle of the year, it is necessary to pass an IRS competency test and meet continuing professional education requirements in order to obtain such registration. Taxpayers were asked whether it was important that tax return preparers be required to meet standards of competency. 75% felt this very important, 19% somewhat important and a surprising 6% unimportant. However 79% felt it important that tax return preparers be required to meet ethical standards and a further 15% felt this somewhat important.

It would be interesting to know how the UK figures would compare with the US ones. I suspect that the figures for taxpayer honesty would be fairly similar albeit that in the UK there is far less third party reporting. I am sure UK taxpayers will be far less willing than the US counterparts to wait for their phone call to be answered.

ROBERT MAAS

2011-01-12T03:49:00.000-08:00

BLOG 95

THE VAT INCREASE

Is my memory going? I am intrigued at the media reaction to the VAT increase from 4 January 2011. It seems that there is a serious risk that this will destabilise the economy, lead to mass unemployment and push the country into recession.

What puzzles me is that a year ago VAT increased by 16.67% from 15% to 17.5%. At that time the economic situation struck me as far more risky. If the current 14.29% increase from 17.5% to 20% is as damaging as the media tell me, surely the earlier increase ought to have been far more damaging as it took place at a time when the economy looked far more fragile. In fact it seems to have had little, if any, impact on the economy. So why should the latest increase be any different?

What I find equally puzzling is that I cannot recollect widespread warnings of doom in the media at the end of 2009 similar to those at the end of 2010. My recollection is that it was generally accepted that the increase to 17.5% would not be damaging. So if a 16.67% increase was not thought damaging, why should a 14.29% one be so much more disastrous? After all in January 2010 the effect of a VAT increase was unpredictable, as we had not had one for many years. In January 2011 we had the experience of 2010, which was that the increase did not seem to have had any impact on the economic recovery.

But the media – and those trade associates which have berated the increase – seem to have wholly ignored this experience. I do not understand why. I would have expected the doom-mangers to have differentiated this year’s increase from last year’s and explained why the experience of 2010 is not an appropriate pointer to what is likely to happen in 2011.

ROBERT MAAS

2011-01-07T06:22:00.000-08:00

BLOG 94

NOT TAKING REASONABLE CARE

I am a bit disquieted by the First-tier Tribunal decision in Express Food Supplies v HMRC. The case was argued by Mr Al-Faham, the proprietor of Express. It is often difficult to judge whether a taxpayer in person has been disadvantaged by his lack of knowledge of tribunal procedures, so the usefulness of such cases as precedents is often questionable.

In May 2009, when the April VAT return fell due, Express’ accounts administrator was on holiday and a temporary employee who had been recruited to cover her absence completed the VAT return. This showed a VAT repayment due to Express of £21,660. HMRC asked Express to verify that the repayment was indeed due and asked to see the invoices. Express asked its accountant to have a look at the return. He found two categories of error

a) a small batch of zero-rated purchase invoices had been incorrectly entered with nothing being shown in the “net” column and the amount of the invoice in the VAT column, and
b) some sales invoices had been posted late so were omitted from the VAT return.

The accountant calculated that the refund due was only £1,082. He explained to HMRC that Express had been restocking with standard-rated packaging products and because of this had been expecting a VAT refund for the quarter so that return did not look out of the ordinary.

HMRC duly repaid the £1,082 and everyone lived happily ever after? Well, not quite. HMRC demanded a penalty of £3,086 – getting on for three times the VAT repaid. I should stress that they were being generous. This is 15% of the tax initially wrongly claimed, which is the absolute minimum penalty that parliament has specified for a mistake that is discovered by HMRC and results from a failure to take reasonable care.

I wonder what parliament expected a small business to do? In this case Mr Al-Faham was conscious that the VAT return needed to be submitted. He engaged a temporary employee to do the requisite work. He expected a VAT repayment and the return claimed one. He is not an accountant; he is, I assume, a food wholesaler. Surely parliament could not have expected him to do more than he did. What did he – or indeed the temporary, inexperienced book-keeper – do carelessly?

HMRC said that the largest VAT repayment that Express had had in the past was £5,504. Accordingly a claimed repayment of almost four times that amount would have rung alarm bells in the mind of a reasonably conscientious person. That seems to me questionable. The VAT payments/repayments for small traders can fluctuate wildly. The amount depends on when invoices happen to be issued and when the trader needs to incur capital expenditure or to stock up on particular items. Most of us do not remember all of our prior VAT returns!

Unfortunately Mr Al-Faham shot himself in the foot because at the Tribunal hearing he agreed that he had been careless. As his only escape from the penalty was to demonstrate that he had not been careless, the Tribunal had no option but to uphold the penalty.

MPs of all parties often pay lip-service to small businesses being vital to the economy. I carry around a card from the Federation of Small Businesses that tells me that there are 1.6 million VAT registered small businesses in the UK, that micro-businesses (i.e. businesses with under 500,000 euro of assets, under 1 million euro turnover and less than 10 employees) account for 94.7% of total UK businesses and 30.6% of total UK employment. The card is a few years out of date but I doubt that the figures have changed much. Hitting a conscientious small business with a £3,086 fine in these circumstances does not suggest to me that parliament cares about small businesses. This is not a party political issue. Chancellor Gordon Brown introduced this penalty but no-one in any of the opposition parties spoke out against it during the Finance Bill debates. It is a shame that politicians do not have the guts to say that they believe small businesses are a nuisance and ban people from setting up in business unless and until they are sophisticated enough to be able to run a medium-sized one, as they obviously see no role in 2011 for the traditional new businesses where the budding entrepreneur gets on with generating profits and growing the business without first getting an accounting or legal qualification or an MBA. Expecting a tiny business to be capable of achieving the standards of a larger one is so unrealistic that I cannot believe that any MP seriously thinks that is how the world works.

ROBERT MAAS

2010-10-29T09:27:00.001-07:00

BLOG 92

ARE HMRC FLOUTING THE SUPREME COURT?

Over the last few years HMRC have been reviewing their Extra-Statutory Concessions (ESCs) with a view to either withdrawing the concession or recommending the government to enact it. ESCs are published concessions under which HMRC state that they will not enforce the precise wording of a particular legal provision in specific circumstances. These concessions were introduced under the old Inland Revenue’s power of “care and management” of the tax system. I remember being told by the Revenue many years ago that they aimed to create fairness in areas where it would be too difficult to phrase the scope of the concession in statutory language.

HMRC have been advising the government to enact those ESCs that they feel it right to keep because of something said by Lord Hoffman in 2005 in the case of Regina (on the application of Wilkinson) v CIR. Lord Hoffman said that the Revenue’s power of care and management gives them a wide managerial discretion which enables them “to formulate policy in the interstices of the tax legislation, dealing pragmatically with minor or transitory anomalies, cases of hardship at the margins or cases in which a statutory rule is difficult to formulate or its enactment would take up a disproportionate amount of Parliamentary time”. Counsel for Mr Wilkinson claimed that some of HMRC’s published concessions went beyond mere management of the efficient collection of the revenue. Lord Hoffman’s response was, “I express no view on whether she is right about this, but if she is, it means that the Commissioners may have exceeded their powers under section 1 of TMA. It does not justify construing the power so widely as to enable the Commissioners to concede, by extra-statutory concession, an allowance which Parliament could have granted but did not grant, and on grounds not of pragmatism in the collection of tax but of general equity between men and women”.

As Lord Hoffman specifically stated that the Revenue did have power to make concessions in the circumstances set out earlier, it is highly questionable whether the judgement required HMRC to dispense with existing ESCs and to forbear from creating new ones. The HMRC response smacks of using the judgement as an excuse to stop trying to help taxpayers by promulgating ESCs where the law did not deal with cases in the interstices or created anomalies or a method of achieving fairness would be difficult to enact.

However, that is not the point of this article. On 27 August, HMRC published a technical note on the proposed new Regional Employer National Insurance Contributions Holiday for new businesses other than in the East and South-East of the country. The government want this to operate from 6 September but it needs legislation and the government do not expect this to be enacted until next year.

This note tells us that until Parliament enacts the legislation (assuming that it chooses to do so) “businesses eligible for the Holiday will, as a result of the exercise of HMRC Commissioners’ collection and management powers, be able to receive the benefit of the Holiday from 6 September 2010”.

Curiouser and curiouser …? The “collection and management” power is in the Customs and Revenue Commissioners Act 2005, which replaced the TMA “care and management” power that applied at the time of the Wilkinson decision (given a month after the enactment of CRCA 2005). Granting by concession a completely new relief that Parliament has not even been asked to enact – or to put it another way, declining to collect N.I. that Parliament has told HMRC to collect – seems to me to fall squarely into Lord Hoffman’s prohibited category of conceding a relief which Parliament could have granted but did not grant.

Do HMRC’s 2005 powers go wider than their 1970 ones? They do not appear to me to do so. If they do, it must follow that there never has been a need to enact or scrap a single ESC, as the new HMRC powers were in place before the Wilkinson judgement. So what is going on? Are HMRC contemptuous of the House of Lords and are simply ignoring Lord Hoffman? Is George Osborne – or more likely David Gauke – contemptuous of the House of Lords? Or am I right in thinking that there was never a need to do anything about ESCs and Lord Hoffman simply provided a convenient excuse to withdraw from taxpayers reliefs enacted in those bygone days when the Revenue believed that the tax system ought, by and large, to operate fairly, but which are an inconvenience today when the tax system seems to be largely designed to make taxes easy for HMRC to collect with fairness having become largely an irrelevancy?

ROBERT MAAS

2010-10-11T05:32:00.000-07:00

BLOG 91

EVEN MILLIONAIRES CAN BECOME UNEMPLOYED

Someone sent me a link to an article on Bloomberg.com noting that in 2008 (the latest year for which figures are available), 2,840 US individuals from households reporting income of at least $1million on their tax returns claimed a total of $18.6million in jobless aid (aka unemployment benefit). 806 of these had income of over $2million and 17 had income of over $10m. Another $52.8m was paid to 8,011 households earning between $500,000 and $1m.

In 2009 Congress voted to exempt from federal income tax the first $2,400 of jobless benefits. The top rate of personal income tax in the US is 35%, so to a millionaire that $2,400 was worth $6,857 net. Unemployment benefit in the US averages $300 per week but lasts for only 26 weeks. So on the full $7,800 dollars a millionaire would be left with $5,910. Not bad for doing nothing other than put in a claim.

This story raises some interesting questions. The first thought in my mind in reading the headline was, “How greedy can some people be?” My second was that surely unemployment pay is not aimed at millionaires and it is unreasonable for such people to claim it even if technically they may fall within the rules.

But I then read the justification from a couple of Washington Think Tanks. One pointed out that, “Unemployment benefits are insurance, funded with taxes paid by employers, and the program isn’t need-based like welfare. A millionaire who loses his or her job is entitled to benefits the same as a laid-off factory or restaurant worker”.

Another said, “Getting an insurance payment doesn’t depend on need but only on suffering an insured loss. We don’t say that your homeowners’ policy shouldn’t pay off if you’re a millionaire”.

Of course we’re in the same position in the UK. Jobseekers Allowance is an entitlement “bought” by payment of employee’s National Insurance, in the same way as in the US Unemployment Insurance is “bought” by payment of FUTA (Federal Unemployment Tax Act) contributions by employers of 6.2% on the first $7,000 a year paid to a worker. The employee gets a credit against his Federal Tax of up to 5.4%, so effectively much of the cost of the “insurance” is met by the State.

I am not personally convinced either by the, “It’s the same as an insurance claim” argument or the “You’re entitled to it” one. It seems to me that both National Insurance and Unemployment Insurance are far more akin to taxation than to genuine insurance.

But the fact that these arguments can be put forward by respected Think Tanks does raise an important issue, namely if the State opts to “sell” to the public a tax, such as National Insurance, by labelling the compulsory contributions (that are not related to the benefit being “bought” by the employee’s earnings) as an insurance premium, is it right to look aghast when the rich take that presentation at face value and claim benefits that they do not need? Indeed if universal Social Security benefits are advertised by the State as an “entitlement”, as frequently happens here, is it reasonable to complain if even the ultra rich claim the entitlement, albeit that most of us would probably think that in making the benefit universal Parliament assumed that the very rich would not expect the State to contribute to their support?

ROBERT MAAS

2010-08-04T02:46:00.000-07:00

BLOG 90

WHAT SORT OF TAX AUTHORITY DO YOU WANT - 4?

Here is another batch of cases where it intrigues me that HMRC felt it worth the damage to their reputation to take the cases before the Tribunal.

Cameron v HMRC

HMRC can require a person to deliver an income tax return to them (TMA 1970, s 8). Once a taxpayer has submitted his return he can amend it within the following 12 months (TMA 1970, s 9ZA). A person who makes a gift aid payment can elect to treat the gift as made in the previous tax year but must do so on or before the date that he delivers his return under s 8 (ITA 2007, s 426(6)). Mr Cameron sold his business. He made a substantial charitable gift in January 2009. He submitted his tax return (due by 31 January 2009) in September 2008 and when he made the charitable gift he amended his return to claim to carry back the gift.

“Too late”, said HMRC, “if only you had not been so prompt and diligent in submitting your return …”. “But”, said Mr Cameron, “if I have amended my “return under s 8”, I have surely not delivered it until I deliver the amendment”. Unfortunately the Tribunal agreed with HMRC. It commented though, “This is a case where commonsense and fairness appear to be on the taxpayer’s side. If I were permitted to use only those concepts as my guides I would find for the taxpayer”; and later “I accept that the purpose of s 98 is to encourage charitable donations. Is the literal interpretation of “his return … under section 8” … at odds with that purpose … That interpretation does not prevent the encouragement of charitable giving; rather it merely indicates … the conditions under which such encouragement is given. Is the result of such a literal interpretation absurdity or inconsistency? … It is true that the result … is that … delay in the delivery of returns may to some extent thereby be encouraged, but that is not an absurdity in the sense of a result wholly inconsistent with the aim of encouraging charitable giving. It is in the circumstances an odd stipulation and one for which no clear policy may be evident, but that is not the same as absurdity or repugnance”.

A victory for the public. Mr Cameron cannot get tax relief for his charitable donation to the extent that it exceeds his 2006/07 income. That will teach him to make big donations. He should have realised that us taxpayers (through our elected representatives) only pretend to want to encourage charitable donations. Curiously Dave Hartnett has complained on a number of occasions that some firms of accountants save up their clients’ tax returns and deliver them all on 31 January. That causes huge difficulties for HMRC, which encourages accountants to spread the submission of returns through the tax year. So if HMRC want accountants to spread the delivery of returns why take a case to establish that that is a dangerous thing to do and it is far safer to hoard them up until the 31 January just in case a carry back seems sensible? I wish I knew!

Wessex Continental Travel Co Ltd v HMRC

Wessex registered for VAT in 1988. In December 2007 it applied to deregister and was told by HMRC that it couldn’t as its turnover was above the registration threshold. It asked for a reconsideration and HMRC eventually accepted that the turnover was below the registration limit and deregistered the company in May 2008. The company asked for the deregistration to be backdated to 1995. It said that it had a VAT visit in 1995 and the VAT Officer should have told it that, as it had to use the tour operators’ margin scheme (TOMS), its turnover was its margin not the gross fees received and it was mistaken in believing that it was required to be registered for VAT. Not surprisingly HMRC refused to do so and have to repay 13 years’ tax.

Fair enough? Well, HMRC argument was that the case was “wholly misconceived as it is ultimately a trader’s responsibility to make himself aware of his business entitlements and liabilities … There is no obligation on the Commissioners to invite application for deregistration from taxable persons trading below the deregistration limit … It is not within the remit of the [VAT] assurance officer … to offer individual tax planning advice”. The Tribunal agreed. It also commented that HMRC “do not have a duty to advise as to the benefits between two valid options” (i.e. to register voluntarily even though turnover is below the registration limit or not to register).

So why do I think HMRC should not have taken this case? Well firstly TOMS is very complicated. Furthermore the method of calculation of the tax is prescribed by HMRC. Accordingly it is highly unlikely that at the 1995 visit the Officer looked very closely at the calculation.

It is one thing for HMRC not to give “tax planning advice”. But that does not seem to be what has happened. What seems to have happened is that the company got a statutory calculation wrong and the VAT Officer did not point this out to them. It may well be of course that because of the complexity of TOMS, the Officer did not understand the calculation required. But if so, Customs & Excise had the necessary expertise available and the Officer chose not to call on it. In such circumstances it does not seem reasonable for HMRC to wash their hands of their own mistake and say that it is up to the taxpayer, not them, to get it right.

Secondly, “Your Charter” (or the HMRC Charter as most of us call it) says, “What you can expect from us: … Help and support you to get things right”. I find it hard to square this with what seems to have happened with Wessex.

Chamberlain v HMRC

Ms Chamberlain is a solicitor. Her practice relates largely to asylum and illegal immigration cases. As such the normal place of residence of all of her clients was outside the UK and therefore outside the scope of UK VAT. Unfortunately her accountant prepared VAT returns which treated the fees as VAT inclusive amounts. There were four VAT returns and the VAT shown on them, plus surcharges came to £28,560. HMRC issued a statutory demand to Ms Chamberlain for this sum and when it was not paid issued a bankruptcy petition. Ms Chamberlain sought to have the bankruptcy order annulled. Although HMRC accepted that no VAT was exigible on the fees, they said that that was irrelevant; the VAT returns themselves created a debt due to HMRC and, even if it was not one that parliament has envisaged, HMRC were surely entitled to their pound of flesh.

Fortunately the High Court disagreed. It said that there was never any debt due to HMRC and, if there was no debt, the bankruptcy order should not have been made and would be set aside.

So why should HMRC struggle to bankrupt a professional person who they knew the legislation had not intended to tax? I wish I knew.

ROBERT MAAS

2010-06-30T07:55:00.000-07:00

BLOG 89

WHAT SORT OF TAX AUTHORITY DO YOU WANT - 3?

“In considering my approach to remaking the decision, I have tried to avoid being seduced by the blandishments of one side [Goldman Sachs] as to its willingness to settle (as to which it has yet made no concrete offer) or by the blustering intransigence of the other [HMRC] and its determination to litigate everything to the bitter end. I think I should approach the prospect of settlement by reference to how responsible parties ought to behave in discharge of their duty to the Tribunal. It seems to me that the question of settlement ought to figure in that approach, as the Tribunal rules themselves demonstrate is necessary. I therefore consider that I ought to do whatever is necessary to facilitate a settlement whilst not compelling the parties to enter into any process”.

Mr Justice Norris in Goldman Sachs International v HMRC; and Goldman Sachs Services Ltd v HMRC.

I first posed that above question in Blogs 84 and 85. The first of these was concerned with a tax case in which HMRC seemed to me to have been acting unreasonably. The second dealt with what seemed to be an unreasonable imposition of penalties. (Incidentally, I am happy to acknowledge that in the latter case after the intervention of the solicitors, McGrigors, to which I had referred in the blog, HMRC reviewed the penalty and not only cancelled it but made an ex-gratia payment to the taxpayer to compensate him for the worry that he had been caused. Well done, HMRC. But wouldn’t it be a lot better if HMRC had a system that identified penalties that were clearly unreasonable and reviewed them voluntarily rather than putting an unrepresented taxpayer through weeks of needless worry and forcing him to find a solicitor willing to act on a pro-bona basis.

But back to Goldman Sachs. As a taxpayer, do you want the tax authority acting in your name to be “blusteringly intransigent” and insist on spending your taxes on litigation rather than take a pragmatic approach of trying to reach a settlement? I don’t. But in this case the question is not a wholly straightforward one. Goldman Sachs used a tax (or rather NIC) avoidance scheme. 21 other businesses used the same scheme. They all settled on HMRC’s terms. Goldman Sachs is the only one that refused to do so. HMRC’s terms were “Pay 100% of the NI that we think is due but we won’t charge you interest”.

HMRC have a published Anti-Avoidance Strategy. One leg of that is, “We aim to persuade our customers not to attempt to engage in avoidance by changing the economics of avoidance to make it less attractive”. This is expanded to “HMRC will develop a climate in which avoiders face increased risks of investigation and litigation” and “We will take a strategic approach in litigating avoidance cases”. So being tough is consistent with that strategy.

HMRC also have a published a Litigations and Settlements Strategy. This says that, “Where we have a strong case we should seek full value from settlement or take the matter to litigation”. If 21 out of 22 users of a scheme have completely caved in and paid “full value from settlement”, HMRC probably believe that they have a strong case with user 22. Norris J explained earlier in his judgement:

“HMRC’s publicly stated position is that it is opposed to a settlement of any sort. HMRC will contemplate only capitulation to its present demands. It says that there is no question of settling with GSI in respect of GSI’s liability for the GSI employees because it has already settled with 21 other taxpayers and to settle with GSI would not be consistent with the terms it offered those other 21 taxpayers. There is accordingly no question of a settlement, even a settlement on harsher terms than those put upon the other 21 taxpayers. What is required is complete capitulation”.

What came before Norris J was not the substantive appeal. It was two procedural points. Firstly Goldman Sachs wanted to minimise costs by having a preliminary hearing to decide whether GSSL was “present in the UK”; if so it would be liable for the bulk of any tax and NI. GSI would be liable for a maximum of around £10million (25% of HMRC’s total claim) and might well be prepared to capitulate at that level. HMRC refused to agree to the Tribunal separating out that issue. Norris J decided that the issue should be separated out and dealt with first. As my opening quote makes clear, he expressed the view that “responsible parties” to litigation would not adopt the intransigence in fact being adopted by HMRC.

Secondly, there were at the time the scheme was entered into no special rules for the recovery of NIC. HMRC have to issue a county court summons and have to do so within the six-year statutory limitation period. They issued such a summons against GSI but not against GSSL. HMRC brushed this aside. They said that the court will be likely to substitute GSSL as the defendant under GSI’s summons to the extent that it is appropriate. GSSL said that HMRC ought to ask the county court to do so as a preliminary issue. It would be a complete waste of time and money to litigate the substantive points if at the end of the day HMRC cannot collect the money even if they win. Norris J agreed with GSSL. He was far less confident than HMRC that the court would accede to a request for substitution. However he said that it is up to HMRC whether they apply to the county court and that he would remove the stay on the case if GSSL were to delay the hearing.

Whether that is satisfactory to GSSL is questionable. It was Goldman Sachs, not HMRC, that requested that the substantive appeal should be listed for hearing before the First-tier Tribunal. Accordingly if HMRC do nothing, Goldman Sachs will simply have delayed its own appeal. GSSL have to rely on an expectation that if HMRC do not apply to the county court at this stage, when they have been told by the judge that he thinks it appropriate for them to do so, the court would take that into account when deciding at a later stage whether or not it has power to substitute GSSL as the defendant and if so should exercise it.

The question as to what sort of HMRC do you want perhaps resolves itself into whether you want a big bully that makes life as difficult as possible for its victims, or whether you want a body that acts reasonably even in relation to tax avoidance. I notice that the HMRC Charter (actually “Your Charter”) issued at the end of last year says, “Your Rights: What you can expect from us … Do all we can to keep the cost of dealing with us as low as possible”. If that is what Goldman Sachs are entitled to expect they have certainly not been given it!

ROBERT MAAS

2010-05-26T06:12:00.000-07:00

BLOG 88

MY BUDGET ADVICE TO GEORGE OSBORNE

George Osborne is going to give his emergency Budget on 22 June. Prior to the election he said that a Conservative government would use the Pre-Budget report to expose for comment the vast majority of its tax legislation. I hope that pledge has not got lost in the negotiations for the coalition.

Accordingly my Budget advice to George Osborne is –

1. Increase VAT as that is the one thing that can easily be done during the course of a fiscal year, and

2. Leave all the other changes that you would like to make for the Pre-Budget report in November.

Why increase VAT? An increase to 20% will raise £11 billion a year or £55 billion – roughly a third of the deficit – over the five-year life of the parliament. VAT does not hit the very poor. Two of the three generally accepted essentials of life – food and accommodation – are both exempt from VAT and the third, heating, is taxed at a 5% reduced rate so will not be affected by an increase in the standard rate. Clothing (except for children) is VATable and so are some of the expenses that the poor need to incur. However to forgo £55 billion because a tiny fraction of it will be paid by the poorest members of society is akin to throwing the baby out with the bathwater. It is far more sensible to collect the £55 billion and increase social security to compensate for the extra cost that it will impose on the poor.

ROBERT MAAS

2010-05-21T09:32:00.000-07:00

BLOG 87

LET’S USE THE PRINCIPLES FOR A GOOD TAX SYSTEM!

A bit over 10 years ago the ICAEW Tax Faculty published its Ten Tenets for a Better Tax System. This was intended as a set of principles by which tax policy ought to be judged.

Last February the Treasury published a consultation document, “Tax Framework for Business” (At least it was called a consultation document. Unlike other such documents it did not call for comments but simply gave as a footnote an e-mail address to which comments could be sent “ahead of the budget”, i.e. in contempt of the then government’s own three-month standard consultation period). The tax framework set out six principles against which the then government would consider changes in tax policy. It is to be hoped that the present government will also endorse these principles as they are remarkably similar to the Tax Faculty’s Ten Tenets.

Ten Tenets Tax Framework

Statutory -
Certain ) stability and certainty
Constant )
Simple Simplicity
Easy to collect and calculate Tax administration/compliance costs
Properly targeted -
Subject to proper consultation -
Regularly reviewed -
Fair and reasonable Fairness
Competitive (Competitiveness
(Minimum distortions to commercial
(decisions.

The above are in no particular order. It is perhaps not surprising that the Treasury omits “Statutory”, i.e. that Tax Legislation should be enacted by statute, not enacted by the Treasury in the form of secondary legislation (statutory instruments) or by HMRC in the form of guidance or tertiary legislation (binding instructions). Proper consultation, although not in the Treasury’s list was probably omitted as being a given. In the last 10 years there has been, if anything, too much consultation, although it is questionable how much of it met the “proper” objective.

I doubt that many in the Tax Faculty would suggest that tax legislation over the last 10 years has paid much attention to the Ten Tenets. The corollary is that it has not paid much attention to the Tax Framework either. There is an old saying, “actions speak louder than words”. I hope that George Osborne will not, like his predecessors, simply pay lip service to the Treasury’s Tax Framework but will both adopt it and keep to it. Perhaps the Regulatory Impact Assessments introduced by Gordon Brown – which in practice very few believed as the government’s assessment of the costs to businesses of proposed tax changes always seemed wildly understated – could be replaced by a Tax Framework Assessment showing to what extent proposed tax changes conform with the Framework.

Of course no change can be expected to tick all of the boxes. For example, simplicity and fairness are poor bedfellows as, almost by definition, simplicity is likely to lead to unfairness in many cases. Fairness requires legislation to foresee all of the circumstances in which the legislation is likely to impact and ensure that it impacts fairly in each. Simplicity inevitably is likely to mean dealing only with the most common situations.

The Tax Framework also omits, I suspect deliberately, what has probably been the major driver of uncertain, complex, often poorly-targeted and sometimes unfair legislation in the last 10 years. This is Combating Tax Avoidance, which probably constitutes over 50% of the tax legislation over that period. This is set to continue whatever government we have. Tax avoidance by its nature militates against either simplicity (as complex legislation is needed if the legislation is to be properly targeted) or certainty (which in recent years has on several occasions been jettisoned by the introduction of mini general anti-avoidance provisions (GAAR) (or Targeted Anti-Avoidance Provisions as the last government preferred to call them) although targeted in this context meant no more than that a general provision applied only in a specific situation).

Although many people put simplicity at the top of their list of principles, indeed the Conservative Manifesto pledged some sort of Simplicity Commission, most businesses would actually put certainty far ahead of simplicity. People want to know the likely tax effect of their transactions before entering into them. A simple system that gives HMRC a high degree of discretion to challenge transactions that they decide they do not like, which is what a GAAR is, may look superficially attractive, but makes doing business extremely difficult.

ROBERT MAAS

2010-05-17T08:17:00.000-07:00

BLOG 86

MONEY WELL SPENT?

In Blog 77 I expressed surprise that HMRC had sponsored the TV series, “The Business Inspector”. My friend, Mark Lee, has since enlightened me. Apparently HMRC put £370,000 of our (taxpayers) money into the programme “to raise awareness among small businesses that they need to keep good records”. I am out of touch with HMRC’s salaries, but I would guess that in order to spend that £370,000 HMRC had to dispense with employing 10 Officers to carry out enquiry work for a year.

So was it taxpayers’ money well spent? I watched all of the programmes but the message about keeping good records never came through to me. Did it get through to you? One of the slogans/mottos/or whatever, thrown into the HMRC’s ads in the second programme was, “Getting the numbers right is important to success in business”, and another was “accurate paperwork is important to success in business”, which I suppose indirectly has something to do with record keeping. But it did not register with me that that was what the programmes were about from HMRC’s point of view.

Personally I very much doubt that it is possible to convey any message about record keeping for tax purposes in a handful of soundbites. The legislation requires a person to “keep all such records as may be requisite for the purpose of enabling him to deliver a correct and complete return”. It goes on to say that these must include records of all amounts received and expended in the course of the trade, profession or business and the matters in respect of which the receipts and expenditure take place, and in the case of a trade involving dealing in goods, all sales and purchases of goods made in the course of the trade”.

So which does this actually require? What records must a business keep? The answer is that it depends on the business. Every business is different. Suppose for example Joe Bloggs, a market trader in perishable goods, keeps his takings in a tin and banks the amount in the tin every night as he goes home. Suppose also that he pays small expenses in cash out of his own pocket, jots the amount down on the back of an envelope and at the end of a week tots up the six envelopes, draws a cheque for the total and put the envelopes in a box. For large items he pays by cheque, marks on the invoice the date of payment and then puts the invoice in the box. He gets his bank statements weekly and writes on the statement the payee of cheques. If he receives odd receipts he banks them separately to his daily takings and marks on the bank statement the source of the receipt.

What records does he need to keep to satisfy his statutory obligation? In my view he needs to keep his bank statements and his box of papers. That is all that he needs to deliver a correct and complete tax return. He need keep no other records.

I suspect that neither HMRC, nor Hilary Devey, the Business Inspector, would agree with me. Why do I think that? Firstly, I think that most HMRC Officers confuse the statutory requirement with HMRC’s desire to find an “audit trail” that they can check. Secondly, I think that most HMRC Officers cannot get their heads around my personal concept that the right records for a small businessman to keep are those that he is comfortable in writing up. I used to act for the manager of a singer who kept a book in which he noted incomings and outgoings. He noted outgoings on the left hand side and incomings on the right. It frustrated the singer’s accountant unbelievably because the accounting convention is to put income on the right and payments on the left. But so what? I was happy to let the client use his own idiosyncratic system because it recorded all of the necessary information that I needed to prepare his accounts.

I mention this because in the case of Joe Bloggs, I suspect that HMRC would label him as high risk – and thus with great suspicion and at a large risk of being the subject of an HMRC enquiry – because they would regard his records as inadequate. I also suspect that if he were to keep a cashbook in which he were to enter his bankings and his cheques every day, or even every week, he would be regarded as low risk and left alone by HMRC. But if my suspicion is right, surely that is ridiculous. What Joe Bloggs has done is delegate his book-keeping to his bank. It would be completely pointless for him to keep a cash-book which does no more than duplicate what his bank has done. Yet I think that we have somehow created a tax system that says that if he wastes time doing such pointless work, that will be regarded as “a good thing”, even though commonsense would indicate that it is “a bad thing”.

I suspect that Hilary Devey would be critical of Joe Bloggs’ accounting system because she has never been a sole trader setting up in business. I readily admit that Hilary is a multi-millionaire and I am not, so her view ought perhaps to carry far greater weight than mine. However her background was working for a large company before setting up her own less large one, whereas at least part of mine is advising people who started one-person businesses from scratch. Is there a real difference? Yes indeed. Although the State requires a business to keep records because it has a stake in the profits and wants to be able to check that it receives its just due, the better reason for a business to keep records is that the records should enable the proprietor to be aware of how well (or badly) the business is doing. The one-man, no staff, business does not need records for his own benefit. He knows how well or badly he is doing because he knows what his outputs are and what money he has received from clients. As a business grows he loses touch with every transaction and needs to rely on others. Accordingly he needs records to see the overall picture that he is no longer creating on his own.

When self-assessment was introduced, HMRC issued a booklet, SA/BK3, “A guide to keeping records for the self-employed”. To my mind this is still the best guidance on record keeping for small businesses that I have come across. Sadly HMRC seem to insist on reinventing themselves every few years and self-assessment is now well over 10 years old. A 10-page booklet (which is what SA/BK3 is) is no longer in keeping with their current philosophy, which seems to me to be that most people have a short attention span and only want to read a half page of guidance. They may be right. But it seems to me that if 10 pages provides real guidance, as SA/BK3 did – and still does as the law has not changed – the sensible solution is not to scrap it but rather for the short (and in my view unhelpful) guidance to suggest that those with a 20-minute attention span would be well-advised to read the whole 10 pages.

ROBERT MAAS

2010-04-26T09:40:00.000-07:00

BLOG 85

WHAT SORT OF TAX AUTHORITY DO YOU WANT – PART 2?

Both “The Times” and the “Daily Telegraph” have commented on the case of the Kent tradesman who claimed a tax refund of £3,000 when he was only due a £1,000 refund and was charged a penalty of £1,400, which represents 70% of the difference. Writing on one of the accounting websites, McGrigors, the solicitors who are currently advising the taxpayer on a pro-bona basis, have given further information. The taxpayer completed his tax return for 2007/08 himself. It was the first self-assessment return he had ever completed. He misunderstood the tax return instructions and believed that he did not need to give details of his income or expenditure if he earned less than £30,000. He put on the return his deductions under the construction industry scheme (CIS), so HMRC were aware that he had income from which tax had been deducted at source. Indeed when HMRC got the return they wrote to him to ask if he had made a mistake. McGrigors point out that if the taxpayer had been more computer literate and had filed his tax return online, he would not have been able to file it as the self-assessment computer checks for obvious errors and demands a correction before the return is submitted.

The new penalty regime operates from 6 April 2009 and this penalty was apparently raised in April 2009, so it must have been one of the first under the new penalty regime. “Teething” problems occur under any new regime. It looks as if an HMRC Officer has made a mistake on the level of penalties. McGrigors have taken the matter up at a high level on the taxpayer’s behalf and I imagine that HMRC will accept that something has gone wrong and either waive or reduce the penalty. So why am I so concerned about this case?

Well firstly a “key element” of the new approach to premises is, “a “stepped” approach to penalties depending on behaviour along the “compliance spectrum” from failing to take reasonable care to deliberate understatement with concealment”. (HMRC Consultation document, December 2006).

HMRC went on to say in that document that responses to the consultation broadly favoured this overall approach and that “no penalties for mistakes or misinterpretations, suspended penalties and greater emphasis on disclosure were all welcomed”. It is not possible to get a 70% penalty for error. The 70% applies only to “deliberate understatement”, and deliberate understatement is a euphemism for fraud. So we have here a set of facts that McGrigors categorise as a mistake – or as a misinterpretation, it does not matter which, as HMRC say themselves that neither attracts a penalty – and that HMRC categorise as fraud. Howe can this happen if both parties are looking at a spectrum of behaviour where mistake merges into carelessness and carelessness merges into fraud? A feature of a spectrum is that whilst the borderline between different segments is blurred, outside the borders the situation ought to be clear-cut. Thus it would be understandable if McGrigors thought that the behaviour was a mistake and HMRC thought it carelessness, or if McGrigors thought it carelessness and HMRC thought it fraud. But that is not the case. Neither thinks it carelessness. This suggests that there may be something fundamentally wrong with the model. Conscientiously trying to get something right and not managing to achieve it, is so remote from deliberately doing something knowing that it is wrong, that the two are wholly incompatible. How can anyone mistake one for the other? Yet that is what either McGrigors or the HMRC Officer (or possibly both as the behaviour could be carelessness) seem to have done. This case seems to me potentially to discredit the entire new penalty system.

Secondly, when the website took the matter up with HMRC they said that confidentiality prevented it from commenting on individual cases “but emphasised that it took a more lenient approach to those who take all reasonable care to get things right and who co-operate with the department’s investigations”. Who can question that?

Confidentiality is the cornerstone of tax compliance. It is vital that HMRC maintain confidentiality. Fair enough, although HMRC seem happy to pay lip service to confidentiality when it suits them. For example when they threaten to issue a third party notice to get information rather than allow the taxpayer to obtain it himself they tend to say, “Of course we will not say that your client is under investigation but we cannot stop a third party from drawing what conclusion he chooses”, knowing full well that the most likely conclusion is that the client is under investigation by HMRC and HMRC do not trust him.

But taxpayer confidentiality surely does not prevent HMRC from defending itself. It would not have prevented HMRC’s Press Officer explaining to the Times and the Telegraph either that HMRC appeared to have made a mistake, which they were investigating and would correct if necessary, or that the facts as understood by the Times and the Telegraph did not reflect the facts that had been before the Officer when he or she made the decision on penalties. What is at stake here is the integrity of the new penalty regime. HMRC surely ought to defend it. It is a major area of public importance. If the new system is unworkable then something needs to be done about it; for HMRC to simply ignore the issue is an unreasonable response. HMRC could also explain the 70% figure. I am assuming that it is a penalty for fraud as that is the only way a 70% penalty can arise. But it may not be a 70% penalty. If the taxpayer had omitted the income from his return but claimed his expenses, 70% of the net profit might in fact be only 30% of the income. Confidentiality does not prevent HMRC pointing that out; they do not even need to refer to the specific case to do so.

My other concern is the comment that HMRC “took a more lenient approach to those who take all reasonable care to get things right”. So what? Fraud is clearly incompatible with trying to get things right. It is contemptuous of the taxpaying public to answer a question in relation to an apparent claim of fraud, by ignoring the question and commenting on something else entirely. Furthermore HMRC have no call to be lenient with those who take “all reasonable care”, as such a person has no liability to a penalty. Even the penalty for carelessness cannot, by definition, apply to someone who takes all reasonable care as such a person cannot have been careless. And if ever there was a case for suspending a penalty for carelessness (if that is the actual behaviour), this is surely it. And what about co-operation? The taxpayer in this case was actually thanked by HMRC for his help, yet 70% is the maximum penalty for fraud so, in spite of his co-operation, HMRC seem not to have been at all lenient with him.

I am also concerned if the penalty is indeed a maximum penalty, as it appears to be. I have specialised in tax since 1965. In that time I have never, ever, seen a maximum penalty for fraud. Back in the 1960s or 1970s I think I agreed a 55% penalty in one case with HMRC’s Enquiry Branch, but in recent years the largest penalty that I have agreed in the case of what HMRC describe as “serious fraud” is 30%. Accordingly even if HMRC have reason to suspect fraud, a maximum penalty seems completely unconscionable in circumstances where the tax involved is small, the taxpayer has co-operated, and suspended penalties have been introduced to give people the opportunity to eliminate the penalty by a change in behaviour.

This is yet another illustration that, as a citizen, suggests that HMRC is not the sort of tax authority that I want. One that is not prepared to explain its actions however unreasonable they may appear to the general public. One that talks of leniency but seems unwilling to actually show it. One that treats unrepresented taxpayers far more harshly than those who can afford to engage professional advisors to stand up for them. Is it the sort that you want?

ROBERT MAAS

2010-04-23T06:09:00.000-07:00

BLOG 84

WHAT SORT OF TAX AUTHORITY DO YOU WANT – PART 1?

I pose this question after reading the decision of the Court of Appeal in R (on the application of Valentines Homes & Construction Ltd) v HMRC.

Valentine has two directors, Mr & Mrs Brooke. On 28 May 2007 Mr Brooke sustained a serious head injury while in Spain. He needed brain surgery and was detained in hospital for several weeks. At the time Mrs Brooke, who was pregnant, was juggling between tending to her husband and looking after their three children. As a result of those personal problems the company failed to pay over its PAYE for the period May to August 2007.

Where an employer does not pay over PAYE by the due date HMRC have power to guess the amount due and serve a notice on the employer to pay that amount within 7 days. The amount so guessed is deemed to be PAYE due by the employer unless during the 7-day period the employer either tells HMRC the true amount due or demonstrates that nothing is due. HMRC guessed £83,697 in two stages, on 2 July and 10 September 2007. Mrs Brooke, for understandable reasons, did not supply the correct figure by 9 July and she never received the September guess. The amount of £83,697 was accordingly technically payable.

On 9 October 2007 HMRC instituted County Court proceedings to recover it. The company served a defence admitting that it owed £60,613 and explaining that Mr Brooke was “injured, hospitalised and not fully functioning for a period of months”.

HMRC responded that the company had had seven days to give it the correct figure and “as you did not, my estimate is legally due and payable”. It added that “Mr Brooke’s period of incapacity is not relevant to my claim”. Finally it said that if the company paid the tax it believed to be due it would be accepted without prejudice and HMRC would still go to the County Court for the difference of £23,000 odd between their guess and the tax actually deductible under PAYE.

I am fairly familiar with the tax legislation. I cannot find anything that says that HMRC are not allowed to be compassionate or, indeed, that they cannot use commonsense. Personally I do not want the sort of tax authority that in effect says, “While you were seriously ill we initiated a procedure that results in the company owing £83,697. It is our good luck that at the time you were too ill to respond to it. You now owe us £23,000 more than parliament intended you to pay. We don’t care how ill you were at the time. Mrs Brooke wasn’t ill; she was simply nursing you, looking after your three children and coping with the stress of pregnancy. The children would not have died if she had abandoned them for a couple of days to work out the tax due. She chose to put the welfare of her family before her duty to ensure that the company pays its PAYE. No reasonable person would do that”.

Is that the sort of tax authority you want?

The case got to the Court of Appeal because on 13 May 2008 the company sought judicial review of HMRC’s decision to go to the County Court. In the interim the company’s accountants had worked out that the tax actually due was £64,888 and had told HMRC this on 11 December 2007. HMRC ignored that letter. In March 2008 they obtained a County Court hearing date and on 21 April 2008 wrote explaining that they were disinterested in the accountants’ figures, i.e. the facts, as by law the amount due was the amount HMRC had guessed. On 2 May 2008 the accountants expressed concern about HMRC’s “zealous desire to pursue an incorrect debt in court rather than attempt to accept evidence”. On 9 May the company paid the tax and interest that it believed to be due. On 13 May the company made its application for judicial review, together with an application for a stay of proceedings in the County Court. At the County Court hearing on 14 May, HMRC’s claim was adjourned to 16 June when the application for the stay would also be heard. A few days before that hearing, on 10 June 2008, HMRC agreed to accept that £64,888 plus interest that the company had paid on condition that the company withdraw its judicial review application, pay the costs of HMRC’s original claim of £630 and pay its own costs. HMRC confirmed that “any additional costs claim by HMRC will be met by us”. The company agreed to pay the £630 and wrote to the County Court withdrawing its application for a stay.

Is that the sort of tax authority you want? One that gleefully puts a pregnant woman under the stress of believing that they intend to collect tax in excess of that decreed by parliament and then at the latest possible date, just before the Court hearing, say that they don’t intend to do so after all. It is not the sort that I want.

The company did not withdraw or agree to withdraw its judicial review application. Indeed it asked HMRC to pay the costs of £10,549 that it had incurred in relation to the judicial review. The High Court granted the judicial review application. However HMRC then pointed out to the Court that while notice had been served on a senior official within HMRC the Court rules required it to be served on the Solicitor to HMRC (a different senior HMRC official). The Court thereupon set aside the permission. HMRC also used that as an excuse to soundly reject the company’s claim for the costs of the judicial review. “Please note that as the original application was not properly served on this office we will not entertain your request for costs”.

Is that the sort of tax authority that you want? One that seeks to avoid payment of a reasonable claim by taking technical legal points rather than approaching the claim on its merits – and in order to do so seems happy to wash in public what seems to be very dirty linen indeed. As both a citizen and a taxpayer, it is not the sort of tax authority that I want.

On 10 February 2009 the High Court refused permission for judicial review on the grounds that the matter had become academic following the settlement of the County Court proceedings. It ordered the company to pay HMRC £500 in respect of costs as it was not justified in pursuing the application. The appeal to the Court of Appeal was against the decision on costs. Happily the Court of Appeal set aside the order for the company to pay the £500 and instead ordered HMRC to pay the company £6,000. Ironically, the court arrived at that figure by guesswork! It felt that the company had not provided it with sufficient details of the costs to enable it to assess what sum was actually appropriate.

ROBERT MAAS

2010-04-21T06:08:00.000-07:00

BLOG 83

TAXED BY PARLIAMENT? OR BY THE STATE?

“No taxation without representation” is reputed to have been the slogan of the Boston radicals that opposed payment by Massachusetts of the tea duty imposed by the UK parliament. The refusal of the UK government to allow the colonist’s voice to be heard in parliament led, of course, to the American War of Independence that lasted from 1775 – 1783.

This long and bloody war was a consequence of an unfair concept of “democracy” under which England sought to impose its will on America.

Democracy comes from the Greek meaning “rule of the people”. Of course in a society of over 60 million people such rule is impractical. Instead the people elect representatives to determine the rules. However the populace is surely entitled to expect that such representatives will indeed represent its needs and concerns. Would it be a democracy if the populace were to elect a parliament of representatives and that parliament were to say to the government, “Do what you like, we’re not interested in approving, improving or even bothering to read the laws that you wish to introduce. We’ve got better things to do. Who cares about the citizenry? Who cares whether we have a fair tax system that reflects the needs and the intellectual abilities of the citizenry? We don’t”. I would answer that question, “Of course not it; that would be to hold democracy in contempt”. But what would our actual representatives say? I do not know. What I do know is that before rushing off to ask us to re-elect them, our MP’s enacted a 156 page long Finance Act 2010.

Introducing the second reading of the Bill (the first stage in its debate) the Minister said, “We have published a much shorter Finance Bill than usual and it is focused on the Key Budget measures … We are proceeding today on the basis of consent, and to be helpful to Opposition Members, I will not be moving the landline duty in clause 23 …, clause 58 requiring financial securities from employers at serious risk of pay-as-you-earn or National Insurance contributions not being paid, or clause 65 … on furnished holiday lettings. These will all be in the second Finance Bill at the start of the new Parliament. I have also tabled amendments to clause 9 that will limit the increase in cider duty to 2% above inflation …”.

What are we to make of, “we are proceeding today on the basis of consent”? I think that it means that the Finance Act 2010 is a cross-party measure. In particular the vicious and unfair penalties where careless mistakes involve offshore income – and as such are most likely to be made by the poorer immigrant members of society, such as the nurses that I hypothesised in Blog 79, is not a Labour party imposition. It’s unfairness also reflects the views of the Conservative and Liberal Democratic parties who were happy to add it to the statute book without debate, without any government assurances on its operation and without asking the government to explain the reasoning for treating immigrants so harshly.

Of course there was some debate. Last year’s Finance Bill ran to 450 pages. There was some debate then too, although admittedly nothing like as much as the Bill deserved or as was traditional pre Gordon Brown’s penchant for marathon bills. Here is a comparison of the two (to the nearest quarter hour)

2009 2010
Second reading 9 2¾
Committee stage 61½ ¼
Report stage 11¾ 0
Third reading ½ 0
______ ______
82¾ 3

For those not familiar with parliamentary proceedings, the Second Reading is political bantering based on the budget proposals. The Committee stage is when parliament actually starts to consider the Finance Bill. Report stage is where the government responds to points made at the previous stage and Third Reading is another round of political speeches.

Obviously this year the Bill was savagely guillotined by the government? Not at all. The three main parties agreed that three hours was the appropriate time to consider 156 pages of legislation that would have a lasting impact on the lives of the citizenry.

I am aware that some bits of the Finance Bill, in particular tax rates for the coming year, have to be passed by 5 August as the Provisional Collection of Taxes Act allows tax to be collected on the basis of the budget resolutions only until that date. However there was no urgency in most of the Finance Bill. It could have been introduced later in the year with the anti-avoidance bits still applying from budget day, but with proper debate so that people could have a degree of confidence that what reached the statute book had been properly considered by parliament. I am also aware that a full Finance Bill was rubber-stamped by the Conservatives and Liberal Democrats when we had an election on 5 May 2005, although on that occasion a lot of proposed measures were dropped from the Bill and reintroduced in a second Bill after the election. However that did not happen for earlier May elections, such as the 1 May 1997 election, where the government started the Finance Bill process in January so that the Bill could be passed in March or the 3 May 1979 election. On that occasion, as traditionally happened, a very short Act confined to the tax rates and the other bits of the Bill that had been debated in Committee before parliament was prorogued was passed.

History accordingly suggests that the current Conservative and Liberal Democrat parties are very weak in standing up for citizens’ rights. I can understand Labour MPs wanting to get as much legislation as possible on the statute book in case they are not re-elected. However there is no logical reason why Opposition MPs should want to put on the statute book legislation that they are unhappy with, so that if they are elected they would need to find time to remove or amend it. The inference must be that they are not unhappy with a single word of it.

If I spend only about 3.5% of my normal time in voting this year I won’t even reach the end of my street, let alone the polling station. If that is the level of commitment that the politicians show towards democracy they cannot reasonably expect me to do more. Walking part way down the road is a bit pointless, so I think I’ll just not bother to vote at all this year. Hold on, I see that I have a Green Party candidate. Perhaps I should find out what his taxation policies are before boycotting the process in the same way as the politicians seem to me to have boycotted democracy.

ROBERT MAAS

2010-04-07T08:30:00.000-07:00

BLOG 82

KICK THE SICK WHILE THEY’RE DOWN?

Sometimes a Court or Tribunal decision raises the question, “Why did HMRC pursue this case”? I have said many times before that the government’s pleas of “fairness” when condemning tax avoidance schemes would carry a lot more weight if they were to recognise that fairness (and its companion reasonableness) is a two-way street. I do not think that it was fair or reasonable for HMRC to pursue the Executors of W M Atkinson before the Tax Tribunal. As a taxpayer I do not want them to take such points. Do you?

Mr Atkinson was a farmer. In 1957 he acquired and farmed Abbotsons Farm. Later he took his son into partnership in the farming business. In 1966 he built a bungalow on the farm land and moved into the bungalow so that his son and daughter-in-law could occupy the farmhouse. In 1980 his daughter-in-law became a partner. In 1994 so did his grandson. Sadly Mr Atkinson’s son died a couple of years later. Throughout Mr Atkinson retained ownership of the land but it was occupied by the partnership under an agricultural tenancy.

In 2002 Mr Atkinson became ill. He later went into hospital and when discharged had to go into a care home, where he died in 2006. During his illness the bungalow remained ready for the eventuality of Mr Atkinson’s return. His daughter-in-law and grandson kept an eye on it and picked up the post two or three times a week. They visited Mr Atkinson in the care home and discussed the farm business with him at least once a week.

“Ah”, said HMRC, on behalf of you and me, “While Mr Atkinson was in the care home he was not occupying the property. Accordingly on his death it cannot qualify for agricultural property relief for IHT as that requires the property to be occupied for the purposes of agriculture”.

I do not know the purpose of agricultural property relief. I suspect that it is to avoid farms having to be broken up on a death. There is a clear public interest in viable agricultural units. If that is the case, parliament cannot possibly have thought that if a farmer dies while living on the farm the relief should apply but if he is taken ill his illness should require the farm to be broken up.

To be fair to HMRC, it is not clear to what extent HMRC are forced to take cases such as this and to what extent they choose to do so in order to try to maximise the tax take, however unfair or unreasonable it may be to do so. In R (on the application of Wilkinson) v HMRC the House of Lords said that HMRC’s power of care and management gives them a wide managerial discretion which “enables the Commissioners to formulate policy in the interstices of the tax legislation, dealing pragmatically with minor or transitory anomalies, cases of hardship at the margin or cases in which a statutory rule is difficult to formulate or its enactment would take up a disproportionate amount of parliamentary time … It does not justify construing the power so widely as to enable the Commissioners to concede … an allowance which Parliament could have granted but did not grant, and on grounds not of pragmatism in the collection of tax but of general equity”.

HMRC’s power of care and management has since transmogrified into a power to “do anything which they think necessary or expedient in connection with the exercise of their functions”, which may give them a wider discretion. I think it probably does give them a discretion to act fairly, but they do not think so and I cannot say the position is clear. Accordingly the law may force them to pursue cases like Atkinson, whether they want to do so or not.

Do you think that they should have a discretion not to pursue cases where it would be unfair to do so? I do. I have put a petition on the 10 Downing Street website asking that they be given such discretion (the easiest way to find it is, http://petitions.number10.gov.uk/list and search “HMRC discretion”). If you agree with me please sign it.

ROBERT MAAS

2010-03-31T09:00:00.000-07:00

BLOG 81

TAXPAYERS MAY HAVE HUMAN RIGHTS AFTER ALL

To date taxpayers who have claimed recourse to the Human Rights Act in tax appeals have had little success. So have taxpayers who have sought to avoid penalties for errors in relation to the Construction Industry Scheme (CIS). HMRC seem to expect the construction industry to be far more conscientious and more knowledgeable about tax than other businesses of a comparable size.

The problem with the Human Rights Act 1998 is that the right most likely to be infringed by the tax system is the protection of property and the law caveats that by allowing the State to deprive a person of his property “in the public interest”. The public interest in the efficient collection of taxes wins hands down virtually every time.

The decision of the First-tier Tribunal in SKG (London) Ltd is accordingly a breath of fresh air. SKG is run by Mr Higgins and his son. It started in March 2008, taking over Mr Higgins’ family business. It supplies conservatories. Mr Higgins handled his own VAT but his accountants handled the payroll. In February 2009 Mr Higgins felt that he had got the VAT into a muddle and called on his accountants for help. The accountants reviewed the records and discovered that in July 2008 the company had used a sub-contractor and the sub-contractor had invoiced the company for his services net of tax. The accountants told Mr Higgins that he should have registered under CIS and that he owed the tax to HMRC. The accountant registered the company for CIS and sent a return for the month to 5 August 2008 together with a cheque for the tax to HMRC on 11 March 2009. The form declared that the company did not anticipate paying any sub-contractors in the next six months – which by March had, of course, already passed. The payment was a “one-off”.

So what did HMRC do? Say “thank you” and ask if the company envisaged using sub-contractors in the future? I don’t know. What I do know is that in February 2009, i.e. just after it had been asked to register the company for CIS and without waiting for submission of any CIS returns, HMRC sent the company two penalty notices for £700 and £2,100 respectively. The £700 was a penalty of £100 a month for each of the months from 5 August 2008 to 5 March 2009. It should be noted that the return for the month to 5 March 2009 was not even overdue; indeed the month hadn’t yet finished on 28 February 2009 when the notice was issued. The £2,100 was a further penalty of £600 for the September return, £500 for the October one and so on because the CIS penalty is £100 per month for every month the return is late.

The tax legislation provides that where a person had a reasonable excuse for not doing something required to be done by the due date, he is deemed to have done it by that date if it did it within a reasonable time after the excuse ceased. Mr Higgins’ accountant said that the company had been honest throughout, the delay had been due to its proprietors failing to understand the tax system, and that the problem had been rectified as soon as the accountants identified it. HMRC told the Tribunal that, “HMRC take the view that a “reasonable excuse” is confined to one where an exceptional event beyond a person’s control has prevented the person making a return on time”. I must say that’s news to me. I have specialised in tax for 45 years and have never heard that before. It is certainly not what the legislation says.

Mr Higgins also said that a penalty of £2,800 for paying £1,119.40 seven months late is disproportionate and unfair. Proportionality, like Human Rights, is a European concept. The Tribunal thought that Mr Higgins might have a point and adjourned the case to hear arguments on proportionality. HMRC subsequently decided to withdraw the penalty notices.

Accordingly it is still not clear to what extent proportionality applies to fixed penalties. It is however clear that if a taxpayer thinks that penalties are disproportionate he should raise human rights as a defence. It may be that, as in this case, HMRC will, on reflection, feel disinclined to contest the point.

ROBERT MAAAS

2010-03-31T05:42:00.001-07:00

BLOG 80

WHY CAN’T THE GOVERNMENT BE OPEN WITH US?

Stephen Timms made a very interesting written statement to Parliament at the end of February. He told them (as has since been confirmed in the Budget) that the government would introduce legislation in the Finance Bill to clarify that for corporation tax purposes all UK distributions are income in nature unless a specific rule says otherwise. That is good news. However the interesting bit is the background.

He explained that before 2005 it was possible to interpret the law in that way. However the rewrite of the law in the Income Tax (Trading and Other Income) Act 2005 “made that view impossible to sustain”.

What I find interesting is –

1. I, and everyone else I know, including HMRC, did not find that view impossible at all, at least up to 2009. Indeed s 383(2), ITTOIA 2005 says, “For income tax purposes [dividends from a UK resident company] are to be treated as income …it does not matter that those dividends are capital apart from that section”. I don’t myself think it “unsustainable” that that means that dividends of a UK company are not capital for tax purposes.

2. A Rewrite Act, such as ITTOIA is not permitted to change the law except in minor respects. If it is found that it has done so, HMRC normally tell Ministers who change the law back without any fuss in the next Finance Act.

What seems to have happened here was that in 2005 the Companies Acts did not permit a reduction of capital, or at least made it difficult and expensive to do so. They now do so and these are becoming fairly popular. The result is that a UK subsidiary company can redeem the shares held by its parent with the proceeds being deemed to be a dividend and, as such, being franked investment income of the parent company, which is exempt from corporation tax. Someone in HMRC seems not to have disliked this and HMRC have been contending that where a company does not have sufficient distributable reserves the distribution is capital and as such attracts corporation tax on capital gains.

In other words the problem does not seem to be that the rewrite changed people’s understanding of the law. What seems to have happened is that in pursuance of its off-stated policy of seeking to collect “the right tax at the right time” HMRC decided to mount an argument that the right tax cannot be the amount that the law says, because that would mean that no tax is due. In other words the right amount in HMRC parlance seems to mean not what parliament has determined, but rather as much as possible.

Accordingly the proposed change in the law seems to be a face-saving device. It would be embarrassing for HMRC to have to admit that they tried to get away with collecting tax that was not due, but the same result can be achieved by changing the law retrospectively so that the tax that was not due, but that they tried to collect, again becomes not due. As section 383 seems pretty clear to me I look forward with interest to seeing what change to the wording the government have in mind.

ROBERT MAAS

2010-03-29T09:53:00.000-07:00

BLOG 79

LET’S HIT THOSE NASTY NURSES?

I do not intend to use up space by reproducing my firm’s Budget booklet that we prepared for clients. If anyone would like a copy, let us know (mail@blackstones.co.uk).

However there was one proposal that really worries me and I thought it might be sensible to give my comments on this wider circulation, so her goes:

Tackling Offshore Tax Evasion

Legislation will be introduced in Finance Bill 2010 to impose larger penalties on taxpayers who fail to provide a full account of their income tax or CGT liabilities where the failure is linked to an offshore bank account.

The proposal is that the world will be divided into three parts:

a) Countries with which the UK has both a full double tax agreement and a Tax Information Exchange Agreement (TIEA).

b) Countries with which the UK has a full double tax agreement but no TIEA.

c) The rest of the world.

Where the bank account is in a country within Category A the normal penalties will apply. If it is in Category B the penalties will be 150% of the normal penalty. If it is in Category C it will be 200% of the normal penalty.

Blackstone Franks’ Reaction:

It is noticeable that some of the changes proposed in the budget (such as this one) will be included in Finance Bill 2010 and others will be included in a Finance Bill to be introduced as soon as possible in the next Parliament. The normal procedure in an election year is to have either a very short Finance Bill containing only the rate changes, or to have a normal Finance Bill but to drop the part of it that has not fully been debated by parliament by the time that parliament rises. There is a rumour going round that this year the two main Opposition parties have agreed with the government that they will co-operate in putting a large number of provisions on the statute book with little or no debate and little or no regard for the rights of the citizen that such undebated legislation removes. We hope that this rumour is wrong. We particularly hope that the Opposition parties will not agree to bulldoze this provision onto the statute book without debate:

a) because it has not been subject to public consultation – the government consulted on a different proposal and have decided to adopt the above instead;

b) because although headed “Tackling Offshore Tax Evasion” it goes far beyond evasion and will penalise, amongst others, immigrants from overseas countries who omit to declare income arising in their home country, not deliberately but because they do not understand the tax system, cannot afford to buy advice on how it affects them, and are unlikely to be given helpful advice from HMRC helplines.

c) the proposal is discriminatory and penalises people for things outside their control, such as having been born in a particular country; and

d) the response is wholly disproportionate to the problem at which it is aimed.

Take for example nurse Ann and nurse Betty. They both work for the NHS. Both came here 15 years ago. Both intend to return home at some stage. Both live frugally and have saved some money out of their meagre earnings, which they send home every month. Accordingly both are earning interest in their home country. Both come from the Caribbean. Nurse Ann comes from Anguilla. Nurse Betty comes from the neighbouring island of Barbuda. They are both “non-doms”. Neither realises that, although the bank interest was not taxable here up to 5 April 2008, the law changed from that date. HMRC learn about the interest and think that Ann and Betty ought to have known that the law changed and demand penalties from them.

The UK has both a double tax agreement and a TIEA with Anguilla. It has a double tax agreement but no TIEA with Antigua and Barbuda. Accordingly Ann comes from a Category A country and is liable to a minimum penalty for having made a careless mistake of 15% of the tax on the bank interest. Betty comes from a Category B country and is liable to a minimum penalty of 22.5% for having made exactly the same careless mistake. Is that reasonable? It is not her fault that the UK and Antigua and Barbuda have not yet got round to agreeing a TIEA. As they entered into a double tax agreement it is likely that they will in due course enter into a TIEA too.

ROBERT MAAS

2010-03-26T07:07:00.000-07:00

BLOG 78

WHY CURIOUS?

I was reading an article recently in Taxation magazine about the recent tax Tribunal decision in D J Thresh v HMRC. I was struck by the author’s comment that, “Curiously, the Tribunal found in favour of Mr Thresh”. HMRC had contended that Mr Thresh had obtained a benefit from employment from his own company. The Tribunal decided that he had not. Why should that be curious? We have surely not yet reached the stage where it is not possible to do anything without creating a tax liability!

The facts in the case were fairly straightforward. Mr Thresh was the sole director and shareholder of Hunt’s Construction Ltd. The company entered into an arrangement with a Mr Baxendale that it would build three cottages on land held by Mr Baxendale and Mr Baxendale would keep one of these and transfer the other two to the company. The company intended to finance the development by raising a mortgage on the land. However this intention was thwarted because Mr Baxendale’s solicitor advised him not to transfer the land to the company until the cottages had been built.

So what could be done? Mr Thresh proposed that he should raise the money personally and finance half of the development costs in return for being given one of the cottages. Accordingly there became a three-way joint venture, Mr Baxendale would put in the land, Mr Thresh would provide a large part of the finance needed to make the deal happen, Hunt Construction Ltd would provide the building expertise and they would each take one of the completed cottages. If I entered into such an arrangement with a couple of neighbours I would be most surprised if HMRC were to claim that the house that I ended up with somehow gives rise to income.

I accordingly found nothing “curious” about the Tribunal’s decision. It seems to me to reflect commonsense. Perhaps that is the author’s concern. Maybe he feels that in recent years tax and commonsense have drifted so far apart that it is not possible that a commonsense solution to a commercial problem cannot create as a by-product a tax liability.

ROBERT MAAS

2010-03-22T10:23:00.001-07:00

BLOG 77

WHAT IS GOING ON?

I was sitting at home the other evening eating dinner and vaguely watching the TV between mouthfuls when at the end of the commercial break I noticed the legend “Sponsored by HM Revenue & Customs”.

I was intrigued. HMRC seem to me to be squeezed of resources. They look to have cut down substantially on enquiries. Their recent spate of “Disclosure opportunities” seem to be designed to raise cash quickly without having to incur the expenditure that would have allowed them to collect the much higher penalties that they have previously always sought from tax evaders. They seem to have come to the professional bodies with a begging bowl to try to promote joint training at joint cost.

So why are they spending taxpayers’ money sponsoring TV programmes? I don’t have a clue. They did come up with some slogans. The ones I noticed were: “Knowing the right ingredients helps you to succeed in business”; “Accurate paperwork is important to success in business”; “Cultivating opportunities is important to success in business”; “Being in tune with the market is important to success in business”.

What do all these have in common – apart that is from the copy writer being obsessed with the phrase, “important to success in business”? How about none of them mentions tax. Indeed none of them has any obvious connection with tax. The programme had nothing to do with tax either. It was one of those reality programmes where a millionaire business person patronises a couple of small businesses by expressing feigned surprise that a person who has come up with an idea and sought to exploit it does not know how to go about converting the idea into a viable business. Of course the businesses concerned are given some free advice in return for agreeing to have their naivety exposed on national TV. They may well feel that a fair price to pay for the help, in which case good for them.

But I am still puzzled why HMRC should think it sensible to spend your and my taxes sponsoring such a programme in order not to promote the importance of getting tax right, the need to think about tax consequences from day one, or even that successful businesses are happy taxpayers, but simply to suggest non-tax attributes that can contribute to business success.

If any reader can understand what on earth is going on, please explain to me how this is a sensible way to spend our taxes.

Robert Maas

2010-03-17T04:29:00.001-07:00

BLOG 76

HMRC ACTING “FAIRLY” YET AGAIN

What do you think ought to happen when HMRC think that you owe tax and raise an assessment on you because you have not declared it, and you appeal against the assessment because you do not believe that you owe the tax and think that you will be able to demonstrate that you don’t?

Well, the law says that you still have to pay the tax; you can’t hang on to the money until the appeal is heard. Of course paying the tax may mean that you can no longer afford to appeal. Does that sound fair to you? It doesn’t seem at all fair to me. However don’t blame Alistair Darling. This was the brainchild of former Chancellor Denis Healey.

Actually it is not quite that bad. You can ask HMRC to hold off collecting the tax until your appeal is heard (as HMRC had to do in the pre Denis Healey days (they had no discretion then)) and if they refuse you can appeal to the tribunal (or before 1 April you appealed to the General Commissioners, an unpaid body of ordinary citizens who most of us thought were renowned for their commonsense).

So the system is fair after all? Tell that to Mr Rogers! HMRC assessed Mr Rogers for tax of 2.7m, which he believes he doesn’t owe. Mr Rogers duly appealed in November 2006 and asked for postponement of the whole of the tax. HMRC agreed to his request. Then 20 months later they changed their mind and asked the General Commissioners to require Mr Rogers to pay the whole £2.7m. The Commissioners fixed a date for a hearing to decide the matter. Mr Rogers’ advisors told the Commissioners that neither they nor Mr Rogers could attend on the day they proposed. So, exercising their renowned commonsense, the Commissioners went ahead without them! HMRC turned up and told the Commissioners that Mr Rogers was seeking to dissipate his assets. They don’t seem to have put forward any evidence to suggest that, but I assume that those Commissioners worked on the non-legal maxim that “there’s no smoke without fire” and they accordingly ordered Mr Rogers to pay the £2.7million.

Many would find it surprising that any body of Commissioners would make such an order for such a large sum without having heard the taxpayer’s side of the story and without, it appears, even bothering to ask whether Mr Rogers was still contending that he owed the money. Personally I am amazed that they did not adjourn the case to hear Mr Rogers.

Where the Commissioners order such a payment and there is a later change of circumstances, either side can ask the Commissioners to reconsider. Mr Rogers engaged new tax advisors who pointed him to an old tax case that might well support his view that he did not owe any tax. Furthermore new information to quantify the amount owed, even if HMRC’s view were to turn out to be right, had become available.

So what did HMRC do next? Wait for the Commissioners to hear the application? No, that would be the fair thing to do. HMRC and fairness seemingly don’t go together. HMRC issued a High Court writ for the £2.7million.

Next the Commissioners heard the taxpayer’s applications. HMRC contended before them that there had been no change of circumstances so they had no power to change their order. After “lengthy consideration” the Commissioners agreed. Mr Rogers appealed to the High Court against the Commissioners decision. In response, HMRC applied to a different bit of the High Court for summary judgement for the £2.7million.

The case came before Mr Justice Floyd. HMRC’s case that is. The High Court has not yet heard Mr Rogers’ application to review the refusal of the Commissioners to reconsider their decision. No one has yet heard Mr Rogers’ appeal against the assessment, so no one yet knows whether or not he owes any tax. The only issue was that HMRC wanted the judge to give summary judgement for the “debt”, presumably so they could go on and bankrupt Mr Rogers. What does it matter whether the tax is legally due? The Chancellor could do with £2.7million so does it really matter what Mr Rogers’ tax liability, if any, really is?

Fortunately for Mr Rogers – and many, including me, would say, for justice – Mr Justice Floyd not only dismissed HMRC’s application for summary judgement but stayed the action.

He thought that a change in legal advice could amount to a change of circumstances and, indeed, that the request for reconsideration has a realistic prospect of success. Whilst he accepted HMRC’s contention that bankrupting Mr Rogers for tax that he may not owe does not wholly deprive him of the right to fight his case, as his trustee in bankruptcy might be prepared to make funds available to fight it, and noted that HMRC had pointed out that if after having been bankrupted Mr Rogers won his case HMRC would not only repay the tax but would pay simple interest as well, he did think that Mr Rogers’ bankruptcy would be “an unjust result … the effect [of which] will not be capable of being remedied by a simple repayment with interest”.

When HMRC put into their new Your Charter, “What you can expect from us … treat you even-handedly”, do you think they had their collective tongue pushed very firmly into their cheek? Or do you think that the above simply reflects their idiosyncratic interpretation of “even-handedly”? To be fair, the Charter does not actually say that HMRC will treat taxpayers “fairly”, so even-handedly could mean that they intend to try to bankrupt everyone for tax that they may well not owe!

Robert Maas

2010-02-09T06:00:00.001-08:00

BLOG 75

Q. WHEN IS “THE SAME” NOT THE SAME: A. WHEN YOU’RE A JUDGE?

I try to read all of the UK court decisions on tax. Sadly, although I manage to do this, I do not always do it as promptly as I would like. Furthermore I rely on a subscription service, Simon’s Tax Cases, that does not report the cases as promptly as I would like.

Accordingly it was only the other day that I read the August 2009 decision in Matalan Retail Ltd v HMRC. This is a Customs duty case. I do not profess to know very much about Customs duty. Nevertheless I persevere with such cases because they sometimes make points that are of interest in relation to other taxes.

With the Matalan case I was intrigued by a criticism that the judge made of the Tribunal. He thought the Tribunal “in error” because it looked at goods which “are indistinguishable from” the item for which HMRC had given a tariff ruling. This was a departure from the wording of the legislation. This requires the goods declared to correspond “in every respect” with the goods for which the ruling has been granted.

I am often intrigued at the depth of analysis by lawyers. I am however nonplussed as to how the judge believes that A can be “indistinguishable from” B and yet not correspond to B “in every respect”. I find the two expressions themselves identical in meaning. Thank goodness I opted to become an accountant rather than a solicitor, as I clearly cannot cope with the fine nuance that the judge found between the two.

This was that Matalan allocated a different stock number to a blue swimsuit from that which it gave a green swimsuit of the same pattern and construction. Accordingly as Matalan had applied for a tariff ruling for a blue swimsuit it could not reasonably expect that the same ruling would have applied had it been green. In my youth (many years ago) a common expression to indicate disbelief was “the mind boggles”. My mind certainly boggles at the concept that a trader who seeks a tariff ruling, i.e. a decision by HMRC as to what rate of customs duty a particular category of goods attracts, should have to send to HMRC a large bundle including a sample of every colour and, I assume, size in which a garment is manufactured if he wants a ruling that he can rely on.

Indeed my accountant’s mind not only boggles but cannot cope at all with the concept of stock numbers making item A that is indistinguishable from item B nevertheless not identical to it! I do not have a clue how Matalan devises its stock numbers. However I suspect that a blue swimsuit held in a store in Manchester may well have a different stock number to the identical swimsuit held in a London store.

So how does Marks and Spencer cope? If I cannot find my size in a store, they can tell me fairly quickly, which stores hold the garment that I desire. Accordingly I imagine that their computer system must use a code that can identify this. Their website tells me that they have over 600 stores in the UK and over 295 outside the UK. The Customs Code is an EU code. A tariff ruling given by HMRC is binding throughout the EU. I like to be accurate but cannot be bothered to spend the time to find out how many of the non-UK stores are in the EU, especially as I find that they have 12 in Cyprus but none in France (or Germany, or Australia, or the USA, so their overseas operations do not follow those of most businesses). Let’s assume they have 700 stores in the EU. Are they expected to send HMRC 700 copies of every colour and size of each item for which they want a tariff ruling? For example I see that Blue Harbour Drawstring Swimming Shorts come in 4 colours and 5 sizes. Does that mean if Marks & Spencer want a tariff ruling on them they have to send HMRC 14,000 garments, i.e. 1 of each size and of each colour sold in each store?

A far easier question to answer may be, “Does the law reflect common sense”? On the basis of the above, I would answer that with a resounding, “No!”

ROBERT MAAS

2010-01-13T04:46:00.000-08:00

BLOG 74

THE CHARTER – AS GOOD AS IT SOUNDS?

I am not a fan of the HMRC Charter – or whoever’s Charter it is. In the interests presumably of clarity, the HMRC press release describes it as HMRC’s new Charter but an HMRC notice of the same day calls it HMRC’s new Customer Charter and HMRC actually head it “Your Charter”.

However there are some interesting bits in it that seem to revolutionise the way HMRC work. For example paragraph 2 says, “We will provide information that helps you understand what you have to do and when you have to do it”. Presumably this means that the ordinary citizen will no longer be expected to know and understand the complicated mass of tax law that we have. Instead he can wait for HMRC to tell him what he has to do. Presumably it also means that when someone calls an HMRC Helpline and the person on the other end of the telephone is not able to help with the particular issue raised they will be transferred to someone who will be able to help. Sadly, I fear not. I suspect it means no more than we will continue to publish masses of information on our website; you probably won’t be able to find what you need because our search engine is not very good (but why not search our site using Google instead); and if you call us we will simply tell you that we have published something and you should look harder.

Paragraph 5 says, “We will make sure that you are dealt with by people who have the right level of expertise”. That will be a welcome change in most cases! At least it will be if HMRC mean what they say. I expect they really mean that they will continue to decide what is the right level of expertise and it’s bad luck for the taxpayer if they get it wrong. To be fair I don’t expect them to have many, if any, staff with the necessary level of expertise to deal with all of the problems of a growing business across the wide range of taxes that exist. But then they shouldn’t undertake what they cannot deliver.

Paragraph 7 is interesting. “We will give you information we hold about you when you ask for it, as long as the law lets us”. I am not aware of any law that forbids HMRC to tell me information that relates to me. I wonder what law they have in mind. All that I can think of is that they may have a duty of confidentiality where information is provided by a third party. But if so, what are they actually promising to tell me? Things that I have already told them? That would be a pointless undertaking. Presumably they are undertaking to tell me things that they have worked out (or guessed) for themselves. There cannot be any confidentiality there. Well at least that will be a big advance over what they have done in the past. They always seem to have worked on the basis of, “We are not going to tell you what we have got (or think we have got) because there might be other things that we don’t know about that you might reveal to us if we simply ask you to review your returns”. I can see the reasoning behind that approach and am a bit surprised if HMRC really intend to abandon it, but I can’t think of anything else that they might mean by the undertaking. I certainly think it will make negotiations with HMRC much easier, and quicker, if they are going to put all of their cards face up on the table (that is what the courts expect taxpayers to do) at the start of an enquiry.

2010-01-11T09:05:00.001-08:00

BLOG 73

HOW HELPFUL CAN WE EXPECT HMRC TO BE?

“What you can expect from us … Help and support to get things right”
(extract from HMRC Charter, November 2009).

“We accept that HMRC maintain the proposition that callers to the VAT Helpline must ask the right questions to obtain the correct answers. We also accept that people staffing the Helplines are generally furnished with text answers to common questions and that it is too much to expect the people staffing the Helplines to give constructive and intelligent and helpful advice”
(extract from First-tier tribunal decision in James Jeffrey (Decision TC 71)).

Are these two HMRC positions compatible? If HMRC helpline staff cannot be expected to give “constructive, intelligent and helpful advice” – or indeed any useful advice at all unless the taxpayer is sufficiently tax-literate to be able to identify and ask “the right questions to obtain the correct answers” – what does HMRC understand by helping and supporting to get things right? If someone knows what question to ask, it is generally relatively easy to find the right answer. Where people need help is where they can explain a problem but do not know what precise question will lead towards an answer to that problem.

Of course there is a limit to the level of knowledge that HMRC helpline staff ought to have. But surely they ought to know enough about tax to be able to identify what is worrying a caller and then to either choose the “right question” from their list of FAQs or get someone who is capable of doing so to call back the taxpayer. For HMRC to maintain that all that can be expected of their staff is to look up the answer if the question that a caller poses happens to be one of their FAQs seems outrageous to me.

That HMRC chose to pursue Mr Jeffrey before the Tribunal seems to me equally outrageous on the basis of the facts set out by the Tribunal in its decision.

Mr Jeffrey had been delinquent in the past in paying the VAT on time. He therefore was not dependent on the VAT Helpline. He had the telephone number of someone in HMRC’s Debt management Unit. He knew that he had to submit his VAT return and pay his VAT by 30 June 2008. However he had not received the VAT return. On 23 June he called his contact in Debt Management who promised to send him a duplicate form. By 30 June he had still not received the form and telephoned his contact again. She told him to try and do his VAT return online in order to avoid a surcharge.

This was unhelpful advice because, as the Tribunal explained, Mr Jeffrey “did not have, or seemingly know how to operate, a computer, and also because we understand various codes required to facilitate online filing would be unlikely to have been obtained in time to file online”. Unlikely is a bit of a euphemism here. One of the codes is sent by post, so if it had been applied for online on 30 June 2008 it would have been impossible to have obtained the code the same day.

A friend told Mr Jeffrey that if he drove over to a particular VAT office he would be able to obtain a return from there, which he duly did. He completed and posted the return and his cheque. HMRC recorded having received the cheque on 9 July, so demanded a surcharge for late payment. A surcharge is not payable if the taxpayer has a reasonable excuse for the late payment. Accordingly HMRC presumably felt that not having received a VAT return, even after asking for one and then asking HMRC what to do, not once but twice, and then being given impractical advice, did not amount to a reasonable excuse.

Unsurprisingly the Tribunal disagreed. It pointed out that the surcharge arises only if the taxpayer had outstanding VAT at 30 June 2008. It thought the Debt Management Unit ought to have told Mr Jeffrey that if he paid the VAT due electronically either by BACS (by transfer initiated before 2 July) or by CHAPS (by transfer initiated by noon on 7 July) he would avoid the surcharge even if he filed the actual return late. The Tribunal therefore felt that “had he been given the right advice and instruction by someone who must have been versed in all of the intricacies as to how he could avoid a default and a surcharge, he would indeed have paid on time”.

Surely most people in the light of these facts would have thought that Mr Jeffrey had a reasonable excuse; he had done his best to comply with his obligations in time and the only reason he had not achieved this is that HMRC were not prepared to tell him that he was concentrating on the wrong obligation and had time to pay the tax, the real obligation, by the due date and avoid a penalty.

In the context that he was entitled to expect “help and support to get things right” it is worrying that not only did no one in HMRC (including in their Solicitor’s Office which argued the case before the Tribunal) identify that in the circumstances Mr Jeffrey had a reasonable excuse, but HMRC were prepared to spend taxpayers’ money in insisting on a hearing before the Tribunal that could clearly be expected to expose their own shortcomings.

It is certainly hard to see how HMRC can have expected their reputation for fairness and reasonableness to survive such a case. Perhaps no one within HMRC cares about that?

ROBERT MAAS

2009-11-04T05:59:00.000-08:00

BLOG 72

WE DON’T CARE ABOUT YOU! WE’RE HMRC

I received an e-mail the other day from a client who is CEO of a major company but also is the sole director of a tiny private company. The tiny company received a phone call from HMRC last week asking to speak to a director. The phone was answered by the Company Secretary, who is in fact the officer of a company who is primarily responsible for the proper administration of the company. The HMRC Officer refused to tell the Company Secretary what HMRC’s concerns were. They insisted on the Company Secretary giving them the phone number of a director, which she duly did.

HMRC then phoned the director and said that the company had not paid its PAYE for month 6. The director said that he did not deal with the PAYE but would look into it.

When he told me what had happened I said that I thought that HMRC’s refusal to talk to the Company Secretary was outrageous.

HMRC called the director again later in the week. I reproduce below part of the first paragraph of his e-mail to me.

We received another call from HRMC at 08 55 this morning. I told the lady that Robert had said that it was inappropriate for them to be calling and she replied that Robert didn't work for HRMC so he had nothing to say about it. … As it happened I was rushing about doing other things and she told me, “ I was trying to help you but if you are going to take that attitude I will pass this onto local people and we will just keep your money and assume that you haven't paid us”. I told her that I really could not deal with this at this time. She quickly said something along the lines of "" or something of that sort. I thenasked her what her name was but it seems that I was speaking to a dead receiver as she had quickly hung up.

The Company Secretary phoned HMRC later in the day. She said that the director had informed her of the problem. She was puzzled as she always pays over the PAYE at the end of each month when she pays the salaries. She had checked the company’s bank statements and the payment had left the account via BACS. The Officer she spoke to checked on the computer and told her that she had found the money. The problem was that the company had paid it “too early”. Accordingly HMRC had allocated it to month 5 (despite the fact that they already had a payment for month 5).

HMRC talk a lot about “customer service” and wanting to help taxpayers to get things right. Wouldn’t it be a good idea if instead of this simply being a mantra chanted periodically by Dave Hartnett he did something to tell his staff about his desired approach?

I appreciate that HMRC is a big organisation. I appreciate that it takes time to change attitudes. But I thought that customer service (or simply “service” as it used to be called when I started in tax 40 odd years ago) had always been important to HMRC. Accordingly what seems to me to have actually happened on the ground is that the concept of service has been jettisoned in favour of bullying taxpayers. Certainly bullying can get results but, as my client has said to me, “that attitude is, of course, one that is not likely to get particular co-operation out of me”.

The above is not an isolated incident. I am aware of other instances where HMRC seem to me to have adopted wholly unreasonable attitudes when they thought that money was due to them.

Some years ago the US Congress concluded that abuses of power by the US tax authority, the IRS, had reached such a level that something had to be done to rein them in. I think that it may be time for Parliament to do something similar in this country!

ROBERT MAAS

2009-10-05T05:22:00.000-07:00

BLOG 71

DON’T CALL US IF YOU WANT OUR ADVICE – AND INTEND TO RELY ON IT!

Every so often there is a tax case decision that worries me. One such is the decision of Sales J in R (on the application of Corktech Ltd) v HMRC.

Mr Malde, the director of Corktech, had a VAT problem. He was an experienced exporter and knew that a sale within the EU does not attract VAT whereas a sale outside the EU but with the goods being situated in the UK at the time of the sale does so. In early 2005 he was approached by a Belize company with an office in Poland to sell goods to it for delivery to its own customer in Poland. It was a large order. Mr Malde hoped that he would obtain further sizeable orders from the Belize company. He was aware that VAT was chargeable on a sale to a Belize company but, as the goods would remain in the EU, thought it illogical to have to charge VAT. So what should he do?

VAT Notice 725, “Guide to VAT in the Single Market”, contained at the front “If you need general advice … please ring the National Advice Service (“NAS”) on XXX”. So Mr Malde did. He says that he spoke to a Mr Baker who, after checking, told him that he need not charge VAT if he included on his invoice and delivery note the address and VAT number of the Polish company. Fair enough! Well, it would have been had that advice been correct. In December 2006 Mr Malde received a visit from HMRC. They told him that he ought to have charged VAT on what by that time had been a string of sales to the Belize company and please could they have a cheque for £370,717 being the VAT that he should have charged plus interest plus a surcharge for late payment.

At that stage Mr Malde consulted a VAT specialist, Mr Mainprice – presumably the late Hugh Mainprice who, until his death last year, was a leading VAT practitioner. Mr Mainprice expressed the view to Customs that VAT was not due as “triangulation” applied. HMRC disagreed. Mr Mainprice then pointed out that Mr Malde had been told by the NAS in early 2005 that no VAT was payable. HMRC disputed that Mr Malde had been given any such assurance.

When the case came to court, Mr Malde gave evidence of the phone call. HMRC did not call Mr Baker to give his side of the story. He no longer worked for HMRC, although it is hard to see why that should have been a bar to calling him. Instead they called Ms Harris, who did not know Mr Baker but worked in NAS. She said that NAS staff are given nine weeks full-time training during which they are told, “not to give advice in the form of expressing their own views about the VAT treatment of a particular transaction but rather to give it in the form of directing the caller to the terms of the relevant parts of public guidance notices”.

So that’s what HMRC mean by customer service! They tell Joe Public if you need advice call NAS and they tell NAS that when Joe Public asks for advice, refer him back to the notice that told him to make the call in the first place. How helpful!!

But back to Corktech. Mr Baker had made a brief note, “Caller wanted to know about the supply of goods to an EC Member State and the VAT liability of the supply. Advised caller as per public notice 725 that they would be able to zero-rate the supply provided that the conditions in section 3 are met”. Mr Malde did not himself make a note of the phone call. There was no dispute that one of the 3 conditions in section 3 was not met. Mr Malde knew that it was not met. That is why he had called NAS in the first place! Indeed as an experienced exporter it is hard to think of any other reason for him to have called NAS at all.

Faced with the evidence of Mr Malde, no evidence from Mr Baker, a bland file note of HMRC and evidence from Ms Harris that Mr Baker should not have given the advice that Mr Malde said he did, what could Mr Justice Sales do? I would have expected him to have had to accept what Mr Malde told him as he had no evidence before him other than the fairly ambiguous file note, to contradict Mr Malde. After all the only other person who was aware of the phone call was Mr Baker and HMRC had chosen not to bring him along.

How naïve can 1 get! Mr Justice Sales reasoned that, as he had not heard Mr Baker, he could only conclude that Mr Baker had followed his training and that therefore Mr Malde must be lying. After all HMRC had not given him an opportunity to form his own view of Mr Baker, so it was only reasonable to assume that he had followed his instructions not to seek to help taxpayers. Sales J also pointed out that Mr Mainprice had initially told HMRC that his own view was that no VAT was due and it was only after he had lost that complex technical point that he had resorted to non-technical issues and had pointed out that, even if he were wrong on the technical point, Mr Malde was entitled to rely on the NAS advice. Sales J thought that Mr Malde should have said to Mr Mainprice something like, “It doesn’t matter what you as a VAT expert believe the VAT position to be; just tell HMRC about the advice I got from Mr Baker”. Personally I find this extraordinary. I would get fairly uptight if a client were to say something like that to me! Sales J also found it strange that, as a layman, Mr Malde did not make a note of the telephone call. After all lawyers are trained to do this, so clearly someone without any such training should have done it too!

But the real worry is what Sales J said next. He said that even if he had believed Mr Malde’s version of the phone call, he still would have upheld HMRC’s claim. This is because in R v CIR ex parte MFK Underwriting Agencies Ltd the Court of Appeal had said that if someone intends to rely on advice from HMRC – which is surely why most people seek such advice – “it is necessary that the taxpayer should have put all his cards face upward on the table. That means that he must give full details of the specific transaction on which he seeks the Revenue’s ruling … It is one thing to ask an official of the Revenue whether he shares the taxpayer’s view of a legislative provision, quite another to ask whether the Revenue will forgo any claim to tax on any other basis. It means that the taxpayer should indicate the use he intends to make of any ruling given”.

MFK involved a marketed tax scheme where the promoter had written an innocuous letter to HMRC asking them to confirm that the indexing element on indexed linked bonds was not taxable as income. They had not said that the reason they were asking is because they were trying to develop a tax avoidance scheme.

Sales J pointed out that in Mr Malde’s case “Mr Malde’s approach to the defendant was not in writing, involved only a telephone conversation of about six or seven minutes duration (with no prior notice to Mr Baker even of the broad nature of problem on which his view was to be sought) and did not involve full disclosure of the transaction and the perceived problem which Mr Malde wished to have addressed. In all these circumstances Mr Malde could not reasonably have thought that Mr Baker had given Corktech a fully considered and binding ruling in its favour”.

Unfortunately he did not say what he believed that Mr Malde could “reasonably have thought”. HMRC are just fobbing me off with the first thing that comes into their head to get rid of me? When HMRC tell me to phone for help they are trying to trap me and have no intention of helping me at all? If HMRC need further information to deal with my problem they will tell me, not simply make a guess based on what I tell them?

Mr Malde seems to me to have acted wholly reasonably in following HMRC’s instructions to phone them. I do not myself think that he could have been expected to be aware of the MFK Underwriting decision (a direct tax case not a VAT one) and the HMRC notice did not say that if he wants to rely on advice from HMRC he should ignore their instruction to call them and send them a detailed letter instead. Indeed I think that Mr Malde could have reasonably expected Mr Baker to have told him that if Mr Malde wished to rely on what he was telling him, he would have to write to HMRC in addition to speaking to Mr Baker.

Personally, I would have thought that a businessman phoning HMRC for help – at the suggestion of HMRC – on a commercial issue ought to be entitled to “reasonably have thought” that HMRC would help him and that, if in order to do so they needed more information, they would tell him what extra information they need. I would have thought it wholly unreasonable for him to have thought, “When HMRC tell me they will help me they are only going to let me speak to someone who has no ability to help me but has been trained to politely refer me back to their booklet”. Indeed if I had been Mr Malde and Mr Baker had simply told me to look again at the booklet, I suspect that I would have found it somewhat difficult not to have been fairly rude and very sarcastic when Mr Baker conveyed that message to me. Mr Baker must have been unbelievably thick-skinned not to have reflected that in his note.

Of course VAT specialists know that it is possible to contact NAS in writing even though HMRC do not advertise this fact to taxpayers such as Mr Malde. They also know that many years ago the then Minister, Mr Sheldon, told Parliament “if an [HMRC] Officer, with the full facts before him, has given a clear and unequivocal ruling on VAT in writing” HMRC will not seek to collect the tax that is due if that ruling turns out to be incorrect. At that time HMRC’s normal method of communication was by letter. It seems to me a bit unreasonable that in current conditions, where they urge people to deal with them by telephone, they should turn round and say that the taxpayer cannot rely on what they tell him on the telephone. But obviously my perception of reasonableness is very different to that of Mr Justice Sales.
Robert Maas

2009-07-20T02:55:00.000-07:00

BLOG 70

THE SAYINGS OF SARAH McCARTHY-FRY – NUMBER 1

In my last blog I puzzled over how Sarah McCarthy-Fry, the Exchequer Secretary to the Treasury, could see a distinction between extending the scope of a tax and mitigating revenue losses when such mitigation was achieved by extending the scope of the tax.

I now realise that Ms McCarthy-Fry probably has a view of the world that is somewhat different to how most of us approach it. Accordingly I am now on the look out for her concepts.

Today’s offering is, “One effect of increasing the AMAPs rate would be to provide an incentive to those employees whose actual costs are less than the proposed 45p a mile rate to drive further in order to profit from the mileage reimbursement. That is not the purpose of the allowance, and it could lead to an increase in unnecessary driving and thus to an increase in overall carbon dioxide emissions, contrary to the Government’s environmental objective”.

For the benefit of those, like me, who had never heard of an AMAP, it stands for Approved Mileage Allowance Payment (I think). Mileage allowance payments were introduced on 6 April 2002. They are exempt from tax. They are amounts paid to an employee for expenses related to the employee’s use of his own car for business travel and are 40p a mile for the first 10,000 miles a year and 24p thereafter. Business travel is travelling, the expense of which would be deductible under ITEPA 2003, ss 337-342. Under s 337 the employee must be “obliged to incur and pay” the expenses as holder of the employment, and the expense must be “necessarily incurred on travelling in the performance of the duties of the employment”.

The Opposition proposed an amendment to the Finance Bill to increase the 40p to 45p a mile. Inflation since 5 April 2002 (using HMRC indexation allowance table) is a bit over 21%. A 5p increase on 40p is 12.5%. Accordingly it does not even cover inflation.

Ms McCarthy-Fry seems to think that if the government were to allow employers to increase their mileage allowance payments to their employees not even to reflect inflation, but to reflect only 60% of the effect of inflation, employees with small cars whose actual cost of fuel maintenance, depreciation and insurance amounts to less than 45p a mile would needlessly drive around, spewing carbon emissions into the air, in order to reclaim from the employer an extra few pence a mile. This in circumstances where they need to convince the employer that the extra mileage is “necessarily incurred” on the business journey! That is a pretty stiff test. If an employee takes a longer route when a shorter one was available, is the extra mileage “necessarily incurred”? Obviously Ms McCarthy-Fry believes that it is, as she envisions thousands of motorists driving necessary, but needless, miles to earn a few extra quid tax-free.

Personally I find it hard to understand how something can be both necessary and needless at the same time. Which just goes to show that I am not Ministerial material.

It’s good to know that Ms McCarthy-Fry is there to protect us from those who would otherwise be tempted to drive necessary mileage simply for the sake of it!

ROBERT MAAS

2009-07-17T03:12:00.000-07:00

BLOG 69

Q. When is a tax increase not a tax increase?

A. When it is mitigating revenue losses. At least that is what the Exchequer Secretary to the Treasury, Sarah McCarthy-Fry, explained to parliament when she told it that the government intends to charge to landfill tax something that the Court of Appeal has held to be outside the scope of landfill tax and for which she told parliament, “The Government have accepted that decision”.

The Minister actually said, “I stress that this is a case of mitigating revenue losses and not extending the application of the tax” (Hansard, Public Bill Committee, 25.6.2009, col 639).

This concept of mitigating tax losses is a novel concept. What it appears to mean is that if the government wants to tax something, but introduces legislation that actually exempts it from the tax then, when they try again to tax it, they are not taxing something that was not previously taxable; they are simply mitigating the loss that the State has suffered because the government originally exempted it when they actually intended to tax it. I hope that is clear.

If the government were to say that they originally got it wrong but were now “extending the application of the tax” so that it catches the item in question, the Opposition parties and many commentators might label the extension of the application as a stealth tax. Mitigation of a loss is not a tax increase at all; it merely increases the tax that is being lost because the law did not reflect what the government would have enacted had they been bothered to think more carefully about what they wanted to do, and not bulldozed masses of legislation through parliament to a timetable that left no room for either themselves or the Opposition parties to work out what the government was trying to tax and ensure that the wording of the legislation achieved that objective.

Obviously, like me, the Minister is a fan of Humpty Dumpty, “when I use a word … it means just what I choose it to mean – neither more nor less”.

At least Ms Carthy-Fry’s ridiculous distinction between extending the application of a tax and mitigating revenue losses caused by the tax, not extending it to the item that she now proposes to tax, is a big advance on the approach of one of her predecessors, Dawn Primarolo.

When it was pointed out to her that legislation that she was introducing was unclear, she dismissed any suggestion of clarifying it before it was enacted in its unintelligible state with the statement:

“We expect people to be sensible. The tax system cannot be absolute and is not designed to be. The Schedule gives clear indicators of the type of development we want”.

In other words, “The law doesn’t matter; people should guess what the government wants them to do and do it, irrespective of whether or not the laws that we choose to enact require them to do”.

I doubt that even Lewis Carroll would have had the nerve to put forward such an outlandish proposition.

ROBERT MAAS

2009-06-24T06:42:00.000-07:00

BLOG 68

DON’T MESS WITH US – OR ELSE!

“Organisation Values – a broader relationship with customers … Broad principles such as treating customers courteously, dealing with their issues promptly, being fair and professional are covered under this heading”.

“H M Revenue & Customs … aim to make the tax … system feel easy to use. You can expect HMRC to … provide you with accurate information”.

“Don’t mess with us. We can destroy you. Even if you don’t owe us a penny we have the power to destroy you. And be under no illusion. Even if you don’t owe us a penny, we will destroy you if you choose not to co-operate with us”.

The first of the above quotes is from the June 2008 Consultation, “HMRC and the Taxpayer: A new Charter for HMRC and its customers”. The second is from the February 2009 Consultation, “HMRC Charter”. The third is from my imagination; I imagine that it is what someone said to Mr Cassells. I will come back to Mr Cassells later. I’d like to start with a hypothetical scenario.

Mr X does not believe that he owes any tax. He is a bit uptight that he is asked to complete tax returns because he thinks that he has had tax deducted at source under the construction industry scheme that exceed his tax liability. His income is low. He and his wife jointly own their house, which is worth in the region of £80,000 but is subject to a substantial mortgage. Mr X’s equity in the house is in the region of £26,500. That is his only significant asset. Indeed he is so uptight that he cannot be bothered to complete the tax returns that he has been sent.

After a few years HMRC work out that Mr X owes them tax of £4,533. They send him a demand. Because he does not believe that he owes anything, Mr X ignores it. HMRC make Mr X bankrupt.

This wakes Mr X up. He writes to HMRC and asks how they arrive at the £4,533. After a few months they say, “What a surprise. You don’t owe us £4,533 after all. We owe you £6,113” (or words that that effect).

Mr X is so uptight and so convinced that he owes nothing to HMRC, that he refuses to co-operate with the trustee in bankruptcy too; he sees him as brought in to do HMRC’s dirty work and he is not going to help him.

When HMRC tell Mr X that, although they lodged the petition on the basis of which he was made bankrupt, they made a mistake he applies to have his bankruptcy annulled. (I assume that they made a mistake; I am sure that if Mr X believed that HMRC owed him £4,533 and it turned out that he owed them £6,113, HMRC would say that he had clearly failed to take reasonable care in dealing with his tax affairs, but I also believe that in HMRC eyes failure to take reasonable care is a one-way street; HMRC staff always take care but being human can occasionally make mistakes). A judge hears the story and annuls the bankruptcy. All’s well that ends well. I like stories with happy endings.

I said earlier that I’d get back to Mr Cassells. Actually the above story is not hypothetical at all. Mr Cassells is Mr X. So what about the happy ending? HMRC are contrite, apologise profusely and compensate Mr Cassells for the hassle that their mistake has caused him?

Not a bit. Even if he owed nothing, Mr Cassells didn’t complete his tax returns. If people can get away with not doing what they are told to do by HMRC, however unreasonably it may seem (or even may be to them), what would the world come to? Other people may even start to think that parliament has given them rights and might challenge what they are told by HMRC. That would undermine the whole concept of HMRC expecting people to do as they are told. So HMRC – or, perhaps you and me as it is our money that HMRC paid out in legal fees – applied to have the annulment of Mr Cassells’ bankruptcy set aside.

Eventually Mr Cassells swallowed his pride and completed his outstanding tax returns. As a result HMRC calculated that they were wrong in thinking that they owed him money; he actually owed them £3,890. Oops! Another HMRC error. By the time the case came to court they accepted that he did not owe them a penny.

So why did HMRC pursue their application? Personally, I suspect that it was to teach Mr Cassells (and anyone else who is tempted to cross HMRC) a lesson. But that is obviously not what they told the judge. What they seem to have told the judge is that Mr Cassells had been threatening throughout to take action to prove that he didn’t owe them anything and he had been “all mouth and no action”. Accordingly they had been right to serve the petition. Having done so in error they have a responsibility to his other creditors (of roughly £5,000) as it had taken HMRC so long to work out what Mr Cassells did or didn’t owe them (assuming, that is, that their fourth try is right) that their debts would now be statute barred if Mr Cassells were to decide not to pay them and his bankruptcy were annulled. Furthermore, although if Mr Cassells had paid those debts at the beginning he would still have net assets of £21,500 (plus whatever HMRC might owe him), those creditors are entitled to interest and the trustee in bankruptcy has obviously incurred both his own fees and legal costs, which by now had amounted to £64,524. Accordingly as a direct result of HMRC’s actions he is now well and truly bankrupt even if he was not before.

“Yes”, said the judge, “I’ll cancel the annulment”! So that’s all right then. Result: Mr and Mr Cassells thrown out on the street. No tax collected (as none due). But, most importantly, HMRC have clearly established that anyone else who dares to challenge them needs to realise the extent to which HMRC are prepared to go to punish them.

A puzzling aspect of this case is why HMRC should have spent taxpayers’ money to appeal a matter in which they clearly had no interest. Indeed someone cannot simply initiate a court case, or I would have thought an appeal, simply because they feel like it. They need to have some standing that the court will accept gives them an interest in the case. I doubt that being upset because someone declined to co-operate with you is sufficient.

The answer lies in what is called equitable liability. In law Mr Cassells does owe tax even though in terms of arithmetic his tax deductions fully cover his liability. He owes the £4,533 that HMRC originally claimed and later accepted was an error. He owes it because HMRC assessed it on him and he did not appeal against the assessment. The reason that HMRC accepted that he now owes them nothing is the concept of equitable liability under which, where information received after the statutory deadline has passed shows that tax assessed is too high, they are prepared to make an administrative decision not to pursue recovery of the full amount assessed.

I wonder whether it is a coincidence that on 22 May, HMRC issued a statement saying that they intend to withdraw the concept of equitable liability from 1 April 2010.

I know nothing about Mr Cassells’ circumstances other than that he was a building industry sub-contractor, had little assets and used to live in an £80,000 house subject to a substantial mortgage, which the case report tells me. For all I know he may be a university graduate with a deep knowledge of the tax statutes. He may have deliberately not made tax returns, deliberately not applied to have his bankruptcy set aside the minute he was informed of it and deliberately refused to co-operate with his trustee in bankruptcy. It is, though, equally possible that he was a frightened little man with no knowledge of tax or of bankruptcy law who did not know what to do when the State claimed from him money that he knew he did not owe, who did not know that he could appeal against the bankruptcy order and was deeply upset that the State could strip him of his livelihood and his assets for no obvious reason whatsoever. If he has read Kafka’s “The Trial”, he will undoubtedly have empathised with Joseph K, whose nightmarish world seems to resemble that of Mr Cassells.

As a taxpayer I feel as angry about HMRC’s proposal to withdraw equitable liability as I do about the State’s treatment of Mr Cassells. HMRC say that equitable liability was introduced to protect other creditors in insolvency cases. But that is not the circumstance in which most of us have used it. In my experience, and I suspect that of TaxAid and LITRG, it is mainly used to avoid penalising those who are too frightened to open brown envelopes, who do not see HMRC as the friendly, loveable folk that HMRC wish to be perceived as, and who freeze at the very mention of the word “tax”. It provides a safety net for the vulnerable. It brings a touch of humanity and fairness into the tax system.

The powers review seems to me to have tipped the balance between HMRC powers and taxpayer rights, which the Inland Revenue strove hard to achieve when self-assessment was introduced, firmly towards enhancing HMRC powers and largely replacing taxpayer rights with taxpayer obligations to be enforced with an iron fist. I also notice that the draft HMRC Charter does not use the word “fair” at all, whereas that came right at the beginning of the original Inland Revenue Charter. Accordingly for HMRC to decide that there is no longer room for humanity and fairness in the Brown/Darling new tax world is perhaps not surprising. It is nevertheless very sad.

HMRC say that as under self-assessment from 1 April 2010, a taxpayer will have three years both to file a tax return and to displace a legal determination based on an estimated amount so it is no longer necessary for them to operate equitable liability. So does this mean that it is an obsolete concept as since 1996 taxpayers have had almost six years; that it has never been used since 1996? Of course not. Most of us have had instances where vulnerable people have come along with issues several years old because they have been too frightened to react to the bits of paper and it is only when the writ had been received or the bailiff had knocked on the door that they have realised that they had to do something.

I realise that the government is short of money and is probably pressuring HMRC to collect what is owed to it. However as a taxpayer I do not want the country’s financial problems to be alleviated by oppressing the most vulnerable members of society; by collecting money that is technically due from them but which to my mind it is morally offensive to society as a whole to exact; or by punishing for their inability to cope those who are bewildered by the tax system. I hope that I am not alone. I hope that someone in parliament can persuade Mr Darling either to keep equitable liability as a safety net for the vulnerable or, if he really believes that the House of Lords in Wilkinson meant him to withdraw such discretion from HMRC, to enact an equivalent power to enable them to continue to act fairly towards the vulnerable.

Robert Maas

2009-06-01T02:33:00.000-07:00

BLOG 67

HMRC: MOTHER’S LITTLE HELPER?

HMRC, the caring department of government: caring about you (or, perhaps, rather your assets and income) from the cradle to the grave. Actually, apparently, even from before the cradle!

I have been reading a press release on “Information for mums-to-be”. This tells me that from April 2009 a “mum-to-be who’s at least 25 weeks pregnant” (and who’s due date is after 5 April 2009) can claim a “one-off, tax-free payment of £190” from HMRC. Oh, but not if she is too independent minded. She must have been given health advice from a midwife or doctor on matters relating to maternal health if she is to qualify for this handout.

I do not know what the technical definition of a “mum-to-be” might be. The 25 week period seems to have been determined on the basis that abortion is legal in this country under 24 weeks of pregnancy (if two doctors agree that it is necessary for specified reasons). This 25 weeks therefore looks like a tax (or rather relief) avoidance provision. It prevents a woman from claiming the relief, getting the money, and then aborting the foetus.

So how come that HMRC have suddenly become so generous? I suspect that it is a ploy to get people onto their books as early as possible! Or it may be that the government couldn’t persuade anyone else to administer this grant. Actually I’m not sure that HMRC want to either. They have made claiming the £190 as hard as possible. You obviously have to fill in a claim form. But you can’t download it from the internet. You can’t even get it from HMRC. You need to get it from your midwife or doctor, who must confirm on it that advice has been given to you on matters relating to your pregnancy and sign and date it before they give it to you. You then need to complete it and send it to HMRC within 31 days of the midwife or doctor dating it. This is apparently a strictly enforced time limit. HMRC helpfully say that if your midwife or doctor doesn’t have any claim forms you should call their Health in Pregnancy Grant Helpline and they will send a form – but not to you; to your doctor or midwife. If the expectant mum-to-be is ill or disabled and cannot manage her own affairs, the prospective dad-to-be (or anyone else) can make the claim, but this needs another form, which is not obtainable either from HMRC or the doctor or midwife; you have to go to a Jobcentre Plus office to pick it up.

I was so intrigued with this new role for HMRC (who I thought did not even have sufficient resources to do their basic tax collection role properly) that I wondered where the legislation is. It is in ss 140 – 140A of the Social Security Contributions and Benefits Act 2002 inserted by s 131 of the Health and Social Care Act 2008 – and supplemented by the Health in Pregnancy Grant (Entitlement and Amount) Regulations 2008 and the Health in Pregnancy Grant (Administration) Regulations 2008.

There is still no definition of a mum-to-be though. This is apparently an HMRC version of baby talk. The law refers to a woman (which in turn is defined as a female of any age – presumably because we know that in today’s Britain pregnancy starts in the gym-slip). The Regulations impose the further conditions that she must be pregnant and have reached the 25th week of the pregnancy. A woman is not entitled to the grant unless she is in Great Britain (or Northern Ireland) at the time she makes the claim. Unless she is under 16 she also has to have a National Insurance number and information or evidence establishing that that number has been issued to her (or she must evidence that she has applied for one).

The Regulations define a health professional as a practicing midwife who is registered with the Nursing and Midwifery Council or an obstetrician or General Practitioner who is registered with the General Medical Council. They also say that a woman must be treated as not being in Great Britain if she is not ordinarily resident here or does not have a right to reside here (but a woman deported to the UK from another country is treated as being ordinarily resident here; and so is a Crown servant posted overseas, a partner accompanying such a person or the daughter of such a person if child benefit is being paid in respect of her). A partner is defined as one of a couple and a couple embraces a man and woman who are married to each other (or living together as husband and wife) and two people of the same sex who are civil partners of each other (or living together as if they were).

If a woman is not yet 25 weeks pregnant HMRC say that they will send her a “free reminder” when she becomes 25 weeks pregnant. Anyone who wants this free reminder can register for it online or send HMRC a text message (text DUE followed by the date – e.g. DUE 060909 if you are due to give birth on 6 September 2009 – to 83377). Can the provider of such a friendly, helpful service really be HMRC?

ROBERT MAAS

2009-05-29T02:38:00.001-07:00

BLOG 66

MORE THOUGHTS ON MPs EXPENSES

The rules on MPs expenses are contained in a 72 page publication, “The Green Book: A guide to Member’s allowances”. You can find this on the web, www.parliament.uk/documents/upload/GreenBook.pdf. This contains some fascinating information that I thought I would share with readers.

The current edition of the Green Book was published in March 2009. The Forward tells us that the new edition “is the result of decisions taken by the House over the last year”. I am fascinated by “over the last year” which I take to mean on several different occasions. While the rest of us have been worrying about the recession, international terrorism, Afghanistan and Iraq and the situation in the Middle East and Sri Lanki, MPs have apparently turned again and again to worrying about their expenses!

The first Chapter is headed “Welcome”. It tells us that “MPs are provided with financial support in the form of allowances to enable them to work effectively in Parliament and in their constituencies”. It appears that “work effectively” in the minds of many MPs requires them to be relieved of all financial worries that beset the ordinary man. “Welcome” section does go on to explain that this relates to “costs properly incurred in the performance of their duties”, but perhaps MPs are too busy to have read that far. “Welcome” also tells us that “Members who are contemplating incurring an expense which is large or unusual, or who are uncertain about any allowance, should contact the Department [of Resources] beforehand for advice”. I see from Saturday’s paper that Tom Dalyell did that two months before he retired and the Department told him that £18,000 for three bookcases in which to keep his archives was a bit OTT but £7,800 would satisfy the test of being “properly incurred in the performance of” his duties as an MP. Lucky for Tom that he needed to ask the Department not HMRC. HMRC would have said that no part of the £18,000 was incurred “in the performance of the duties”, whether properly or otherwise. As I mentioned in my previous blog, Andrew Walker, the man in charge of the Fees Office is reported to have said that, “he had virtually no ability to scrutinise [MP’s] claims beyond a “common sense” test”. Personally I cannot see how even a common sense test could have produced £7,800 or, indeed, any figure other than nil.

In passing, I see that Andrew Walker said that, “responsibility for policing expenses lay with voters, they could eject an MP from Parliament if he or she had been exploiting the system”. My understanding is that even if I mobilise all of the voters of Brent North we cannot eject our MP from Parliament. Once we have voted him in we are stuck with him until such time as Her Majesty chooses (on the advice of the Prime Minister) to dissolve Parliament. But even if I am wrong, how can I and my fellow constituents carry out our responsibility for policing? Although my MP sends me a newsletter every so often, he does not include in it the amount of expenses that he has claimed. The last figure I can find on the HMRC website is a total figure for 2007/08, 14 months ago. It took the Sunday Telegraph four years to obtain the release of details of MPs expenses under the Freedom of Information Act and they only got it because the sponsor of a private member’s bill to block the release of the information (widely supported in the Commons) could not find a sponsor for the bill in the House of Lords.

So I have to leave policing to the Fees Office. Sadly, “Welcome” tells me not that the Fees Office cannot disallow expenses. Rather it “is expected to bring to the attention of individual Members instances where they may appear to be vulnerable to criticism or accusations of impropriety”. They don’t seem to have done a very good job there, then. If an MP does not recognise his vulnerability, the Fees Office can refer the matter to the Members Estimate Committee of the House of Commons.

The House has adopted a Code of Conduct which, readers will be pleased to know, “includes a number of general principles of personal conduct. These are based on concepts of selflessness, integrity, objectivity, accountability, openness, honesty and leadership”. Yes, seriously, even after all of the exposures in the last couple of weeks that is what “Welcome” actually says! It also gives a useful tip to MPs, “How comfortable do I feel with the knowledge that my claim will be available to the public under Freedom of Information”. Tom Dalyell apparently feels very comfortable but a number of others seem to have not noticed this tip, as now that the information has become available they do not seem that comfortable.

I do not wish to dwell on chapter 2, “The Allowances” as others have done so fairly extensively. I did however notice para 2.1.3.6, “Subsistence: A flat-rate sum of £25 may be claimed for any night which a Member spends away from his or her main home on parliamentary business”. I noticed it because HMRC have recently issued “benchmark scale rates” for subsistence that HMRC will accept from all employers (or, apparently, all employers other than Parliament which has its own, far more generous limits). These are £5 for breakfast – but only if the employee leaves home before 6.00am and actually buys a breakfast away from home and does not regularly leave home before 6.00am – and £15 for an evening meal – but only where the employee has to work later than usual, finishes work after 8.00pm having worked his normal day and actually buys a meal (or the £15 can provide both lunch and dinner if the worker is away from home for at least 10 hours). Presumably the House of Commons canteen overcharges MP’s; they surely do not simply think that they deserve to eat better than “the little people”?

An MP can also claim for the provision of an office (in addition to the one that Parliament provides for him at Westminster that is). This includes “additional costs of using part of your home as an office … but you must take particular care to ensure that you do not claim twice for the same expense”. So that’s all right then!

The MP also gets an allowance for staff. He is told though to “ensure their staff are … able and (if necessary) qualified to do the job, and actually doing the job”. I would hope so too. Curiously the Green Book contains no special rules about employing your spouse or children or ensuring that they are not paid above a market rate.

On travel, I note that, “Examples of appropriate expenditure” includes “routine travel … by the recognised direct route between Westminster, your constituency and your main home as well as travel within the constituency”. For the rest of us, home to work travel is of course private expenditure for which we cannot claim a tax deduction. Spouses and civil partners and children under 18 of MPs are each entitled to up to 30 single journeys each year between London and the constituency or the Member’s main home. For the rest of us, of course, the number of such journeys that attract tax relief is nil.

I’ve got a radical suggestion. Parliament ought to be a good employer. It should provide the maximum benefits that qualify for tax relief for the ordinary man in the street. There should be no extra tax privileges for MPs as compared with anyone else whose job has two bases. I think it would be reasonable for Parliament to revisit the tax rules that apply to such people. I do not think that the current rules are reasonable and if MPs have to fix rules that apply to everyone, including themselves, they should be given the opportunity to consider whether they might want to be less harsh than they decided to be when they fixed the rules to apply only to “the little people”.

That would make HMRC the guardian of MP’s expense allowances. They can do a far better job of this than either voters or, on the basis of the past, the Fees Office. Voters would see that MPs are both not in a privileged position and not in charge of vetting their own expenses. Such an independent scrutiny should overcome the current public suspicion of MPs’ expenses. Any revised system that either leaves Parliament in charge of vetting its own expenses or takes MPs expenses out of the ambit of public scrutiny cannot restore people’s faith in the integrity of their MPs. The knowledge that MPs were answerable to HMRC would surely do so!

Robert Maas

2009-05-22T03:26:00.000-07:00

BLOG 65

MP’S EXPENSES

What annoys me most about the scandal of MP’s allowances is the hypocrisy. “How can I be criticised, I have kept within the rules?” Fair enough! Or is it? MPs are not the only people who keep within the letter of the rules but use them in a way that could not have been intended, in order to rip off the taxpaying public. Mr Brown and a succession of Treasury Minister constantly describe such action by other people as “unacceptable tax avoidance”. How can it be unacceptable to Mr Brown for you and I to keep within the letter, rather than the spirit of the rules, but so acceptable for his friends to do so that he rewards them with government jobs?

I heard an even more astounding “justification” from an MP on the radio recently. Successive governments have given MPs such minor pay rises that they exploit the expenses rules to bring their earnings up to what they believe to be a more appropriate level. That is not keeping within the rules, it is abusing the rules. I do not know what the appropriate level of pay for an MP is, principally because I am unclear what the average MP does. £61,820 – roughly two and a half times average wage – does not seem particularly low to me. Logically the right pay for a job is the amount that will attract a small number of properly qualified applicants so that there is a choice in who to appoint. Vacancies for MPs generally seem to attract several hundred applicants, which suggests, if anything, that £61,820 is wildly excessive.

What does an MP do to earn his money? Those who have watched Parliamentary TV will know that only between 2½ and 5% seem to take part in, or even listen to, most debates. Of course they have to be at Westminster because when a vote is called most of them turn up and vote in ignorance of the arguments and, I suspect, in ignorance even of what they are voting for (or against). Voting simply involves walking through the door that their whip points them to. I have attended several Parliamentary Committee hearings. The impression that I get is that it is fairly unusual for all of the members of a Committee to be present throughout its hearings. I am told that an important part of the job is dealing with constituent’s problems. Over the years I have written to my MP perhaps half a dozen times. On each occasion my letter has been forwarded to the appropriate Minister and the Minister’s dismissive response sent back to me with a compliment slip. Accordingly none of the people who have been my MP seems to have regarded dealing with my problems as even warranting their getting personally involved. Being an MP seems to me an unskilled job with not very onerous responsibilities. No wonder there are so many applicants anxious to do the job for £61,820.

But back to hypocrisy. MPs are office-holders. Such people are taxed in the same way as employees. I set out later what that is. Office-holders in general, I mean, of course, not MPs. Because in 1984 the then Chancellor, Nigel Lawson, decided to exempt from tax completely the “overnight expenses allowances” of MPs. Overnight expense allowance is defined as “an allowance expressed to be in respect of additional expenses necessarily incurred by the Member in staying overnight away from the Member’s only or main residence, for the purpose of performing parliamentary duties (a) in the London area or (b) in the Member’s constituency” (s 292, ITEPA 2003).

There are some interesting points here. The first is “necessarily incurred”. That is a well interpreted phrase in tax law. It means an expense that would have to be incurred by each and every holder of the office, even one who lives next door to the Houses of Parliament. The second is “overnight expense”. This does not have its normal day-to-day meaning. It has been defined by parliament to mean “rent or mortgage interest, hotel expenses, utilities and communications charges, furnishings, maintenance, service agreements, cleaning and insurance and subsistence”. The third is “for the purpose of performing parliamentary duties”. In 1984 parliament sat from 12.00 until it finished business, often late into the night when transport home was not available. However Tony Blair changed that. It now seems normal to sit from 11.30am to around 5.00 or 6.00pm. Accordingly it is hard to see how it can any longer be “necessary” for an MP to stay in London overnight for the purpose of performing parliamentary duties.

I live in Brent North, about 12 miles from Westminster, or around 30 minutes by tube. The first train leaves at 5.35am and the last train back leaves Westminster at 00.31. Accordingly I cannot see any possible way that my MP can “necessarily” need to stay in London overnight to perform his parliamentary duties. Like me, most of the residents of Brent North work in London. We have no difficulty in commuting back and forth each day. Yet in 2007/08 my MP claimed overnight expense allowances of £15,079 (roughly 65% of the maximum overnight expenses allowance of £23,083). If you are wondering what your MP got you can find out at www.parliament.uk/documents/upload/HoCallowances07/08.pdf.

An MP also gets a travel allowance. In 2007/08 mine got £4,501 (£3,952 for regular travel between his home/constituency and Westminster and £549 European travel). A Transport for London annual travelcard between Brent North and Westminster, allowing travel 24/7, currently costs £1,472! (It would have cost a bit less in 2007/08). However the good news (for taxpayers) is that the travel allowance is not tax-free; only the part of it that constitutes a “business journey” is tax-free. The bad news is that it is the House of Commons Fees Office, not HMRC that decides what is the cost of business journeys, and last Friday’s Times noted that “last year the man in charge of checking MP’s expenses declared that he had virtually no ability to scrutinise their claims beyond a “common sense” test”.

An MP of course has duties to perform in two places, his constituency and Westminster. That is different from most people who may occasionally carry out duties in two places but do not regularly do so. But the MP’s situation is not unique. A manager in commerce can be responsible for, say, his company’s factory in Manchester and also have regular duties at the company’s head office in London. He is in an identical position to an MP. So how does his tax position compare with an MP’s?

The tax rules on travel and subsistence were thoroughly overhauled by Gordon Brown in 2003. In other words they are rules imposed on the rest of us (but not themselves) by the will of most of the current MPs. So how do they reflect this “two places of work” problem that applies to MPs? What do they allow the non-MP with two places of work to claim against tax in relation to his overnight stay in Manchester (if he lives in London) or in London (if he lives in Manchester)? The answer is, not a penny; nothing at all. What about the travel from Manchester to London? Again, nothing at all – unless the manager pops into the Manchester factory first, in which case the travel becomes tax deductible. Fair? Or hypocritical for MPs to vote themselves huge tax-free allowances but to deny any tax relief whatsoever to the ordinary man in the street in the same position as an MP? You judge! The justification for the non-MP’s tax treatment is that phrase “necessarily incurred” that I mentioned earlier. Every person who takes the job knows that it carries duties in both London and Manchester. Accordingly the travelling costs are not an expense of carrying out the duties; they are an expense incurred to put the manager in a position to carry out his duties and as such are not tax deductible. Are MPs not expected to realise when they take on their job that it has duties in both places, or do they know full well but choose to give themselves privileges that they deny to others? You decide!

Robert Maas

2009-05-11T03:19:00.000-07:00

BLOG 64

IT MAY BE RIGHT BUT IS IT FAIR?

I want to return to what is becoming a recurrent theme of mine, namely how do Ministers have the nerve to complain that people who pay the tax prescribed by the tax system (rather than the tax that it would have prescribed had Ministers been bothered both to ensure that the legislation reflected their intention and been prepared to allow Parliament sufficient time to consider whether or not it did so) are being unfair when the tax system itself contains so many unfairnesses?

My thoughts have been prompted by reading the judgement of Mr Justice Warren in HMRC v Mobilx Ltd. HMRC suspected Mobilx of either being involved in a tax fraud or, more likely, not investigating their supplier and customer (and its supplier and customer and so on) so as to ensure that they were not an innocent scapegoat caught up in a tax fraud. Mobilx submitted its VAT return for the month to 30 April 2006 showing a VAT repayment due to it of £1.8m. It submitted its return for the month to 31 May 2006 showing a repayment due to it of £3.13m. The repayment never appeared in its bank account. HMRC explained that they were carrying out enquiries and the repayment would “continue to be withheld until our enquiries are complete”.

Obviously most businesses cannot afford to be £5m out of pocket for very long before they go bust! There is a perception that that is what HMRC actually want. “If we can’t prove people are crooks, why not sit on their money until they go bust because it is unlikely that a liquidator will sue us?” OK, that may be a jaundiced view. But, in the context of HMRC telling us time and time again that they want to minimise burdens on business, what other realistic views are there?

Mobilx Ltd did not wish to go bust! Accordingly it asked its accountants to lodge an appeal to the VAT and Duties Tribunal against HMRC’s refusal to repay it the money due. HMRC said, “We haven’t refused to repay you; we have merely refused to decide whether or not to repay you”. The tribunal decided to hear the appeal. Before it could do so HMRC rushed to the High Court and said, or I suspect words to this effect, “It’s ridiculous to think that Parliament believes that taxpayers ought to have some sort of general right to oppose the State. Parliament is very careful to limit the rights of the ordinary citizen. In the case of VAT it has only given the citizen a right to appeal against a decision of HMRC. If we are careful to simply delay indefinitely making a decision there is nothing that the citizen can do about it”.

Sadly, I have no doubt that they are right. Both Magna Carta and the Bill of Rights protect the rights of Parliament, not the rights of the citizen. They were both based on the theory that Parliament represents the citizens. But Parliament today does not really regard itself as representing anyone. Its role seems to be to rubberstamp what the government wants to do. That does not include giving lots of rights to citizens. Citizens’ rights are a nuisance to government and as such clearly need to be curtailed.

So Mobilx Ltd was fighting a hopeless case because it had no right to stop the State (in the guise of HMRC) forcing it into liquidation. But that is not what caught my eye. This was that Warren J complained, when the case came before him, that “Since my decision on this case may be of some significance for HMRC in a number of cases, it is unfortunate from my perspective that Mobilx did not appear to argue that Mr Johnson [i.e. the VAT Tribunal] was correct”.

Mobilx in fact wrote a very polite letter to the court explaining that between the date of the VAT tribunal decision and the date of the court hearing, HMRC had decided not to refund their £5m. They had appealed against this decision. However, being £5m short in their cash flow, they had no money to instruct lawyers to appear before Mr Justice Warren to argue that they had an entitlement to appeal even when HMRC took great care to avoid making a decision, particularly as that was now irrelevant to them as HMRC had at last done so.

Personally, I think it “unfortunate from my perspective” that Mr Justice Warren decided to consider the appeal because the issue was “of some significance to HMRC”, even though he felt that he would have liked to hear arguments from someone other than HMRC. Surely he could have simply said that in the absence of any arguments from Mobilx he would reverse the decision of the VAT tribunal without wishing to set a precedent as he had not been able to consider both sides of the argument? Or he could have said that there was no longer any issue to decide so he could not even consider the case. Or he could have appointed an amicus curie to oppose HMRC.

Personally I think it outrageous that he should have expected Mobilx to spend money on legal representation for a wholly theoretical issue when it was obvious that HMRC’s strategy appeared to be to force Mobilx into liquidation and hope that the liquidator would not think it an appropriate use of whatever funds were available to him to challenge HMRC.

I also think that his decision to decide the case, apparently on the basis that it was “of some significance to HMRC”, when he believed that he was handicapped in doing so because he could hear no opposing arguments, gives the impression that he thinks that a role of the court is to comply with the bidding of HMRC.

In the UK’s (unwritten) constitution the courts are supposed to be independent of the executive (of which HMRC is a part). In judging independence perception is everything. What saddens me most of all is that I think that in this case Mr Justice Warren has seriously undermined the perception that the courts are independent from the State.

Robert Maas

2009-05-06T07:59:00.000-07:00

BLOG 63

BUDGET 2009

What an odd Budget Mr Darling delivered last week. The Times first leader on Saturday commented, “It is considered a golden rule in politics that Budgets that look good on the day, start to look poor by the weekend and vice versa. This week’s Budget has broken the rule. It didn’t look very good on the day. Now it looks worse”.

For the first time ever I fell asleep during the Budget speech and had to download the text from the internet. It was a waste of paper. Anyone who is interested in my thoughts on the actual measures can find them in Blackstone Franks’ Budget booklet (go to blackstonefranks.com). My purpose today is to try to fathom out what it was about.

I think that Mr Darling was trying to say, “The country’s finances are in such a mess that there’s not much I can do other than slash government expenditure. I know that’s the right thing to do but we’ve got a general election coming up within the next year and surely no one would expect me to put the interests of the country before those of the Labour party. Cutting expenditure means putting some voters out of work, so although it’s the right thing to do economically it would damage the Labour party, so I’ll just flag it up as an aspiration for a future government and let the mess grow into an even bigger one until after the election. My other big idea is to abandon New Labour – which was Tony Blair’s idea not mine and Gordon’s – and resurrect the old Labour social divisiveness. So, let’s tax the rich! That will bring back old Labour votes”.

Janice Turner, also writing in Saturday’s Times about taxing the rich, told us, “Let the rich, so stung and outraged by this week’s Budget flee [to Hong Kong]”. She explains that tax havens are nasty places to live. For example, “Empty hearted Monte Carlo, with eerie coraly-coloured skyscrapers everywhere blocking out every inch of the lovely bay and the sunlight with it … Or Switzerland … No matter that no one ever had a wild night out in Zurich, that the Swiss – experts say – are cold, xenophobic and insular even to fellow white Europeans … A country that cherishes money more than life itself: the rich and their cash could be very happy there”. Odd. I went to Monte Carlo last year and thought it a beautiful city. I haven’t been to Zurich but I have been to Geneva which I thought pretty, clean and made for walking. All the Swiss that I talked to were very friendly. It’s sad that Janice seems someone to tour the dingy bits of cities that the rest of us manage to miss.

Janice ends her article very old Labour, “If people now revile the rich – and the Times poll yesterday suggests that 57 per cent regard the tax hike as fair – it is because so many have spent a decade being loathsome … How dare the rich complain … They owe it to the country that made them rich, the society they love living in precisely because it is concerned with more than money. Otherwise – to the vaults of Zurich, the chilly units of Hong Kong – let them go”.

On the letters page Mr Watson of Cambridgeshire asks, “What is it that top earners have done for this country that is so marvellous? … If they all emigrated, maybe we would be left with a sensible and pragmatic bunch”.

Well Mr Watson, bearing in mind that Mr Darling’s definition of rich is anyone earning more than £150,000, which the Times told me a few weeks back includes headmasters of major comprehensive schools, the answer to your question is clearly, “A great deal”. Headmasters can readily find jobs in the USA. So can “rich” hospital consultants. That would cause huge problems for the NHS. The “rich” run our major companies which provide employment for many of us. “Rich” inventors create new businesses and products that make our life easier. The “rich” Premier League footballers provide entertainment for about half a million of us every week – and on the basis of the huge sums that Sky Sports was prepared to pay for the TV rights, I suspect many millions more at home. The citizenry seem happy to pay to watch “rich” singers and other entertainers. The UK would be pretty boring if we drive them all overseas.

Writing in the Guardian Anne Redston, a leading tax professional, describes the Budget as “radical” because it brings a new approach to tax avoidance and evasion. I’m not clear what she means. Although the Budget contains a lot of anti-avoidance provisions, most of these seem to be correcting badly drawn provisions in earlier years. Many of us think that the new approach to tax evasion – publicly naming and shaming the culprits – could prove counterproductive and deter people from “coming clean”. There’s not much radical about that!

Robert Maas

2009-04-15T02:54:00.000-07:00

BLOG 62

TAXPAYER PENALISED FOR HMRC INEFFICIENCY?

As they tilt the balance in the tax system further and further towards maximising tax yield and away from rights for taxpayers, the government often claim that the tax system needs to be fair as between taxpayers.

It is unlikely that anyone will disagree with that objective, although many would disagree both that the UK tax system is apt to achieve it and that the government’s concept of fairness coincides with most people’s perception of what that word means.

I am prompted to this thought by the Special Commissioners decision in HMRC v Wilson (Sp C 724).

Mr Wilson sent HMRC his tax return for 2004/05. It appears that he also provided HMRC with some additional information in the space provided on the return to do so. The return showed a CGT loss of £2million. HMRC, presumably, considered the return and having done so decided not to open an enquiry.

So far so good. Mr Wilson did all that he was required to do by the law. The law provides that when HMRC receive a timely-filed tax return they have a period of between one and two years (depending on the date of filing) in which to enquire into it. I suspect that, faced with a tax return showing a £2million loss, most people would either have enquired into the return or would have looked at the additional information provided with the return and been satisfied that the loss was properly allowable. After all one would imagine that the reason why the system requires losses to be declared and enquired into when they are suffered, not at a subsequent time when the taxpayer seeks to utilise them, is that at that stage the necessary information should be readily available, albeit that this is potentially unfair to taxpayers who suffer such a large loss that at that stage they cannot finance the cost of engaging professional help to quantify the loss.

It appears that about a year after the enquiry window for Mr Wilson’s 2004/05 tax return closed HMRC decided to look into it. I believe that it is HMRC’s policy to destroy taxpayer files after six years. Clearly they ought not to have destroyed Mr Wilson’s tax return a mere two years after he submitted it. Indeed, I doubt that they did. They seem to have simply mislaid it.

Having either ignored the statutory enquiry window or the HMRC Officer who had reviewed the return having been satisfied, HMRC decided to look into the loss with a view to considering whether they should make a “discovery”. They asked Mr Wilson for a copy of his return. He refused. That is obviously unhelpful, but I suspect that Mr Wilson is not alone in believing that he should not have to provide the same information twice to HMRC, particularly if he thought that the reason they wanted it again was because they wanted to enquire into a matter that they had either already been satisfied about or had decided not to enquire into during the period in which parliament had decided that enquiries should be carried out.

HMRC issued a TMA 1970, s 20 notice for the copy of the return and, when this was not complied with, imposed a £300 penalty on Mr Wilson. He appealed against this.

When the appeal was heard by the Special Commissioners, HMRC explained that they had entered onto their computer the figures on the return “but the additional comments box was not copied”. I suspect that it was not even read, but HMRC do not appear to have admitted that! Surely that is not Mr Wilson’s fault! Why should HMRC be able to specifically ask for information, ignore it when it is provided, and then come along two or three years later and ask for it to be provided again? There is no statutory requirement to keep a copy of one’s tax return. Surely a taxpayer ought to be entitled to assume that once he sends something to HMRC they will deal with it sensibly!

Apparently not. The Special Commissioner agreed with HMRC that the return contains “information relevant to … any tax liability to which [the defendant] is or may be subject”. Accordingly it can be required to be provided again. The legislation does not impose any obligations on HMRC. Apparently if they were to mischievously decide to destroy your tax return and then ask you to submit it again the law will back them up. I am not of course suggesting that they are likely to do this. I am however suggesting that in a fair system a taxpayer should be entitled only to have to provide information once, and should not be expected to act as an adjunct to HMRC’s filing systems and retain information just in case they decide to ignore it when it is submitted to them, on the basis that the taxpayer is obliged to provide it for a second time should they later change their minds.

Incidentally, it never fails to amaze me how impervious HMRC seem to embarrassment. They seem to cheerfully tell the Commissioners or the courts time and time again that they have lost something or didn’t read it properly or dealt with it inefficiently in some other way. I suppose that in a way it is commendable that they strive to obtain the last penny of tax, even if doing so requires them to highlight to the world their own shortcomings. Or perhaps it is simply that camaraderie within HMRC is such that Officer B is gleefully willing to highlight Officer A’s shortcomings!

ROBERT MAAS

2009-04-03T06:08:00.001-07:00

BLOG 61

A COUPLE OF ODD DECISIONS

1 April 2009 marks the demise of the Special Commissioners – although happily their Members have been reincarnated as judges of the First-tier Tribunal, which replaces both the General and Special Commissioners and the VAT and Duties Tribunal.

I thought that I would mark their passing by commenting on two recent Special Commissioners’ decisions that caught my eye – and both of which worry me!

The first is ECL Solutions Ltd v HMRC (Sp C 721). This was an application for a closure notice on a corporation tax enquiry. HMRC said that the enquiry depended on the outcome of outstanding appeals against assessments to income tax in relation to purported annual payments by the company. HMRC apparently told the Special Commissioner (or possibly he misunderstood them) that if the payments were annual payments they were not deductible for corporation tax although relief would potentially be available under ICTA 1988, s 338B (charges on income). An annual payment is not a deduction in computing trading profits but it is deductible in calculating profits chargeable to corporation tax, so that statement appears to be incorrect.

Be that as it may, HMRC’s reason for opposing the issue of a closure notice was that “the corporation tax position thus depended on the appeal as to the licence payments since the corporation tax assessments would have to be amended if the company’s appeal against the assessment fails … If a closure notice was issued the Revenue would make a conditional assessment”. The Commissioner held that these were reasonable grounds for not giving a closure notice while the income tax appeals remain to be determined.

This seems to me to completely undermine the rationale behind closure notice applications. The purpose of giving a taxpayer a right to ask for a closure notice is surely so that HMRC are not able to undermine the concept of finality, which is fundamental to the system of self-assessment, by refusing to make an appealable decision. If HMRC are required to issue a closure notice, they must state in it their conclusions from their enquiry. Clearly if they are forced to issue a closure notice such conclusions are likely to give the benefit of any doubt to HMRC, but that is a risk that a taxpayer takes in deciding to ask for a closure notice.

In the past the Special Commissioners have taken the view that if HMRC are in a position to reach a conclusion that will enable them to amend the self-assessment then they ought to be required to close their enquiry. In the case of ECL Solutions Ltd, HMRC freely admitted that they were in a position to make a conditional assessment, i.e. that they could quantify the amendment that they would make if they win on the income tax position. The rules for deductibility of charges on income are broadly similar to those for the deduction of trading expenses. Accordingly it is difficult to see that there is anything different for HMRC to enquire into whether or not they win on the income tax position.

In those circumstances ECL Solutions Ltd ought to have been entitled to its closure notice. Indeed it appears that the refusal seriously disadvantages both it and the public interest. It would surely be in the public interest for the income tax and corporation tax appeals to be heard together as they both relate to the same facts. Instead HMRC now get two bites of the cherry. If they lose the income tax appeals they are in a position to nevertheless amend the company’s self-assessment to disallow the payments, and then relitigate the same issue from a different angle.

The second decision is Morgan v HMRC (Sp C 722). This was a dispute over whether Mrs Morgan elected in 1967 to pay N.I. contributions at the married woman’s reduced rate. It was of course for her to prove that she had not done so and it is notoriously difficult to prove a negative, particularly one based on events that happened 40 years ago.

Accordingly my worry is not that Mrs Morgan lost. It is that HMRC explained to the Commissioners that although an election such as this will last for perhaps 40 years, it is their policy to destroy such elections after six years. I find this incredible. I can understand destroying correspondence after six years; many businesses do. But to destroy a formal document that not only governs a person’s tax position for the next 40 years but also seriously limits her pension, and accordingly is unlikely to be challenged until she retires and discovers that her expected pension entitlement does not exist, seems to me to be utterly unreasonable.

HMRC do not destroy everything. Indeed they kept their internal records of Mrs Morgan’s actual contributions and also their internal note recording that she had made the election – but obviously without the election itself could not say whether the officer who made the note had done it correctly or, perhaps, should have put it on the file of a different Mrs Morgan.

What is the HMRC policy on record retention? I assume it is not, “keep the secondary note and destroy the document so that the taxpayer cannot prove we were wrong and we can thus bury our mistakes”. Or even, “We know that we are always right and our staff are superhumans who never make mistakes like ordinary mortals, so there is no point in keeping important documents when we have our second-record that we received it (but not what is said because we are clever enough to be able to guess that in 40 years time)”. However that may well be the effect of the policy.

And what other important documents that clearly have a shelf life of well over six years do HMRC destroy? I think we should be told!

ROBERT MAAS

2009-03-25T05:34:00.000-07:00

BLOG 60

WE’RE HMRC: DON’T EXPECT US TO ACT REASONABLY

The new system of penalties that applies from 1 April 2009 differentiates between prompted and unprompted disclosure. An unprompted disclosure attracts half of the maximum penalty of a prompted one. This is to encourage taxpayers to notify HMRC promptly if they make a mistake. A disclosure is “unprompted” if it is made at a time when the person making it has no reason to believe that HMRC have discovered or are about to discover the error.

The legislation does not specify how to make an unprompted disclosure. That may sound odd. Surely you only need to write a letter to HMRC. Yes, of course! But which bit of HMRC? Ten years ago I knew who was dealing with a client’s tax affairs. Nowadays I rarely do. Responsibility is split between different offices for different aspects of his affairs and one aspect can be dealt with by several different people in the same office.

Surely, you will be thinking, HMRC is HMRC. If you send the letter to the wrong person it will be forwarded to the right one. Well that is what I thought until I read the decision of the VAT and Duties tribunal in Richard Sadler trading as Warnfield Group.

Mr Sadler made an error on his VAT return. When his accountant came to do Mr Sadler’s accounts he picked up the error and advised Mr Sadler to notify it to HMRC. Mr Sadler did so. Such an error can be notified in one of two ways. You can simply write a letter to HMRC or you can fill in HMRC form 642. Mr Sadler took the latter option. He filled in the form and sent it to HMRC with his next VAT return.

Oh no, said HMRC. The legislation enables us to make regulations (an awful lot of the time actually, much more of the VAT law has been made by HMRC than by parliament) and we provided in the VAT Regulations 1995 that a person must correct an error “in such manner and within such time as the Commissioners [of HMRC] may require”. We say on the form 652, “You can use this form to disclose directly to your local VAT office (not VAT Central Unit) the details of any errors”. Mr Sadler disobeyed us! Admittedly he sent it to us but, as far as we are concerned, sending it to us at our VAT Central Unit instead of to us at his local VAT office is not notification of the error at all. Mr Sadler is not entitled to make the ridiculous assumption that we are here to help taxpayers and, like other organisations, will redirect a form to the correct place in our internal post. Parliament has not required us to be reasonable so we won’t be. (I expect that they did not use those precise words but that seems to be the gist of the reason why they pursued Mr Sadler before the VAT and Duties tribunal for a penalty of £11,044 that would not have had to be paid had he sent the form 652 to his local VAT office).

I doubt that many people actually know where their local VAT office is. They deal only with the VAT Central Unit. The address of the local office is on your VAT certificate, but HMRC seem always to be closing down or amalgamating offices, so even if you can find your VAT certificate (which they sent you when you registered for VAT, perhaps 35 years ago) the address on it may not be right.

I also wonder what would have happened if Mr Sadler had not filled in the form but simply written a letter to HMRC. I suspect they would have said that the VAT Regulations flag up “in such manner as … as the Commissioners may require” and that it was incumbent on Mr Sadler to read the Regulations and find out what they required.

I never fail to be puzzled at how often HMRC seem to say that they are anxious to have a good relationship with taxpayers and to help taxpayers to get things right and yet when it comes to the crunch, they seem gleefully to pounce on mistakes made by people like Mr Sadler and insist on strictly enforcing the rules that they have created.

ROBERT MAAS

2009-03-24T08:51:00.000-07:00

BLOG 59

WHAT’S THE DIFFERENCE?

I find the approach of both the Press and Gordon Brown to the Tony McNulty affair intriguing. What he has done in claiming £60,000 of tax-free expenses from the taxpayer in relation to his (or perhaps his parents’) house in Harrow is precisely the same behaviour as that adopted by a tax avoider. He has used a rule introduced by parliament in a situation that no reasonable person could have thought that the rule was intended to cover, in order to extract money from the taxpaying public.

As I understand it, the parliamentary relief for second homes was introduced in the early 1970s to recognise that where an MP had a constituency outside London it was impractical for him to live in his constituency and at the same time perform his parliamentary duties. At that time parliament frequently sat into the early hours of the morning, by which time most public transport had ceased.

Transport for London’s Journey Planner tells me that it takes 30 minutes to travel from Westminster Station to Harrow-on-the-Hill Station. Furthermore the last train (which, to be fair, takes two extra minutes) leaves Westminster at 31 minutes past midnight, well after parliament has ceased sitting. On the rare occasion where there are late night sittings even the night buses take only a little over an hour. Virtually everyone who works in London has an hour’s commute to get to work and to get home again.

Clearly the rule on second homes was not intended to cover a situation where an MP can readily travel back and forward to his home without impacting on his need to service both his constituency and parliament. Mr McNulty does not need to live in upmarket Hammersmith to fulfil either his parliamentary or his constituency work. He lives there out of choice. Parliament could hardly have intended that the taxpayer should be expected to provide a second home for an MP whose first home is within ready travelling distance of Westminster.

Exploiting the letter of the law contrary to its clear intention is what most of us would understand by avoidance, whether it is a tax law or any other sort of law.

I do not know what Mr McNulty’s views on tax avoidance might be. I assume that he has no moral objections to others adopting the same behaviour towards the law as he does. The English abhor hypocricy in their politicians. My own attitude to tax avoidance is that I have no right to seek to impose my moral principles on those who believe that compliance with the letter of the law is sufficient without needing to go behind the letter of the law and limit one’s use of it to the purpose for which it was intended. Equally I have no criticism of Mr McNulty adopting the same view.

However Gordon Brown has frequently made clear that he believes that sticking to the letter of the law without regard to the intention for which it was enacted is both immoral and unfair to the general body of taxpayers. In these circumstances how can he endorse such behaviour by awarding the perpetrator with a post in his government? “Do as I say, not as I do” is not an attractive proposition. It is blatant hypocricy!

And how about the Press? A leader in today’s Times (24 March) homes in on the efficacy of the parliamentary rules and seeks to make no moral judgement, yet on a later page the paper gleefully later berates Lord Myers for having been the Chairman of an offshore fund, describing the mere existence of that job as a “blow to the peer’s credibility”. It is hard to understand how simply being involved with an offshore fund – which I suspect has no particular tax benefits to UK resident and domiciled individuals – is a blow to a person’s credibility, whereas exploiting a badly drafted parliamentary rule to extract a substantial unintended benefit from the taxpayer does not even attract opprobrium but merely a call for the rule to be reviewed?

ROBERT MAAS

2009-02-04T03:46:00.000-08:00

BLOG 58

A VICTORY FOR COMMONSENSE

Mr Burke started in business in 1989. In April 2002 the government introduced the VAT flat rate scheme. On 18 October 2004 he had a VAT visit. The visiting officer, Ms Jones, did not advise Mr Burke of the flat rate scheme. In December 2007 Mr Burke found out about the scheme. He had several telephone conversations with HMRC’s National Contact Centre and applied to join the scheme. He asked for his application to be backdated to the start of the scheme. He felt that Ms Jones should have told him about the scheme when she visited in 2004.

HMRC refused to backdate his application. They said that the scheme had been extensively advertised and it was Mr Burke’s “responsibility” to make himself aware of the information that might be relevant to his business.

Be that as it may, the relevant law (Reg 55B of the VAT regulations) states that HMRC can allow someone to use the scheme “with effect from (a) the beginning of his next prescribed accounting period … or (b) such earlier or later date as may be agreed between him and the Commissioners”.

I am under the impression that when parliament decides to give HMRC a power they are not simply trying to increase the size of the legislation; they expect them to use that power, at least occasionally.

The Customs Notice 733 says, “When considering [a retrospective] start date we will consider all the facts including the timing of your application and your compliance record [Mr Burke’s compliance record was exemplary, by the way]. We will not normally allow you to go back and use the scheme for periods for which you have already calculated your VAT”. But their internal guidance tells their staff, “The policy is to refuse retrospection where the business has already calculated its VAT using a different method. There must be exceptional circumstances where the policy previously described should be set aside”.

There’s nothing like honesty. Let’s tell the public that we are helpful and reasonable people, but when it comes to the crunch always say “No”! And how about that exceptional circumstance. HMRC’s counsel told the tribunal that as far as he was aware none at all had ever arisen in the 8¾ years since 1 April 2002. So “not normally” apparently means “never” in HMRC language, not “only occasionally” as I suspect most people outside HMRC would interpret it.

Happily the tribunal felt that, “There is a clear expectation from the VAT Guidance that the Scheme should be promoted. Paragraph 55 [of the 2004 version of] Notice 733 identifies as an exceptional circumstance where the business has been misdirected (by omission or commission) by an officer of HMRC. In our view this must include the failure by Ms Jones to alert the Appellant to the benefits of the scheme”.

It decided that HMRC had acted unreasonably and that Mr Burke’s application should be backdated by three years (bearing in mind the three-year cap). It also commented that, “We suspect that many businessmen do not read the various leaflets that are sent to them with their return”. How refreshing to come across a tribunal with knowledge of the practicalities of real life! If only HMRC could be similarly realistic. But that smacks of “crying for the moon”. My own guess is that they are likely to appeal this decision to the High Court!

Robert Maas

2009-01-28T08:50:00.000-08:00

BLOG 57

DISHONEST OR WHAT?

Imagine that you are the director of a property company. The company has £1.25m of bank loans and taking account of interest has a deficit on its balance sheet of £2.65m. The company has an option to buy a hotel, which it intends to turn into a block of flats. You register the company for VAT and opt to waive exemption. You exercise the option in March 2004 at a price of £15.5m plus VAT. You buy some adjoining land for £2m. You cannot raise the money for the development and on 1 April 2004 you sell the property for 17.7m plus VAT of £3.097m. In the quarter to 31 March 2004 you reclaim the input VAT, as the law requires you to do.

What do you do next? You know that you owe the bank £2.655m and at the end of July you will owe HMRC £3.097. If you use the input VAT recovered to pay the bank that would be a fraudulent preference. So would it be if you use it to pay HMRC.

Do you complete your VAT return and tell HMRC that you have no money to pay the amount shown as due? HMRC raise a computer-generated assessment and you pay that. How would you rate your chances of their not putting the company into liquidation?

The sensible thing is to consult an insolvency practitioner, which is what you do. On the advice of the insolvency practitioner you tell HMRC that that company cannot pay the VAT but you are expecting a profit on another development, which you hope will enable the company to do so in due course.

Would you be surprised if HMRC say that you have been dishonest, they want a 20% penalty which comes to £618,803 and that as you have been dishonest they have decided that the penalty ought to be paid by you personally?

Would you be more surprised if the VAT and Duties Tribunal were to say that, “We have accepted that at the beginning the Appellant had a genuine expectation of being able to pay the VAT out of other profits made by another associated company, this was looking doubtful by May 2004 and it is clear that this was not possible by September 2004. We have no doubt that ordinary people would regard this conduct as dishonest. It consists of deliberately keeping Customs in the dark about the amount of the liability for over seven months by the end of which it had become clear that the Company could not pay it”?
Whilst I do not of course condone what the director, Mr Conlon, did, I myself have strong doubts whether “ordinary people”, the “man on the Clapham omnibus”, would have regarded it as dishonest to keep Customs in the dark while he looked for a way to raise the money. I accept that “ordinary lawyers” probably would, but suspect that many “ordinary people” would have acted just as Mr Conlon did. After all there never was any money available to pay over the VAT and not selling the property would simply have made the company’s financial straits worse.

2009-01-12T03:32:00.000-08:00

BLOG 56

DON’T PAY INTEREST IN ADVANCE!!

A small amendment hidden away in Finance Act 2008 can have nasty repercussions for anyone who has borrowed money for an allowable purpose on which the interest is payable in advance. The provision was tucked away at the end of a Schedule headed “Avoidance involving financial arrangements”. As neither of the opposition parties even asked about it during the Finance Bill debates, it presumably has all-party support.

Here is an example of the sort of tax avoidance that your MP apparently thinks is so wicked that tax relief ought to be restricted to punish people for entering into such transactions.

Example

Jack took a mortgage of £200,000 on his house on 1 June 2008 from his friend Jill. Interest was payable quarterly in advance at 7%. Jack duly made his interest payments due of £3,500 each on 1 June, 1 September, 1 December and 1 March each year. He repaid the loan on 30 May 2010.

2008/09

The interest paid on the loan was £14,000.
Interest at 7% p.a. on the loan for the period 1 June 2008 to 5 April 2009 (309 days) is £11,852. Accordingly there is an excess of £2,148, tax relief for which is blocked by section 384(2).

2009/10

The interest paid on the loan is again £14,000.
Interest at 7% p.a. on the loan for the period 1 June 2008 to 5 April 2010 (674 days) is

The interest actually paid is £25,852
2008/09 14,000
Less excess 2,148 11,852
2009/10 14,000 25,852

Excess NIL

Tax relief is allowed on the amount of £14,000 paid in 2009/10

2010/11

The interest paid on the loan is NIL
(the last interest due was paid on 1 March 2010)
Interest at 7% on the loan for the period 1 June 2008 to
31 May 2010 (730 days) is 28,000
The interest actually paid (as above) is 25,852
Excess NIL

No tax relief is due as no interest has been paid in 2010/11.

Although Jack has paid two years interest and the loan has lasted for two years he has lost out on £2,148 of tax relief. This is because the interest due is looked at on a cumulative basis but only the interest actually paid in the tax year is brought into account, so interest paid in relation to any part of a future tax year is disallowed. If Jack delays paying Jill until 5 April the amount due on 1 March in each year he will get tax relief on his full £28,000.

This example assumes that interest at the rate ruling at 1 June 2008 is a “reasonable commercial rate of interest” on the loan for the entire two years. There is a further limitation to the reasonable commercial rate if the rate of interest on the loan exceeds that sum. However it is unclear how that test is applied. It is arguable that a reasonable commercial mortgage rate from December 2008 is around 5% only and it may be even lower by 31 May 2010. Accordingly even if Jack’s loan interest were paid in arrears there might still be disallowable interest because of changes in the commercial rate over the term of the loan. This may depend on how the interest rate is originally fixed. If the rate is comparable to a bank or building society mortgage for the same term at the time it is agreed there is a good argument that it is at a commercial rate throughout the term. However banks and building societies do not normally make long-term fixed rate loans, so such a loan might be regarded as a non-commercial loan and the commercial interest rate assumed by reference to a variable rate loan.

2008-08-15T05:25:00.000-07:00

BLOG 55

THE THOUGHTS OF FINANCIAL SECRETARY JANE – PART 1

I am afraid that the major tax changes in the Pre-Budget Report and the Budget have kept me too pre-occupied to nurture this blog. I am about to take my annual trip to Chicago but before I go thought I would share with readers some interesting snippets that the Financial Secretary to the Treasury, Jane Kennedy, told Parliament during the passage of the Finance Bill.

6 May

On the trade-off between environmental taxes and behaviour

“I heard the word elasticity, and the concept of Liberal Democrats bungee jumping policy is quite entertaining. The hon. Member for Taunton suggests that travelling by train is the way forward; he must know that travelling by train requires a degree of public subsidy. He has no serious proposals for how he would promote and encourage that kind of transport. He is suggesting that it will be possible to do so with a wave of the hand”.

On tax credits

“If a family’s income goes down dramatically, the flexibility of the system enables it to respond—in some cases within days, if the information is received quickly enough—to boost that family’s income. There are many families throughout Britain who will testify to the support that they receive from tax credits”.

On the 10p tax band

“We believe that it is important to help work pay, and that is what the 10p tax rate was designed for: it did what it said on the tin. It made a huge difference and was of benefit. However, things have changed. Ten years on, it was appropriate to review the system, and that review resulted in the proposal in last year’s Budget”.

On the abolition of the 10p tax band

“Nobody is more seized than us of the need to be coherent in what we introduce and make sure that it is affordable and achievable, and to introduce proposals that meet people’s expectations that those who have been badly affected will be assisted. We are working on the detail of those proposals. It would be quite wrong to make commitments that I may regret”.

On why the government did not anticipate the furore over the 10p tax band

“I accept what the hon. Member for Taunton is saying about the 10p rate. Representations were made at the time of the 2007 Budget. A number of hon. Members who participated in last week’s debate drew my attention to those representations and I had read many of them when preparing for the debate. However, he will also recall that at that time the overall package of reforms was welcomed by, among others, the Institute for Fiscal Studies, which described the simplification as broadly very welcome and broadly fiscally neutral”.

(Fiscal neutral of course means that the government collects the same amount of tax; shame it achieves this by giving to the middle classes and taking from the poor. But as Jane said, “400,000 families will be worse off by between £5 and £10 a week … but the maximum that an individual should find themselves paying per year is about £232”).

On tax credits

Mr. Hammond: “Do the … Government accept that not only ignorance about the availability of tax credits or the fear of the complexity of the application but the fear of the consequences of overpayment deters take-up? In practice, the system has created a positive deterrent for people on low incomes; they are simply too afraid of the possible consequences of getting it wrong to take up their tax credit entitlements”.
Jane Kennedy: “I accept what the hon. Gentleman says—there is the potential for that damage to happen. However, I am sufficiently concerned about the issue to raise it regularly in discussions with HMRC. It advised me that it sees no indication of any falling away in the rates of take-up, particularly among those families with children, where the proportion of take-up is largest. Nevertheless, it may well be a factor for those households without children, and that is why I am examining the structure around tax credits to see what can be done within the constraints in which we work and to ensure that those who are entitled to tax credits claim them”.

On the 10p tax rate

“The truth is that the proposals introduced last year were part of a worked-out package of measures that would clearly benefit four out of every five households in the UK, whereby they would be neither worse off nor better off. For the 5 million households, we acknowledge that more has to be done, and as we speak, we are working to that effect”.

(It is noteworthy that the Government regard being neither worse nor better off as providing a “benefit”! Not to increase taxes is apparently an act of generosity).

On savings

“We maintained the savings rate in order to continue to reward saving; we also make available vehicles to encourage others to save, including individual savings accounts and the child trust fund….Trustees are not individuals, so the rate for trusts are unchanged, and that is covered by section 11 of the Income Tax Act.”

(So savings are welcome but not if you lock them away for a rainy day in a trust).

On self-certificates

“It is not advisable for a bank or building society to accept a taxpayer’s self-certification that they are in a particular band. That would put a greater administrative burden on banks and building societies”.

(Surely not? Accepting what you are told creates no administrative burden. Being expected to police what you are told and being held responsible if what you are told is incorrect would of course create a huge administrative burden for the banks but that is not a necessary adjunct to a system of self-certification).

On UK plc

“Certainty and the ability to make planning decisions knowing what the tax implications will be are highly prized by business. Striking a balance between the objectives of responding to global changes and providing certainty is not always easy”.

(It is unclear why global changes should inhibit the UK having a tax system that is certain. Certainty is one of the basic tenets of any good tax system).

On corporate tax

“The headline rate is important, which is why we have been taking steps to reduce the headline rate of corporate tax and why we will continue to look for ways to maintain the competitiveness of the UK economy…Competitiveness is about more than just the headline rate of corporation tax. The UK tax system has other advantages, including a generous system with R and D tax credits, but also there is no withholding tax on dividends, which is regarded as very welcome. We have one of the largest networks of tax treaties in the world, and relatively low administrative burdens. We are unusual in offering full interest deductibility”.

(I am not clear what system she is talking about. Low administrative burdens and full interest deductibility are not recognisable attributes of the UK system).

8 May

On CGT reform

“Those changes replace layers of complex rules built up over many decades with a substantially simpler capital gains tax framework….The CGT regime that we are removing [i.e. Gordon Brown’s] charged CGT at headline marginal rates of 10 per cent., 20 per cent. and 40 per cent…It also meant that, for those paying the highest rate of income tax, the effective rate on business assets came down from 40 per cent. to 10 per cent…we believe that it is reasonable to ask those people who are benefiting from capital gains of this sort, particularly where the gain is not being reinvested in the way that was intended by the taper relief, to contribute more in taxes….We are withdrawing the taper relief and indexation allowance because, as I have explained, it was effectively benefiting everybody irrespective of whether it was reinvested”.

(Actually indexation allowance was intended to compensate investors for the ravages of inflation. This seems to be a typical Gordon Brown tax measure; don’t tie a tax charge to the behavioural effect you want to achieve – in this case don’t even explain what you want to achieve – and then withdraw the relief as it doesn’t achieve the hoped for behavioural change).

On transitional provisions

“The announcement in the pre-Budget report, with implementation in April this year, was intended to allow people time. It could be argued that that is not much time, particularly as we then introduced further changes, and the entrepreneurs relief in January…If the primary purpose of a reform is simplification, introducing a transitional period reintroduces complexity to the process”.

(That’s an interesting concept. Achieving fairness and meeting people’s legitimate expectations cannot justify the short-term complexity of transitional rules).

Robert Maas

2008-02-21T09:13:00.000-08:00

BLOG 54

MORE ON NON-DOMS

Andrew Ellson in Saturday’s “Times” tells us that “while the Chancellor was right to compromise on his plans for additional disclosure and retrospection, there should be no more concessions to the non-doms … The simple fact is that the tax status that they enjoy is both unneccesarily (sic) generous and unfair to resident taxpayers. Labour’s £30,000 a year levy is not unreasonable”.

Irwin Stelzer in its sister paper the “Sunday Times” takes a somewhat different view. He poses the question “Is it worth risking the effect on London’s reputation as a financial centre and the loss of thousands of highly productive, high-spending foreigners in order to add less than one-tenth of 1% to the Treasury’s coffers”. The Sunday Times also tells us that according to a You Gov poll of nearly 2,500 voters, 60% think that Mr Darling should have toughened up his proposals to tax non-doms more rather than relax the rules.

No one knows how many non-doms there are. Many have little or no UK income and are not required to complete tax returns. Some complete the tax returns that they are sent but do not realise that they need to download a Residence page from the internet. They simply complete what they are sent omitting any reference to their unremitted overseas income. HMRC have told the Chancellor that they are aware of 22,000 non-doms of which they expect 3,000 to leave the UK. Irwin Stelzer reckons there are 100,000 which suggests that around 13,600 will leave the UK. I think there are 10 million. The last census indicated that 1 in 5 of us was not born in the UK. Most of those are likely to be non-dom. So are many who were born in the UK but whose parents were not. So I think that 10 million is probably a very conservative estimate. Of course a lot of that 10 million will not have any overseas income and the overseas income of many of the rest – such as your friendly Polish plumber – could well be below the £1,000 de minimis limit.

But that is still likely to leave hundreds of thousands, if not millions, affected by the change. Of course they will be affected in a different way to the ultra-rich. The “George Osborne/Alistair Darling Stuff the Non-Doms Plan” allows the ultra-rich to purchase the right to keep the current remittance basis (although I believe that George would give them the right to keep the current basis whereas Alistair is much tougher and is selling only the right to use a far more restrictive basis). Accordingly most of the extra tax will not come from the ultra-rich. It will come from those who cannot afford to buy privilege. It will come from the Irish nurse, the Polish plumber, the Indian doctor, the Bangladeshi restaurateur, the overseas students being supported here by their parents, and lots of other working class and middle class people. These are the people that George and Alistair and 60% of the population want to stuff. (Incidentally, assuming that non-doms don’t really want to penalise themselves, that 60% could well be 72% of the 80% of the population who were born here).

So what exactly do George and Alistair and Andrew Ellson want? It appears that:

1. They want to require overseas students with unremitted overseas income of between £1,000 and £5,435 (the 2008/09 personal allowance) and no UK income to complete tax returns even though they will have no tax to pay.

2. They want Asian and African people with a concept of family money (and anyone else who comes to the UK and leaves relatives back home to collect and keep their share of income from jointly owned property) to insist on knowing what their share of such income is so that they can pay UK tax on it. Presumably Andrew Ellson is indifferent to the damage that will cause to such family relations as he appears to think it only right that foreigners should be taxed on income that is nominally theirs but is not available to enhance their standard of living in the UK. (This is of course the origin of the tax rules on non-doms; that it is unreasonable to expect someone who is temporarily in the UK to pay tax on income in his home country that is left overseas to either support his family there, or to fund his eventual retirement there when he returns home, and is thus not available for him to spend in the UK).

3. They think it fair and reasonable that ultra rich foreigners should be able to buy tax privileges that their less well off compatriots cannot afford and which are not on offer to those ultra-rich who are domiciled here.

4. Alistair and Andrew (I don’t know about George) want those who either pay the £30,000 or are in their first seven years of residence here to cope with a tax system on remittances that, with the best will in the world, it is virtually impossible to get right.

5. They (again, I’m not sure about George) want executives of international companies who are temporarily posted to the UK by their companies to choose between paying UK tax on their investment income left in their home country and paying more tax on their UK salaries than their UK domiciled colleagues by being denied their personal allowances – including, incidentally, the special £1,800 blind persons allowance, which is intended to help towards the cost of coping with their disability.

Why do I say that the new system of remittances is virtually impossible to get right? Well what Alistair and Andrew want to do is to treat income as remitted if “property is brought to the UK, or is … used here, by or for the benefit of a relevant person [and] the property … is derived from the [overseas] income or chargeable gains … directly or indirectly”. A relevant person is the individual or a connected person. A connected person includes even the spouse of a relative of the taxpayer’s spouse. So here’s some examples of what is taxable on Mr Non-Dom who has come to the UK from Hicksville, Iowa to open a UK branch for the International Conglomerate for which he works. In all cases Mr Non-Dom has a bank account in Hicksville into which he pays his US income and from which the expenditure in these examples is paid.

a) Mr Non-Dom visits home. While there he draws spending money from his US bank account. He has a friendly bet with his wife’s sister’s husband and the husband wins. Mr Hicksville pays up his $50 loss which the brother-in-law uses to buy a new shirt as a memory of beating Mr Non-Dom. Two years later the brother-in-law visits the UK and packs the shirt in his luggage. This triggers a UK tax charge on Mr Non-Dom on the cost of the shirt because it is brought into the UK by his brother-in-law (a relevant person) it is used by his brother-in-law (a relevant person) and the cost was met indirectly out of Mr Non-Dom’s US income. Mr Non-Dom may well not even know that his brother-in-law has brought the shirt. How is he going to get his tax return right?

b) Mr Non-Dom buys his aged mother a suitcase for her birthday. His mother has never left Hicksville and has no intention of doing so. Five years later Mr Non-Dom’s sister’s husband comes on holiday to the UK. He has never been abroad before and does not own a suitcase so Mr Non-Dom’s mother lends him hers. He has never met Mr Non-Dom and does not even know of his existence. Yet his visit to the UK triggers a UK tax charge n Mr Non-Dom on the value of the suitcase.

c) Mr Non-Dom visits the US and on his way back buys a bag of sweets at Kennedy Airport. He eats some in the airport, some on the plane, some while he is waiting to go through Customs at Heathrow and the rest on his way home. I hope he counted the sweets. The cost of those consumed at Kennedy Airport and on the plane is not a remittance (although the position on the one he was chewing when the plane came into UK airspace is unclear) but the cost of those he eat at Heathrow and on the tube going home is.

Personally I think this is wholly farcical. I do not think it reasonable in a civilised society either to require HMRC to snoop into the minutiae of peoples private lives or to impose obligations on them that are impossible to meet. If Mr Ellson really considers this a “generous” treatment of overseas visitors I suggest that he devotes a column in the Times to explaining how he expects them to comply.

Oh, and actually Mr Ellson, I am not sure that Mr Darling has compromised on anything. What has happened is that the Acting Chairman of HMRC has clarified “what the Government’s intention has always been” in four areas. It is welcome and helpful clarification and it highlights a few areas where the published draft clauses are defective. What he has said is:

a) As long as those using the remittance basis declare their remittances and pay tax on them “they will not be required to disclose information on the source of the remittances”. Personally I agree that this is over-generous. In my experience when HMRC enquire into the tax return of a non-dom they invariably focus on remittances. I find it almost unbelievable that from 6 April they will apparently no longer do so but will simply accept what the taxpayer tells them. This immunity from tax return enquiries (and whatever other interventions are planned) could well be worth £30,000 on its own, as the costs of an enquiry can be horrific for the rich. I am also puzzled that Mr Darling talked only about being able to retain the remittance basis, and did not even mention this other very valuable benefit of paying the £30,000. For those here under 7 years the immunity from enquiries may be a fair bargain for the loss of personal allowances.

b) There will be no retrospection in the treatment of trusts and the tax charge will not apply to gains accrued or realised prior to the changes coming into effect. Unfortunately it is anyone’s guess what this means. It appears to require all of the trust assets to be deemed to be disposed of and reacquired at market value at 6 April 2008.

c) More brought into the UK to pay the £30,000 charge will not itself be taxable. That is good news.

d) It will continue to be possible to bring works of art into the UK for public display without incurring a tax charge. That somewhat misses the point. This is whether rich non-doms will wish to make their art available to the UK public in circumstances where they feel that they are being unfairly treated by the UK tax system – which many do, even though others may not share that sentiment. Furthermore the success of the London art market relies not on non-doms bringing their paintings here for public exhibition but on their (or rather their trustees) bringing them here to sell, and that in future will create a taxable remittance.

e) HMRC are discussing with the US authorities how the £30,000 charge can become creditable against US tax. It is hard to envisage the IRS being enthusiastic about that. What the UK is in effect saying to them is, “Please will you agree that for every wealthy US citizen living in the UK you will transfer £30,000 from the US Treasury’s coffers to the UK’s”. Why on earth should they agree to that? Furthermore as tax credits are limited to the overseas tax on the same income it is hard to see how a charge that is unrelated to any source of taxable income in the UK can ever become creditable in the US.

2008-02-15T05:56:00.000-08:00

IT’S PROBABLY FAR TOO LATE

I’ve been reading a lot in the press over the weekend about the likely effect of the George Osborne/Alistair Darling proposals to hit non-UK domiciled taxpayers. This puzzles me. Not because the strictures and concerns are not justified. My own view is that the proposals are ill-conceived, ill-developed and strongly tinged with xenophobia. No, what puzzles me is why now? George Osborne, the chief architect of this ridiculous scheme, aired his proposal last October. If the press had condemned it then as strongly as they are doing now it is improbable that Alistair Darling would have adopted it – OK he is introducing a slight variant of it, but the main features are all George’s own work. Leaving one’s protests until February, five weeks from budget day, is highly unlikely to persuade the Chancellor to think again as he has run out of time to come up with an alternative. The deafening silence from the press on this issue since November contrasts with its loud protests over the Darling CGT changes which, being made at the appropriate time, undoubtedly induced him to think again and come up with his Entrepreneurs Relief – even if in typical political fashion this has itself been so ill considered that one of the main beneficiaries is likely to be the equity finance industry which Alistair initially portrayed as the wicked tax avoiders that the CGT changes were designed to penalise!

It is interesting to see that the belated interest of the press in non-doms does not address fairness at all. Dalya Allerge in Saturday’s Times bewails the likelihood that “many of the wealthiest individuals, who are some of the most generous philanthropists of the museum world, plan to abandon Britain”. She points out that five of the largest donors at the Tate are non-domiciles. But the fact that UK millionaires are not leading art patrons is hardly a good reason to tailor a tax system to grant special privileges to philanthropic foreigners. It would be far more effective to introduce a targeted relief for art donations.

And Dayla does not even mention the art world’s main concern, that the new rules on remittances mean that even a non-dom who remains in the UK and pays his £30,000 will be heavily penalised if he brings his artworks into Britain, whether to put them on public display, donate them to a public gallery or sell them. The UK is accordingly likely to become an also ran in the art world.

Damian Reece in the Sunday Telegraph is worried that the planned crackdown will hit American workers hardest and drive away City stars who tend to be American. It is unclear why. Someone who earns most of his money in England – and pays tax on it here under the current law – is actually likely to be affected far less than those who live off capital and/or investment income. Will hordes of Americans really give up their UK jobs? The risk is actually not that they will decide to leave but that their employers will move their operations overseas so that Geneva or Chicago will take over London’s role as one of the leading international financial centres.

Mark Kleeman in the same paper tells us that “the super-wealthy Middle Eastern and Russian non-doms won’t flinch. They will move everything, including their tax advisors, offshore and simply become even more ethereal figures, leaving the taxman to grasp at little more than thin air”. Perhaps, but £30,000 p.a. to the super-wealthy is petty cash, they can probably live with the new remittance rules, and they are in the UK because they like living here, so it is hard to see any logical reason for them to leave.

Bruce Anderson in the Sunday Telegraph tried valiantly to distinguish George Osborne’s £25,000 fee (to which he says there were few complaints) from Alistair Darling’s. Most of the rest of us find it impossible to distinguish the two. As it seems to have taken over three months for the press to complain about Darling’s proposals, a lack of complaints about the Osborne proposals in the week or so before they were hijacked by Darling is hardly an indication that non-doms welcomed them. Bruce is however undoubtedly right when he says that “a sensible government will always protect wealth creators and will never be tempted by short-term gains at the cost of longer term losses”. He is undoubtedly wrong in urging Mr Darling to “steal George Osborne’s ideas”. The real problem is that he has already done so!

Almost as hilarious/depressing as last weekend’s strictures is the hearty welcome that the press have in general given to the fairly minor clarifications that HMRC announced during the week. But more of that tomorrow.

Robert Maas

2007-11-26T02:36:00.000-08:00

Blog 52

HMRC LOST COMPUTER DISCS

I am fascinated by the reaction of the Opposition parties to the HMRC fiasco over the lost computer discs. You know, the ones containing personal information about 25 million people that could cause massive grief to most of those people if it were to end up in criminal hands.

Why call for the head of Alistair Darling? Although he is ultimately responsible for HMRC he cannot be expected to have any detailed knowledge of how it operates. He has a junior Minister, Jane Kennedy MP, who has responsibility for HMRC. If anyone’s head should roll it should surely be her’s. Yet no-one has called for this and she has herself not thought it appropriate even to offer an apology let alone contemplate resignation.

Personally I would have thought that if anything ever called for a public enquiry this is it. As more and more information comes out it seems clear that this is not a question of a junior clerk doing something stupid. It is a question of someone far higher in the organisation making a calculated decision to risk breaching confidentiality in order to save money.

To that extent there is a certain logic in calling for Gordon Brown’s resignation, not because he is Prime Minister but because as Chancellor he initiated the savage cuts to HMRC’s budget that forces it to count the pennies. But whilst heads rolling might be a traditional political game it is not what ought to concern the taxpaying public. Our concern should be about:

a) the importance of confidentiality to the integrity of the tax system and the extent to which it should be sacrificed by other considerations, of which cost saving is only one,
b) whether HMRC can operate effectively at its current staffing levels, and
c) whether HMRC should concentrate on collecting taxes rather than trying to earn extra money, or build a bigger empire, by becoming an outsourcing resource for other government departments.

Perhaps I ought to address the last question first because I think that it detracts from the real role of HMRC. I do not think the Inland Revenue have ever been good at mergers. The merger with H M Customs and Excise to create HMRC seems to me to be a textbook case study of how not to do it. There is little evidence of planning, they have rushed at it like a bull in a china shop trying to consumate in 12-18 months a merger that ought to have taken five years to do properly. They have diverted resources to reviewing their powers and seeking parliamentary changes before working out the ideal structure for HMRC, rather than adopting the commonsense approach of first restructuring the department and then looking at what powers different people in that revised structure need to operate effectively.

In these circumstances it may read strangely for me to complain that they have not sought to integrate their role as an outsource resource into the mainstream. The National Insurance Contributions Office, The Child Benefit Office and the National Minimum Wage Office are discrete parts of HMRC which are largely staffed by people without an Inland Revenue or Customs background. This seems to me significant in the context that this latest scandal occurred in the Child Benefit Office.

Which brings me to question 1, confidentiality. In the past confidentiality has been the backbone of the tax system. The concept was that, even if a person committed a criminal offence in order to generate income, he should feel able to disclose the income to HMRC without HMRC passing on the information to the police. There has never been a public discussion as to whether or not that is a good thing. Does the public interest in deterring crime outweigh the public interest in collecting taxes? If it does is that an absolute concept or might it depend on the facts. Most people would agree that if a person abuses children in order to sell pictures of that abuse on the internet there is a greater public interest in his going to jail than in his paying tax on his profits from such sales. I suspect however that many people would think that if a person sells counterfeit goods from a market stall there is a greater public interest in encouraging him to pay his tax on his profit than in telling the police that his goods appear counterfeit.

Over recent years this concept of confidentiality has been to a degree eroded by the government. There has long been a right to disclose information to foreign tax authorities. The Social Security Administration Act 1992 and Tax Credits Act 1999 both allow information to be passed to the DSS (or whatever it is currently called). But the floodgates were opened by the Criminal Justice and Police Act 2001 which permits disclosure to the police even where HMRC merely suspect that a criminal offence may have been committed. So perhaps confidentiality is now regarded as of less importance than in the past. Or perhaps not! It is still a criminal offence for an HMRC Officer to disclose information to someone outside the range of permitted disclosures – albeit one that then cannot be prosecuted without the consent of the Attorney-General.

If confidentiality is still a vital attribute of the tax system, so as not to discourage disclosure, is it wise in order to generate a few extra quid from the government, for HMRC to make confidentiality a hostage to the Child Benefit Office and similar outsourcing sections of HMRC whose staff may not have been instilled with the concept of confidentialilty to the extent that has traditionally happened in the tax collection side of HMRC? The public will not distinguish between different parts of HMRC. It is HMRC as a whole that can no longer be trusted in the eyes of the public.

And what about cost-cutting? It is clear that the NAO did not ask for, and did not want, the detailed personal information that has gone astray. Instead someone within HMRC seems to have taken a decision that they could not afford to segregate personal details from the information that NAO wanted so they would take the risk of the confidential information going astray in the post rather than incur the cost of keeping it confidential. That ought to worry us all. If HMRC are not adequately resourced to enable them to function properly – and surely protecting confidential information is a fundamental part of their functioning properly – what other values that contribute to the integrity of the tax system have been similarly sacrificed?

Most commercial databases do not require the entire database to be copied but enable some only of the information to be extracted. Why have HMRC spent millions of pounds in building one that does not have such a basic facility? And how can a junior member of staff download the entire database? Shouldn’t a secure system require the input of a password by a very senior person to enable this to be done? After all it is hard to think of any legitimate circumstance in which there should be a need to download the whole of the information, except for back-up purposes or if it is wished to move to a new system. Junior staff have no need to do either. Perhaps security and confidentiality were not thought about when the system was built. If so, that would be horrific.

There seems to me to be a lot of questions that need to be answered. I find it depressing that neither the Opposition parties nor the Public Accounts Committee seem inclined to ask them. Indeed the loss of public confidence is surely such that the most sensible way to restore it is not for Gordon Brown to appoint someone to look into a discrete issue and report to him (perhaps so that he can then edit the information that he is prepared to allow into the public domain or “spin” the content of the report) but to be open and appoint someone to hold a public enquiry into how HMRC ensure confidentiality in the tax system. Taxpayers might then be confident that that concept has not been sacrificed to Gordon Brown’s enthusiasm for cost-cutting.

Robert W Maas

2007-10-19T09:18:00.000-07:00

BLOG 51

BACK TO THE MIDDLE AGES?

I am surprised how little comment either the Conservative party tax proposal to charge a £25,000 annual fee to non-UK domiciled individuals, or Alistair Darling’s annexure of that policy but with a £30,000 fee and a £1,000 de minimis exemption, generated. All that I have seen is a squabble between Conservative and Labour as to how much such a charge would raise – with both sides pointing out that no one knows how many non-domiciled people there are in the country. Also, sadly,(as I am a member of the Society of Trust and Estate Practitioners) I also saw something from within the STEP leadership welcoming the proposals.

The number of non-doms is certainly more than the figure of 110,000 that has been bandied about. I would think it is in the region of 10 million. Anyone who was born overseas, or whose parents were born overseas, and hopes one day to return to their home country (or, indeed, to retire somewhere else outside the UK) is likely to be non-domiciled. I suspect that embraces the vast majority of immigrants over the last 50 years. Of course many of that 10 million achieve no tax benefit from their non-dom status as they do not have overseas income or gains.

On the other hand many of them do have little bits of overseas income. This particularly applies to those from countries with a concept of family money, most of which tend to be in the Indian sub-continent and the Far East. Such people have often inherited jointly with their siblings a property or other asset from their parents and allow a brother or sister in their country of origin to collect their share of the rents and use it as he or she thinks fit – often towards the support of other family members who remain in that country of origin.

Accordingly the joint Conservative/Labour party policy actually seems to be that the poorer immigrants who allow their income in their home country to be used to support needy relatives at home should be required to pay tax on such income even though for social reasons it is never going to be available to them, but that the ultra-rich should be able to pay a fee in order to purchase special tax privileges.

It is even sadder that Alistair Darling decided to adopt this squalid Tory proposal. This must be the first time ever that the Labour party has put itself firmly behind the 19th Century concept that the rich deserve respect from the rest of us and that it is only right that the working classes, the traditional base for “Old Labour”, should defer to privilege rather than looking for equality and should accept that the rich should be entitled to all of the tax privileges that their money can buy.

Am I the only one who finds this abhorrent? Firstly, any tax charge that is likely to impact mainly on non-white immigrant families is, to my mind, clearly racist and accordingly seems to position both of the main political parties in a place formerly occupied mainly by BNP and National Front supporters and the more intolerent end of the “Sun” readership.

Secondly, most Conservative supporters look back nostalgically to Thatcherism, a period in which the government sought to provide opportunities for people to stand on their own feet and to reward those who grasped such opportunities without too much concern for the well-being of those unable to do so. Many feel that a return to Thatcherism tempered with a far greater concern for those unable to stand on their own feet (usually because of either health problems or failures of the State education system) would be attractive.
Sadly, David Cameron and George Osborne seem to have looked back somewhat earlier for inspiration. My recollection (from the days I studied history at school fifty years ago), is that the Osborne/Darling system of allowing the rich to purchase privileges from the Crown, but requiring the poor to comply with the obligations that the rich had bought their way out of, started to fade with Magna Carta and was wholly defunct by around the end of the Fifteenth century. Such a system ought to be left in history! It has no place in modern day Britain.

2007-08-16T08:31:00.000-07:00

JOURNAL 50

FAIRNESS IS IN THE EYE OF THE BEHOLDER

Treasury Ministers and senior HMRC staff frequently rage against tax avoidance (which is actually paying the tax the parliament has decreed in circumstances that parliament had not foreseen when it enacted the relevant legislation) on the basis that it is “unfair” to the vast majority of taxpayers. What is fairness as Ministers and HMRC understand it? I don’t know but here is a selection of cases that HMRC have argued before the tax appeals tribunals which might give an indication of what they consider to be fair.

Mr Marsh is a building industry sub-contractor. As such he has tax deducted from his income at 18% before he sees it. He submitted his income tax return on 14 June 2006 showing a tax refund due to him of £30,000 (his profits are only around £27,000 pa on which tax is about £4,600 so it will be seen that contractors who used him were required to deduct tax of seven and a half times his actual tax liability under the “fair” system of taxing sub-contractors). HMRC authorised the money to be repaid to him on 2 August 2006 but the cheque did not arrive until 10 August. Problem! He had a VAT bill due on 31 July of £7,155, which he had no money to pay because HMRC owed him more than the whole of his annual profit. Did he have a reasonable excuse for not paying his VAT on time? “Of course not,” was the HMRC “fair” view. Fortunately the VAT tribunal disagreed. They thought that any conclusion other than “of course he did” ridiculous. They pointed out that if the tax authorities had asked on 31 July “Where is our money?” the correct answer would have been “We have got it”.

HMRC have power under common law to offset money they owe against money due to them. They use it regularly in relation to insolvencies. They have recently issued a consultation document on debt, where they say that they propose to use it more widely – but, it appears, not if setting off would prevent them from seeking to penalise a taxpayer whose finances they have crippled by taking time to make a repayment.

Keen Jewellery Ltd purchased an expensive necklace from Japan. It expected to sell it to a jeweller in Jersey. His customer wanted to see it first so Keen sent someone over to Jersey with the necklace. The customer liked it and bought it on the spot. Keen VAT zero-rated the sale because it had been sold in Jersey outside the EU.

“Hang on”, said HMRC “You haven’t got the right documentation”. This is a form SAD (what an appropriate acronym) which requires the name of a consignee to be shown. “We couldn’t use it”, said Keen, “because we did not have a consignee when our employee flew to Jersey.” “You didn’t try”, said HMRC, “we would have accepted the form without the name of a consignee even though the form gives no indication of this”. The “fair” result? Keen had to pay the VAT because it did not guess correctly what to do in an unusual circumstance.

Mr Duncan runs a car servicing business but is not licensed to carry out MOT tests. If a customer wants an MOT Mr Duncan send the car to an authorised test centre, pays them £35 for the test, and charges his customer £44. He accounts for VAT on his £9 handling fee. Unfortunately he did not specifically state on his invoices that the £35 is a disbursement, although all his customer knew that it was as he did not have the ability to do the test. “Wrong”, said HMRC, “we want VAT on the whole £44”. “But”, retorted Mr Duncan, “MOT fees are exempt from VAT”. Fair? The VAT tribunal disagreed. They said that Mr Duncan cannot and does not provide an MOT test. All that he does is arrange for a test to be carried out for which he charges £9.

Mr Ahmed is a clothing retailer. He bought goods from a number of suppliers some of whom he paid in cash. One of these was Euro-tex. Euro-tex got lost – in the sense that it moved and did not notify HMRC of its new address. Accordingly HMRC deregistered it for VAT. Mr Ahmed was of course not aware of that. In all probably nor was Euro-tex. When Mr Ahmed claimed input tax relief for the VAT it had paid to Euro-tex HMRC refused a deduction on the grounds that he did not hold a valid VAT invoice. “What do you mean?”, said Mr Ahmed; “Here are the invoices, they all bear a VAT number and in any event my own purchases from Euro-tex are sufficiently large to require it to register for VAT.” “So what”, said HMRC “We secretly deregistered Euro-tex so it is not possible for it to issue valid tax invoices after we did so.” Sadly the VAT tribunal had to agree – although it did require HMRC to give relief for the VAT on those invoices issued before the date of deregistration. Fair? Mr Ahmed seems to me to have acted perfectly reasonably throughout. It seems to me unreasonable that HMRC should be able to deny relief to an honest purchaser by secretly deregistering his supplier.

Robert W Maas