IS A 25% CORPORATION TAX RATE REALLY AN ATTACK ON GROWTH?

 

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IS A 25% CORPORATION TAX RATE REALLY AN ATTACK ON GROWTH?

 

 Recently two articles on the 25% corporation tax rate crossed my desk.  The first by Phil Radford, who is described as a trade analyst and author of The Case for Corporate Taxation, claims that the decline in the UK pharma industry is wholly due to taxation.  As he puts it, “What caused this malady?  In a word: taxation.  In the Centre for Brexit Policy paper, we identified how corporate taxation levels appear to exert a dominating effect on where pharmaceutical companies locate their factories”.  More of that later.  For the moment I must admit I am not aware that the British Virgin Island, Cayman Islands and Bermuda (which the Tax Justice Network tell me are the three most wicked corporate tax havens) are major pharmaceutical hubs – which they surely must be if that theory is correct.

 

The second is by John Longworth, who tells us that, “A radical rise in corporation tax would be an attack on innovation, investment and growth”.  Mr Longworth is described as an entrepreneur, but his CV on Wikipedia inexplicably ignores the business or businesses that he created and tells me only that he was Director-General of the British Chambers of Commerce from September 2011 to March 2016, a Brexit Party MEP from July 2019 until December 2019 and a media commentator and writer since then.  He also seems to be involved with several think tanks.  He believes that “the psychological anti-profit, anti-growth signal of a radical increase [in corporation tax] could be much more damaging than is imagined.  If profitability is a prerequisite for innovation, investment and growth, raising corporation tax is an attack on all of them”.

 

Perhaps my problem is that I cannot see why profitability should be a prerequisite of any of those.  Pre-Trump, the US had a federal corporate tax rate of up to 38% with most States and many cities adding their own corporate tax rate on top.  That does not seem to have deterred Apple, Microsoft, Starbucks, Amazon and many others from innovating in the US.  Indeed, tax has little effect on profitability, as it only applies once profits have arisen.  It may affect investment decisions of profitable companies, but I doubt that even then it is a major factor.

 

Mr Longworth also tells me that “What the Chancellor does now with corporation tax could well determine the outcome of [that 2024] election”.  Personally, I doubt that corporation tax is even on the agenda of the bulk of the electorate.  They are much more worried about housing, inflation, childcare and employment!  I certainly agree that reducing corporation tax will determine the outcome of the election, although not in the way that Mr Longworth envisages; I think that most electors would see it as favouring business over working people, so it would virtually guarantee a Labour landslide!

 

Back to Mr Radford.  I looked up his Centre for Brexit Policy paper, “The Case for Low Corporate Taxation: Lessons from the International Pharmaceutical Industry”.  The thesis of this seems to be that Ireland’s pharma industry has grown rapidly whilst those of both the UK and the US have declined.  He notes that Ireland has had a 12.5% corporate tax rate since 2003 and seems to conclude from this that low Irish taxation is the reason for this change.

 

Statisticians warn that care needs to be taken not to confuse causation with correlation.  The fact that the Irish pharma industry has grown during a period of low taxation does not mean that the tax rate has caused the growth.  There is little or nothing in the paper to suggest that it has done so.  Indeed, it is illogical to suppose that it has.  If a businessman is deciding where to locate a factory, one would expect the dominant considerations to be the availability of labour, the general business environment and the ease of export to the EU.  Ireland scores highly on all of these.  It is only when faced with two countries that both meet all of those requirements that I would expect tax rates to come into the decision.  But Mr Radford seems to regard the rate of tax as the dominant consideration.

 

I am also not convinced that he actually understands the pharma industry, because he tells us that “A tax policy that encourages UK-based research but fails to encourage UK-based manufacturing risks seeing practically all the benefits of that research go offshore, including tax revenue from UK-based business.  Spending on research of itself only creates jobs in research: nothing else follows automatically”.  That is correct only if one sees the role of business as to create jobs.  Because what follows automatically from successful UK pharmaceutical research is UK patients.

 

One only needs to compare the prices of generic drugs (primarily drugs for which the patent has expired) with the price of branded drugs (those under patent or for which confidence in the brand has been created during the lifetime of the patent) to realise that the manufacturing profit is low.  The most significant return is from the exploitation of the patent.  In other words, where R & D is carried out in the UK, the bulk of the fruits of that R & D are taxable in the UK even though manufacturing might take place elsewhere.

 

I have also looked at the latest accounts of Astra-Zeneca and GSK, the two largest UK pharmaceutical companies.  Both seem happy to be based in the UK and neither suggest that UK corporation tax rates are a problem.  Of course, like any multi-national company, they do not manufacture solely in the UK.  Most major companies manufacture near where their customers are, so have a manufacturing facility in several parts of the world.

 

ROBERT MAAS

THE UK SHOULD WELCOME THE 15% MINIMUM CORPORATION TAX

 

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THE UK SHOULD WELCOME THE 15% MINIMUM CORPORATION TAX

  

I have remarked before that I subscribe to CapEX (which I highly recommend) which provides me with links to articles on current affairs – some of which it commissions itself and some which are in other publications.  I am however puzzled as to why they commissioned “Levelling down: signing up to the OECD tax plan risks undermining key government policies”.  This was written by Connor Axiotes who describes himself as Director of Communications at the Adam Smith Institute, (another think tank).  My bewilderment is because the article seems axiomatic of the well known saying, “Never let the facts get in the way of a good story”.

 

Mr Axiotes is apparently a fan of freeports but complains, “But there is an elephant in the room which could limit the Government’s freedom to offer these [freeport] incentives.  The OECD’s Global Minimum Corporation Tax would impose a minimum rate of taxation (set at 15%) on the revenues of international corporations”.  He thinks that the UK rush to implement the OECD proposals will undermine the levelling up agenda.

 

So where do I start?  First, the minimum tax (called Pillar II) is not a tax on the “revenues” of international corporations.  It is a tax on the profits of the small number of multi-national enterprises whose global turnover exceeds Eur 750million.  In other words, it is a top-up to corporation tax.  As such, it has very little effect on freeports because the freeport incentives do not include an exemption from corporation tax.  The tax incentives primarily relate to import duties, import VAT and SDLT, none of which are affected by the 15% cap.  Indeed, as corporation tax is based on the overall result of all of a company’s activities, it is largely impractical to grant corporation tax relief on the part earned in a freeport.  It does have some impact as the relief includes 100% first-year allowance on plant and machinery (up to 30 September 2026 only) and accelerated structures and buildings allowances, both of which reduce taxable profits – and both of which can be disclaimed, i.e. the company can limit the claim in the year of expenditure if the allowances would trigger the minimum tax in that year and claim the balance in later years.  The benefit of early capital allowances is also likely to be fairly insignificant in comparison with the exemption from employer’s NIC, the reduced planning restrictions and the tax reliefs on imports.

 

Secondly, the government’s levelling up agenda has very little to do with tax.  It is to do with bringing jobs to deprived areas, and while tax reliefs can encourage business towards a particular area, they have fairly limited effect compared with other factors.

 

Thirdly, the UK has not “rushed” to implement the Pillar II proposals.  These arose from the OECD’s BEPS (Base Erosion and Profit Shifting) project which began in 2013, virtually 10 years ago and in which both HMRC and UK large businesses have had a heavy involvement throughout.  The minimum tax was first proposed in 2020.  The government, like most developed countries, signed up to the minimum tax in 2021 and it issued a consultation paper on the implementation of the tax in January 2022, which is over a year ago.  If Mr Axiotes regards that as rushing the legislation, I shudder to think what his ideal timetable for introducing tax changes might be.

 

Fourthly – and probably most importantly – if the UK does not introduce the legislation, the only one to suffer will be the UK.  This is because the top-up tax is primarily chargeable by the country in which the multinational group is based.  However, if the group is based in a country that has not implemented the tax, the countries in which the profits are generated become entitled to charge the tax.  In other words, the UK legislation applies to only two categories of earnings; worldwide earnings of UK multinationals and earnings of UK branches of those foreign countries that have not implemented Pillar II.  Not implementing it in the UK would exempt UK earnings of UK multinationals (in most cases a very small part of their global earnings) and UK earnings (if any) of overseas countries which also do not implement it.  Most of the benefit of non-implementation would accrue to the US and other overseas governments in the countries in which UK companies have operations, as they would become the beneficiary of what otherwise would have been the UK’s right to impose the tax.

 

Fifthly, the UK government is not oblivious to the fact that tax incentives can reduce taxable profits and so potentially trigger the minimum tax.  That is one of the reasons why it is looking at replacing some tax incentives by tax credits which, contrary to Mr Axiotes’ apparent belief, not only do not reduce profits but are treated as income for accounting purposes so, increase them, and reduce the risk of the minimum tax applying.

 

ROBERT MAAS

LET'S KEEP LOW TAXES IN PERSPECTIVE

 

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LET’S KEEP LOW TAXES IN PERSPECTIVE

 

I recently read an article by Tom Clougherty, the Head of Tax at the Centre for Policy Studies, a Thatcherite think tank, “How can Jeremy Hunt turn his tax rhetoric into reality?”.  If Jeremy Hunt reads it, I hope that he ignores it.  Indeed, I wouldn’t be surprised to learn that Kwasi Kwarteng had based his disastrous Autumn Statement on Tom’s advice, because they seem on the same page: lower taxes and everything will be rosy because lower taxes lead to growth.  But at least Mr Kwarteng knew that cutting taxes needed to be combined with other important changes to stimulate growth.  I am sceptical whether Mr Clougherty agrees.  He seems to be saying that lower taxes = growth, in spite of the markets having made clear last September that is an illusion.

 

Jeremy Hunt’s rhetoric apparently is that the UK needs a competitive tax system.  I suspect no one would disagree.  Tom looks for inspiration from other countries.  He points out that the 2022 International Tax Competitive Index puts the UK 26^th out of 39 OECD countries.  He points out Estonia, which tops the Index, has the same overall tax burden as the UK (33% of GDP) and the same standard rate of VAT yet gets 40% of its revenue from consumption taxes.  He concludes that if the UK’s VAT base were as broad as Estonia’s, we could make over £75bn worth of tax cuts in other areas.  He omits to say that this means if we impose 20% VAT on food and children’s clothing, both essential purchases for the poor, we can reduce income tax for the better off and corporation tax on big business.  Why should he be so coy not to come out and make clear that he wants to tax the poor more highly in order to reduce taxes on the less poor (which I suspect includes himself)?  Admittedly, I suspect very few people would support such a proposition, but surely it is a role of think tanks to posit the unthinkable!

 

Mr Clougherty accepts that this happy state of affairs (happy other than for the poor, obviously) cannot be achieved overnight but he thinks that as a first step Mr Hunt ought to:

 

a)      Abolish the 45% rate of income tax

b)      Let companies write off all capital expenditure against profits

c)      Remove “improvements” from the scope of business rates, and

d)      Lower the VAT registration threshold from £85,000 to the OECD average of around £40,000.

 

I doubt that Mr Hunt will do any of these in his March Budget – with the possible exception of (c) which will cost little and benefit very few companies.  It is not clear why Mr Clougherty wants to limit (b) to companies and leave the self-employed and partnerships to claim capital allowances (where they are available as they do not apply to all types of capital expenditure).  It is probably because long-term Mr Clougherty thinks that companies should not be taxed at all.  He thinks that dividends should be taxed on the shareholder, but the company should be a sort of tax haven, with money becoming taxable only when it leaves that tax haven.  He thinks that in his ideal world, companies would invest the profits in the business.  Of course, in the current real world most do not do so; they build up a cash pile.  It is also unclear why companies should be exempted from tax (yes, I am aware of the economic theory, but I am talking of the real world).

 

I assume that Mr Clougherty is either trying to fool Jeremy Hunt into thinking that he can raise enough tax from (d) to pay for (a) to (c), or he genuinely believes that.  So, let’s look at the VAT threshold.  The first point to make is that it is a de minimis exclusion.  If your turnover is £85,001, you pay VAT on £85,001, not merely on the £1 excess.  Accordingly, reducing the threshold will affect only those with a turnover of between £40,000 and £85,000.  Furthermore, if your turnover is below £85,000, you can already voluntarily register for VAT.  Many, if not most, businesses whose customers are other businesses register voluntarily, either to recover input VAT or because they do not want their customers to know that they have such a low turnover.  Furthermore, if a business that is not VAT-registered mainly supplies other businesses, requiring it to register produces no extra tax because the VAT it has to pay simply reduces the amount currently payable by its customers.

 

So, the people that Mr Clougherty wants to tax so those earning over £150,000 p.a. do not have to pay an extra 5p tax on the excess over that figure are people with income (before deducting expenses) of between £40,000 and £85,000 who deal only with individuals, i.e. you and me (or only with charities).  Who generates such modest income but has only a small amount of purchases or expenses?  Possibly your plumber or electrician and the guy who cleans your guttering.  I find it hard to think of anyone else in that £40,000 plus of gross income category.

 

So, do you agree with the proposition that you should pay extra for your electrical or plumbing repairs so that those earning over £150,000 p.a. (that’s the top 1% of all earners or about 320,000 people) can pay less tax?  I don’t!

 

It is in any event not at all clear that a country’s position in the International Tax Competitiveness Index correlates to growth.  I Googled Estonia and Growth.  Estonia’s GDP growth rate for 2021 was 8.35%.  This was less than Ireland’s (No 35 in the index, 9 places below the UK) at 13.48% and not a lot greater than the UK’s at 7.44%.  A separate table of GDP per capita, which may be more representative of growth, showed Estonia at $27,281, well below the UK (at $47,334) and far below countries such as Switzerland (4^th in the Competitiveness Index), Luxembourg (6^th in the Competitiveness Index), Australia (11^th in the Competitiveness Index) and the US (22^nd in the Competitiveness Index).

 

 

It is also interesting to examine the Competitiveness Index in more depth.  The UK actually ranked 1^st in Cross-Border tax rules, which is probably the most important factor for overseas companies wanting to set up in Europe.  Its overall ranking was depressed by consumption taxes in which it ranked 34^th out of 38 (even though Mr Clougherty wants to increase them further), and property taxes (again ranked 34^th because the UK chooses to finance local government by means of council tax and business rates rather than a far more complex local income tax).  The UK came a respectable 10^th in corporate tax as compared with the USA’s 22^nd.  The US high overall corporate tax rates (in the region of 30%) did not stop it ranking 22^nd overall, although mainly because there are no federal consumption taxes and State sales taxes are relatively low.

 

This all suggests that the Competitiveness Index is actually of little help as an economic tool.  But that is unsurprising because it does not claim to be one!

 

ROBERT MAAS

JEREMY HUNT'S VISION FOR LONG-TERM PROSPERITY

 

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JEREMY HUNT’S VISION FOR LONG-TERM PROSPERITY

 

 I have been reading Jeremy Hunt’s speech at Bloomberg which, the Treasury tell me, “Set out his vision for long-term prosperity in the UK”.  Unfortunately, it seems little more than that; a dream with little real prospect of ever being realised.  There was also a lot of self-congratulating back-slapping about how great the economy is doing compared with other countries.  Unfortunately, most of us know that its not doing very well.  The ICAEW has just published its latest quarterly Business Confidence Monitor report and its headline is “Business confidence crashes to 13-year low”.

 

I think that Kwasi Kwarteng (and Liz Truss) got the diagnosis right in the Autumn Statement, albeit that they got the prescription for the cure horribly wrong.  His growth plan had three priorities:

 

a)      Reforming the supply-side of the economy

b)      Maintaining a responsible approach to public finances

c)      Cutting taxes to boost growth.

 

Unfortunately, growth requires all three and his proposed tax cuts without first addressing (a) and (b) (indeed calling into question his commitment to (b)) spooked the markets.  But we still need growth, and the three priorities are still necessary to achieve growth.  His plans to address the supply side (albeit not revealed) we were told would cover the planning system, business regulation, childcare, immigration, agricultural productivity and digital infrastructure.

 

Many would agree that these problems need to be addressed.  We need a planning system that does not delay major infrastructure projects for decades; we need one that builds houses for employees where the jobs are – which even with the levelling up agenda is mainly in London and the South East; we need to eliminate unnecessary regulation and streamline the rest; we need to reduce regulation on childcare to free women who want to work to do so; we need an immigration system that enables foreign workers to bring their skills to this country but not to add to the vast pool of home grown unskilled labour fighting for fewer and fewer unskilled jobs.

 

Jeremy Hunt addresses none of these.  Indeed, he tells us that “Our Chief Scientific Advisor, Sir Patrick Vallance, is currently reviewing how the UK can better regulate emerging technologies in high-growth sectors”.  I can tell him the answer.  Regulation is a prescription for strangling high-growth sectors at birth.  Mr Hunt acknowledges that “we will not build the next Silicon Valley unless we nurture battalions of dynamic new challenger businesses”.  But Silicon Valley was not built on the back of regulation; it developed in a regulation-free environment, so starting with “how can we best regulate new innovative businesses” dooms his dream to failure.

 

While emphasising the UK’s reputation for innovation he adds, “and as you [Meta, etc]look for funding to expand, we offer one of the world’s top two financial hubs and are the world’s largest net exporter of financial services”.  That would be good if they were amenable to nurturing start-ups but we all know that is not the case.  A lot of our start-ups are sold to US companies at a fairly early stage because those companies understand that nurturing start-ups is a balance of risk and reward, whereas, as the Chancellor acknowledges “we need a more positive attitude to risk-taking”.  He acknowledges that but has no suggestions for achieving it.  And is Mr Hunt’s own prescription in his mini budget of cutting R & D relief for small innovative new businesses really the way to encourage innovation?

 

The Chancellor also tells us that education “is an area where we have made dramatic progress in recent years” but then admits, “We have around 9 million adults with low basic literacy or numeracy skills, over 100,000 people leaving school every year unable to reach the required standard in English and maths”.  I shudder to think where we would be without that “dramatic progress”.  There are around 49.5 million people between 15 and 64 years old in the UK, so 9 million is around 20% of the working population.

 

The Chancellor’s growth plan embraces Enterprise, Education, Employment, and Everywhere.  Sadly, he ran out of time to explain what “Everywhere” envisages.  But it probably does not matter because everyone knows that a fundamental of growth is addressing Kwasi Kwarteng’s supply side issues, and we all know that this is not going to happen because doing so requires tough decisions which the heavily divided Conservative parliamentary party will veto.

 

I don’t know what “the lenders from Meta, Microsoft, Amazon, Apple and Google”, all of whom Mr Hunt tells us were in his audience, made of the speech.  I would be amazed if you were even a tiny bit impressed.

 

ROBERT MAAS

POOR MR ZAHAWI

 

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POOR MR ZAHAWI

 

I feel sorry for Mr Zahawi.  That is probably the first time I’ve ever said that about a politician.  I feel sorry for him because I cannot understand what he did wrong.

 

The press wanted him sacked because he paid a penalty to HMRC.  More of that later.  But that is not why he was sacked – at least, it is not the reason that Rishi Sunak gave for wielding the hatchet.  He was sacked apparently for having broken the Ministerial Code in not having told Rishi Sunak when he became Minister without Portfolio that he was under investigation by HMRC.  In 2023, he was sacked for not doing something that he was supposed to have done when he was appointed a Minister by Theresa May in 2018 and again when he was appointed a Minister by Boris Johnson in 2021, and again when he was appointed Chancellor by Liz Truss in September 2022 and yet again when he was appointed Minister without Portfolio in October 2022.  Rishi Sunak, we are told, as a bright former hedge fund manager, had no idea in October 2022 that Mr Zahawi, who before becoming an MP had a high-profile business career, might have issues with HMRC.  (Well at least we now know that Mr Sunak is so naïve that he could not have guessed that most businessmen are going to have issues with HMRC at some time in their careers).  At the same time as this sin came to Mr Sunak’s knowledge the mob were baying for Mr Zahawi’s head, not for breaking the Ministerial Code but for paying a penalty to HMRC.  What a massive coincidence that Sunak could sack him for a breach of the Ministerial Code while defying the mob and not have to consider Mr Zahawi’s tax affairs.

 

The reason I feel sorry is that the mob was an ill-informed mob.  I know nothing about the tax dispute, but what Mr Zahawi has said is that when he was offered the Chancellorship, he told his accountant to settle his HMRC enquiry by paying HMRC what they were demanding.  He believed that he either had to do that or to tell HMRC that as he was becoming Chancellor, he could not deal with their enquiries until after his term of office was ended, and felt that paying the tax was the most sensible option.

 

So, what about the penalty?  If you do a deal with HMRC, they almost always demand some sort of a penalty.  The penalty sought in this case was apparently 30% of the tax.  This is a penalty for failure to take reasonable care.  30% is a ballpark figure for what I would have expected HMRC to demand.  Of course, like most accountants, I would have tried to negotiate that down and/or would have claimed that the client either had indeed taken reasonable care or had a reasonable excuse for the default which, if I could demonstrate it, would eliminate the penalty entirely.  But Mr Zahawi did not want to negotiate; his sole desire was to close off the issue and get on with running the country’s finances.  Accordingly, I cannot see anything sinister in his having accepted a penalty.

 

It is however sad if the press know so little about the workings of the tax system that they were seemingly not aware that accepting a penalty is a fairly routine thing for taxpayers to do.

 

ROBERT MAAS

A PROPORTIONATE PENALTY?

 

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A PROPORTIONATE PENALTY

 

A recent article in Accounting WEB, an online publication, caught my eye.  It complained that “almost 400,000 self-employed people have had late filing penalties disproportionately levied on them despite having little or no tax to pay”.  I like that word “disproportionately”.  Disproportionately to what?

 

Unlike in many countries, the UK does not burden all of its citizens with the chore of completing a tax return each year.  Instead, it leaves it to HMRC to decide who is likely to have untaxed income and request only such people to file tax returns.  This is backed up by an obligation on the citizen who has not been asked for a tax return to notify HMRC if he has a new source of income or a capital gain of which HMRC are likely to be unaware.  That gives HMRC the opportunity to decide whether or not to ask him for a tax return.

 

By and large this system works well.  It relieves roughly half of all taxpayers from having to complete a tax return.  These are taxpayers whose only or main source of income is taxed under PAYE.  If such a person has a small amount of untaxed income, HMRC normally amend his PAYE Code number to collect the tax painlessly (or relatively so) without requiring a tax return.  This not only reduces the burden on taxpayers but relieves HMRC from the routine task of checking millions of tax returns where the taxpayer has already been fully taxed.

 

The system does not work perfectly.  While taxpayers can be expected to realise that they need to tell HMRC if they have a new source of income, it seems questionable whether they can reasonably be expected to realise that they also need to notify HMRC if they have some other non-income item on which Parliament has chosen to impose tax.  In a recent blog, I raised the issue of the High Income Child Benefit Charge, but the same issue applies to a number of other types of taxable amounts such as gift-aid payments in excess of taxable income and tax charges for breach of pension scheme rules.

 

Even if a taxpayer, anxious to get his affairs right, were to read the relevant tax legislation (which I would not myself recommend) he would find that the way that Parliament has expressed this obligation (in Taxes Management Act 1970, s 7(3)) somewhat obtuse:

 

“A person shall not be required to give notice under subsection (1) above in relation to a year of assessment if for that year

 

a)      the person’s total income consists of sources falling within subsections (4) to (7) below,

b)      the person has no chargeable gains, and

c)      the person is not liable to an amount of tax under any provision listed in relation to the person in section 30 of ITA 2007 (additional tax)”.

 

If the taxpayer is determined to understand his obligations, he will discover that para (a) means income taxed under PAYE.  He can then discover from TMA 1970, s 118 that “ITA 2007” means the Income Tax Act 2007 and if he moves on to looking that up, he will discover that s 30 relates to HICBC and the other items mentioned earlier.  Personally, I think it disproportionate to expect the man in the street, the honest workman, to do so much research to discover his obligations.

 

But to get back to the 400,000 self-employed people – although actually that appears to be journalistic licence rather than fact.  The writer explains that a freedom of information request “found that between 2018 and 2020, nearly 400,000 people earning less than £13,000 received a penalty for a late tax return”.  I doubt that most, or even many, of such people are self-employed.  Many are likely to be small landlords.

 

So what would a proportionate penalty be for someone who is asked to complete a tax return in early April, is given virtually 10 months until the following 31 January to do so, and yet flouts this obligation?  Campaigners think that it should be “nil”, but that does not strike me as proportionate, bearing in mind that HMRC have had to expend scarce resources on issuing the request for a return and will have to spend further resources in chasing for its submission.  The actual penalty is £100.  Is that really disproportionate?

 

Of course if that £100 penalty does not galvanise the individual into submitting his return, further penalties will arise, but HMRC normally warn the taxpayer that this will happen if he does not submit the return by 30 April.  If he still does not do so, the further penalty is £10 a day for a maximum of 90 days.  I can understand that being regarded as disproportionate.  But how disproportionate?  After all, HMRC do not know if the citizen has no income to disclose or if he owes tax but is happy for HMRC to remain in ignorance of that fact – even though he himself may be ignorant of it too.  They therefore need to chase up the missing return in case there is tax owing.  If the return is still outstanding at the end of the 90-days period, i.e. it is over 6 months late, there is a further penalty of £300 (or 5% of the tax due if greater).  Again, £300 does not seem to me disproportionate where a citizen has an obligation to do something and still has not done it after 6 months.  A similar penalty arises after a year, so a taxpayer who owes nothing but persists in ignoring his obligation to submit a return can end up with a total penalty of £1,600.  But he has to be very tardy to do so.  And after the first £100, the penalties apply only if the taxpayer cannot show a reasonable excuse for his tardiness. 

 

There is a particular – and obvious – issue with the self-employed.  This is that their income fluctuates, because it depends on the work they are able to obtain.  HMRC has no way of knowing if any particular year their income is above £13,000.  Leaving aside time for holidays and bank holidays, that is less than 30 hours a week on the national living wage.  Most of us would not expect that many workers consistently earn below the minimum wage year on year.  So is it disproportionate to ask such people to tell HMRC what they have earned?  Surely not?  If such income is below the individual’s personal allowance, that is not something that HMRC will know unless the taxpayer tells them what that income is.  But if it is greater than the personal allowance, so tax is payable, HMRC will not know that either unless the taxpayer tells them.  It is thus surely essential to the operation of the tax system for all self-employed taxpayers to submit tax returns.  That is not a disproportionate obligation; it is to elicit essential information.

 

 

ROBERT MAAS

IS THIS THE SORT OF TAX AUTHORITY YOU WANT - PART 14

 

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IS THIS THE SORT OF TAX AUTHORITY YOU WANT? – PART 14

 

 Mr Kensall “believed HMRC absolutely” and had “unwavering trust” in them.  This is the first finding of fact by the First-tier Tribunal.  “More fool him”, I suspect that you are thinking (as I did).  Mr Kensall “was not financially sophisticated and had no knowledge of the tax system as he has been a PAYE taxpayer for over 40 years, and throughout all that time his only interaction with HMRC had been about changes to his coding notice”.

 

Actually, Mr Kensall is not a fool.  He rarely had a need to contact HMRC (and I suspect when he did was able to go into a local HMRC office to get his position sorted out).  Sadly such customer service disappeared some years ago; HMRC appear to think it unnecessary as they believe that every PAYE taxpayer wakes up in the morning eager to discover what new information HMRC have posted on their website – actually I don’t really believe that but a number of the reasons HMRC puts forward to Tribunals as to why such a taxpayer has not taken reasonable care point firmly to such a belief.

 

But I digress.  And I’m about to digress further.  I wonder whether I should have put the blame on my and your MP, not on HMRC.  Because Mr Kensall’s problem was that Parliament amended the law with retrospective effect in the Finance Act 2022.  Parliament used to be strongly opposed to retrospective legislation.  It was a fundamental principle that a citizen should know what the law was at the time he did (or didn’t) do something.  It was thought fundamentally unfair for the law to change so as to affect something the taxpayer had already done. However, today’s MPs seem far less concerned about fairness in tax matters than their predecessors – or perhaps their concept o f fairness is very different to that of their predecessors.

 

The government was very open to Parliament about the retrospection.  The Minister told Parliament (or to be precise the Standing Committee to which it had delegated consideration of the bulk of the Finance Bill), “The legislation introduced under clause 95 will apply retrospectively … and will ensure that previously issued discovery assessments remain valid.  The Government do not introduce retrospective legislation lightly; we do so only in exceptional circumstances, and will do so, on occasion, when a Court ruling upsets a widely accepted way in which the law I s understood to work.  In this instance retrospection is necessary for two reasons: first, to protect public services by ensuring that tax that has been charged and paid through discovery assessments over a number of years remains undisturbed and secondly to provide fairness to the general body of taxpayer who have declared their liability, submitted their returns and paid their tax.  The retrospective element applies only … where taxpayers … have neither notified HMRC of their liability nor submitted a tax return …  It would be unfair for it to apply to those taxpayers … who submitted appeals to HMRC on the same basis before the judgement [the Upper Tribunal decision in Wilkes] was handed down” (my underlining).

 

In response, Abena Oppong-Asare, for Labour, commented, “The amendment to the 1970 Act has to be understood in the context of the legal challenge in HMRC v Wilkes …  Although there has clearly been historic doubt and an unsuccessful legal defence mounted by HMRC, and while this is being applied retrospectively, there is an exception for those who have appealed …  However, as the Minister probably knows the Low Income Tax Reform Group has raised that point that the application in the clause could be unfair and uneven … those who did not make the necessary appeal will face retrospective charges … despite the Upper Tribunal’s finding that HMRC’s use of discovery assessments in this way was … not legal …  I would be grateful if the Minister could make an assessment of the fairness of this uneven, retrospective application” (My underlining).

 

Alison Thewliss, for the SNP, also commented “While we support its broad principle, this type of clause brings me out in a cold sweat …  What kind of mitigation, if any, may be put in place should people in future be held liable for something they were not aware of for entirely legitimate reasons? …” (My underlining).

 

The Minister responded to these two comments, “This is retrospective legislation but not retrospective taxation.  The tax was due, has been due and is due, but it has not been paid.  What was in question was the process by which it was recovered …  In terms of fairness, it is right that everyone pays the right amount of tax and does not manage to escape paying that tax because they do not declare it to HMRC …  This legislative measure is fair because it ensures that people who have to pay tax do so and that everyone pays it equally” (My underlining).

 

No one voted against the provision.  So what actually was the law before it was amended?  “If [HMRC] discover … that any income which ought to have been assessed to income tax … has not been assessed … [HMRC] may … make an assessment”.  The issue in Wilkes was that the HICBC is not assessable income at all.  It is an adjustment to the tax payable by a taxpayer.  Only Parliament knows why Parliament chose to deal with it in such a way that it fell outside the discovery rules.  My guess is that the tax system is now so complex that no MP is going to question how new legislation interacts with the old.  I accept that may be unfair to some MPs.  After all, their job is to represent our interests, not to rubber-stamp whatever the State wants to do, which surely implies an obligation to understand the impact of the laws they enact.

 

But if it is too complex for MPs to understand, what about the man in the street?  It is surely not reasonable for the Minister to blame citizens for not completing a tax return. There is no obligation on a taxpayer to submit a tax return unless required by HMRC to do so.  There is an obligation to notify HMRC if you “are chargeable to income tax” but there is an exception where all of your income is taxable under PAYE.  Unfortunately, the law was amended some years ago to make an exception to this exception where a person is liable to the HICBC.  So what is fairness?  If it is not fair to expect MPs to ensure when enacting legislation that it interacts properly with existing legislation because the system is so complex, why is it fair to expect a PAYE taxpayer who has no interaction with the tax system to know, in spite of that complexity, that he may have a tax obligation when not he, but his wife, receives child benefit – but only if his income is greater than his wife’s (which she may well not wish to disclose to him)?

 

The other factor that the Minister glossed over is, of course, who administers Child Benefit?  It is HMRC.  So, in that context how reasonable is it to expect a PAYE taxpayer to know that he has to tell HMRC if he is liable for the HICBC even though HMRC themselves administer Child Benefit and so might be expected to already know that he is so liable?

 

It is also relevant that HMRC do not need to make a discovery if they collect the tax due within 4 years of the end of the tax year concerned.  It is only if they did not act within this timescale that the problem exists.  The four-year period was introduced because when self-assessment was introduced Parliament felt that a taxpayer was entitled to regard his tax position as finally settled after four years (except where HMRC were unaware of the tax liability through the fault of the taxpayer or his agent).  Is it really unfair to expect HMRC to work out within four years from the information they already have whether someone owes tax?

 

And did, as the Minister claimed, the Upper Tribunal upset “a widely accepted way in which the law is understood to work”.  As a tax specialist, I had little idea that HMRC needed discovery powers in relation to HICBC and suspect that not many other people did either.  Mr Wilkes’ legal team in the Upper Tribunal acted pro bono, which would have been an odd thing to do if they thought that HMRC were right.  I believe there were around 200 cases “stayed” behind Wilkes – who will all have won because the Court of Appeal subsequently upheld the High Court decision.  Accordingly, I suspect that “widely accepted” actually means accepted by the small number of people within HMRC dealing with HICBC”.

 

I wonder whether, when Ms Oppong-Asare decided to approve the retrospective change subject only to asking the Minister to consider the “fairness of this uneven, retrospective application”, she realised that it would catch those who had not appealed because HMRC had told them that they had no right to do so along with those who did not appeal because they did not understand that they had a right to do so?  Or whether Ms Thewliss’ broad support was given on the understanding that she was voting to retrospectively tax those who had been misled by HMRC into believing, wrongly, that they had to pay the tax.  All I know is that neither thought it necessary to demand a vote on the provision.

 

Back to Mr Kensall’s unwavering trust in HMRC.  On 19 November 2019, HMRC sent him a letter headed “Final reminder: important information about the High Income Child Benefit Charge”.  Mr Kensall received this on 21 November 2019 and immediately rang HMRC’s helpline .  His description of the call (which was not challenged by HMRC before the FTT) was:

 

“In my first interaction with HMRC, which was immediately on receipt of my first letter from them on this subject, the person I spoke to was very cagey as to whether I did or did not owe any money.  I was confused, as I was expecting this interaction to be exactly as all my others with HMRC, i.e. they tell me how much I have over or under paid and my tax code is adjusted accordingly …  But, instead I was given a list of websites and contacts and told to go away and work out if I owed them anything”.  HMRC’s version is “Mr Kensall [who, you may recollect, “was not financially sophisticated and had no knowledge of the tax system”] contacted the helpline on 21 November 2019 where general advice was given and he said he was going to collate P60 and Child Benefit information, he was also given the PAYE helpline number so that he could request this information”.

 

The FTT notes “Mr Kensall did as he was instructed.  He looked at the websites, checked his P60 and child benefit information and entered his and his partner’s details into HMRC’s online HICBC calculator.  This required Mr Kensall to identify and understand the various elements of what is included in DNI [I don’t know what that stands for either].  He completed the calculation to the best of his knowledge and abilities and received the outcome that he had no liability to the HICBC”.  Unfortunately, that outcome was incorrect.  “Mr Kensall said that he was not surprised that he had made one or more mistakes, because he was wholly unfamiliar with financial and tax matters”.  The FTT found as a fact that Mr Kensall had done his very best to ascertain if he did or didn’t need to pay anything back.

 

On 19 April 2021, HMRC wrote to Mr Kensall stating that he was liable to HICBC for the years 2016/17 to 2018/19.  At the top of the letter was an HMRC telephone number.  Mr Kensall called this immediately he received the letter on 23 April 2021.  His account of the call was “I again called HMRC immediately and found the second person I spoke to to be much more helpful.  They took me through exactly what the charge was and explained that the figures I had calculated myself did not take into account the cash value of the benefits I received from my employer.  She calculated there and then exactly how much I owed…  She also explained that I could appeal any penalty but would need to pay the amount of HICBC I owed”.  At the Tribunal, he confirmed orally that in this call he had been told he could only appeal the penalties, but could not appeal the HICBC, because it was clear from the figures calculated that he was liable to that tax.  Curiously, the HMRC note of that phone call was simply that Mr Kensall “agrees the figures” and HMRC recorded that he would have to pay penalties because HMRC had sent him previous letters about HICBC.  It did not refer to Mr Kensall’s appeal rights in relation to either the assessments or the penalties.

 

HMRC issued assessment to Mr Kensall for the tax and penalties on 26 April 2021.  He paid the tax but not the penalties.  He appealed these on 10 May 2021, saying in his letter that he had been informed by HMRC that “he would need to pay back [child] benefit with interest”.

 

HMRC offered Mr Kensall a statutory review which upheld the penalties.

 

By now Mr Kensall’s “unwavering trust” in HMRC was beginning to waver.  He did his own research on the internet and discovered the case of Mr Wilkes and realised that, contrary to what HMRC had told him, it was possible to appeal the assessments.  On 5 September 2021, he sent a Notice of Appeal to the FTT in which he stated that he was appealing both the penalties and the assessments.

 

On 21 October 2021, the Tribunal directed that Mr Kensall’s appeal be stayed behind Wilkes (which HMRC were appealing to the Court of Appeal) unless HMRC objected within 14 days.  HMRC did not object.  Mr Kensall then received a series of contradictory and confusing letters and calls from HMRC’s Solicitor’s Office, including one sent on 9 February 2022 stating that if he didn’t settle ahead of his Tribunal appeal, he would have to pay the tax twice.  When Mr Kensall questioned whether this was legal, he received a further letter dated 15 March 2022 [probably this should be February] stating that he would be taxed twice if he didn’t contact them by 24 February 2022.  Mr Kensall immediately contacted HMRC but was told that the information on his file did not make sense and that someone would phone him back.  Someone duly did, telling Mr Kensall that the self-assessments were being issued to ensure HMRC got paid [remember he had already paid the tax HMRC were demanding in April 2021].  Mr Kensall asked for this to be explained in writing, but HMRC did not do so.

 

On 21 April 2022, Mr Kensall received an e-mail from HMRC saying, “Your appeal to the Tribunal has been deemed to be an appeal against the following six decisions [i.e. three penalty assessments and three tax assessments].  There is a legal requirement that any decision which is being appealed to the Tribunal must have first been appealed to HMRC … you must now make an appeal in writing to HMRC.  You can do this by return e-mail directly to myself, and this will get us over the administrative hurdle.  It does not need to be war and peace, and I am happy if you simply want to reiterate or copy what you have previously provided … to the Tribunal.  I appreciate that this may seem a strange scenario but can assure you this is a necessary step in order for your appeal to proceed correctly …”.

 

The next day Mr Kensall responded cutting and pasting from his appeal to the Tribunal but adding that following HMRC’s subsequent confusing and contradictory demands that he complete a self-assessment return as otherwise “he would have to pay the tax twice”, he was “no longer convinced that HMRC had calculated the taxation correctly, or the legality of how they have calculated the tax owed”.

 

On receipt of this e-mail, HMRC wrote to the Tribunal saying that the stay should be lilfted as Mr Kensall’s appeal to HMRC had been made after June 2021.

 

The Tribunal of course duly dismissed Mr Kensall’s appeal against the assessments because he had not given Notice of Appeal to HMRC before 30 June 2021.  It cancelled the penalties though as it was “objectively reasonable for a financially unsophisticated taxpayer in the position of Mr Kensall not to have realised that he had to add his benefit-in-kind to the figures shown on his P60”.

 

It also invited HMRC to consider using their care and management power to refund the tax Mr Kensall had paid, although acknowledging, “That is however a matter for HMRC.  I do not know if they did.  I doubt it!  When the Daily Telegraph asked them to comment on Mr Kensall’s case, they responded, “The vast majority of customers meet their obligations and comply with the HICBC.  This judgement does not affect any taxpayer’s liability for the charge”.

 

The HMRC Charter states, “HMRC is committed to improving its customer experience”.  It looks as if it has a long way to go!  The Charter also says, “Making things easy: We’ll provide services that are designed around what you need to do, are accessible, easy and quick to use, minimising the cost to you”.  I wonder if Mr Kensall believes that HMRC “made things easy for him”.  I certainly don’t.  Nor do I think that their dealings with him can legitimately be described as “accessible, easy and quick to use”.  I also doubt that he still believes HMRC absolutely.

ROBERT MAAS