HMRC is asking for more powers to force accountants to reveal the names and addresses of clients who use schemes to avoid paying the 50% rate of income tax.
The "new specialist information powers" would enable HMRC to demand that accountants release the details of all individuals using such schemes, when the new rate comes into force in April next year.
Given that tax avoidance is legal, why does HMRC need to know who is avoiding tax?
Surely it only needs to know the nature of the schemes being used by accountants, in order to validate their legality?
Tax avoidance schemes have been around for yonks, why now does HMRC feel the need to increase its snooping powers?
Tax does have to be taxing.
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I thought that any tax avoidance scheme had to be approved by HMRC in the first place. So I am not sure how supplying the names of people who are using approved schems will help them unless they suspect that some accountants are colluding with their clients to avoid tax by using non-approved schems but then wouldn't that be tax evasion?
ReplyDeleteThe sooner we get an easy to manage flat rate consumer tax on ALL consumer goods, like VAT but covering all goods and therefore only requiring 1 page of law, and scrap all corp tax, income tax and NI etc the better it will be for all. Get rid of HMRC completely and set up a new organisation staffed by intelligent qualified accountants.
ReplyDelete"Given that tax avoidance is legal, why does HMRC need to know who is avoiding tax?
ReplyDeleteSurely it only needs to know the nature of the schemes being used by accountants, in order to validate their legality?"
Implementation errors, for a start. A scheme may be within the letter of the law when designed, but users don't always follow them properly, so it's often worth HMRC's while looking at users to check.
The other reason is that it takes time to challenge a scheme. Oddly enough, there will often be disagreement over whether a scheme "works" (i.e. whether it's within the letter of the law) HMRC can't take a hypothetical scheme to court; they have to take an actual implementation through. They therefore have to open an enquiry into one of the users. Meanwhile, they will also need to open enquiries into other users who will become "litigation followers" - i.e. their cases will be put on hold until the court case is decided.
But of course I don't need to tellyou any of this, Ken. You're an accountant so you'll already know!
Do you have a link to a press release or something on this, Ken, because I'm not sure how this represents an extension to HMRC's powers? The existing disclosure scheme works in effectively the same way. Scheme promoters disclose a scheme and are given a reference number; users are then obliged to include the number with their returns where the scheme features. If HMRC are approaching promoters directly to get lists of users, is it because they're worried that users aren't disclosing as they should be?
"The sooner we get an easy to manage flat rate consumer tax on ALL consumer goods, like VAT but covering all goods and therefore only requiring 1 page of law, and scrap all corp tax, income tax and NI etc the better it will be for all."
ReplyDeleteThis is a really interesting idea, and one that I was giving some thought to a couple of years ago. It is appealing: it encourages saving, discourages wasteful profligacy, and is equitable because those who have the most lavish lifestyles pay most. The other thing you can do is vary the rates on things to influence behaviour: low rates on educational materials, high rates on fags, for example.
Unfortunately, the one page of law thing is pie in the sky. What you're basically talking about is raising the rate of VAT and there's an awful lot of VAT law. Even if you simplify it as much as possible, as soon as you introduce the new regime people will start trying to avoid it. One of the main reasons tax law grows each year is the introduction of anti-avoidance legislation. The first thing that springs to mind to avoid this is to go on a glorified booze cruise. The rich would simply stop spending money in the UK. You could combat this by imposing a charge on movements of money out of the country, but that's 30+ pages of law right there!
The real problem with this idea, though, is that the economy would go into meltdown! What's the easiest way to avoid this? Stop spending! In the long-term, the economy would be likely to shrink massively because people would just save their money. While this might sound like a good thing - people making provision for their retirement, etc - savings are no good for you if the economy goes down the pan. Savings are effectively an investment in the future of businesses in the economy. If that collapses then you'll eventually get devaluation of the currency and your savings become worthless.
Also in the short-term, there would be a massive one-off shock to the system, because nobody would know what things should cost. First of all, you'd have to more than triple the VAT rate (even before taking into account reduced spending), so prices would go up by about a quarter straight away. But then business' expenditure would drop because they wouldn't be paying national insurance on behalf of employees and tax on their profits, plus they'd try to cut wages on the grounds that their employees would get a massive instant take-home payrise. Their suppliers' business taxes would no longer have to be factored into their purchase costs (possibly). Employees, however, would demand higher take-home wages, which would create upward pressure on prices. It would be chaos. This could be eased by carefully phasing it in, but this would be far from straightforward and there's no guarantee it would work. The very great risk is that, even before the longer-term economic slowdown described above, there would be a profound sudden shock as everyone stops taking risks (i.e. spending) because of the huge uncertainties over what things should cost!
For another fundamentally different alternative taxation system, Google "land value tax". It's quite interesting if you're a tax geek like me! ;)
"Get rid of HMRC completely and set up a new organisation staffed by intelligent qualified accountants."
I shall try to resist the temptation to rise to this!
"I thought that any tax avoidance scheme had to be approved by HMRC in the first place."
ReplyDeleteNot exactly. There are two things that come close to this.
The first is the disclosure legislation I have alluded to above. Part of this is, I think, what Ken's blog post is about. When someone (either a taxpayer or a scheme "promoter" - generally a lawyer or accountant) comes up with a scheme which has certain features (things like a novel interpretation of the law, for example), they have to submit it to HMRC. A scheme reference number (SRN) is issued and, in the case of a promoter-led scheme, users of the scheme have to quote the SRN on their returns. HMRC does not have to give any sort of approval of these schemes, however. There are 3 ways on which they will respond:
1) if they feel the scheme is within the spirit and letter of the law (some such arrangements will have to be disclosed because to be any use the list of features that determine what has to be disclosed have to be pretty wide), they will do nothing. They won't, I don't think, explicitly say they approve, but they won't tackle the scheme. That's as close to approval as you get.
2) if they think it's within the letter but not the spirit of the law, they'll look into changing the law!
3) if they think it doesn't work as intended (i.e. it's not within the letter of the law) they'll investigate the users. This may mean ending up in court.
Sometimes they'll do 2 and 3 at the same time. If there's a lot of money at stake they might change the law to close the loophole to future would-be users but still take the original users to court. They're hedging their bets, basically.
The other thing is the clearance regime. A taxpayer (usually a company) or it's accountant etc can submit a description of a forthcoming transaction along with their interpretation of what the tax implications are. HMRC will then say whether or not they agree and if not why. This doesn't tend to be used for avoidance schemes, though. If you were going to enter into dubious avoidance (the type that goes to court, not using an ISA or something!) you probably wouldn't want to voluntarily tell HMRC all about it! This is used primarily for commercial, non tax-motivated transactions that happen to have novel features.
"First of all, you'd have to more than triple the VAT rate"
ReplyDeleteActually, I was talking rubbish here. There would have to be a six-fold increase on VAT receipts. This would be likely to more than double the price of most things on the shelf. Admittedly, if you went for the (wholly inequitable) idea of all items being subject to the same rate puely in the interests of keeping the legislation shorter, it would mean that you'd start collecting revenue on things you don't already (e.g. food, children's clothes), but this would be at least mostly counteracted by the fact that, if you really wanted to keep it to one page of tax law, you'd presumably be scrapping things like tobacco, petrol and booze duty!
"What you're basically talking about is raising the rate of VAT and there's an awful lot of VAT law."
ReplyDeleteIMHO this does not invalidate the argument for a flat tax. The problem with VAT is that the existence of exemptions and zero rates give a massive spur to avoidance. If you remove these, I think the flat tax idea works.
The basic problem would be supression - and that would remain, with or without a flat tax - but maybe this would be a more profitable area for HMRC officers to address than endlessly chasing arcane points of law?
"IMHO this does not invalidate the argument for a flat tax. The problem with VAT is that the existence of exemptions and zero rates give a massive spur to avoidance. If you remove these, I think the flat tax idea works."
ReplyDeleteCan you really say that's equitable, though. Remember, you'd have to be doing away with things like alcohol and tobacco duty. How can it be justified that things like baby food would then be taxed at the same rate as fags?
"The basic problem would be supression"
One of them, yes (others, which I alluded to, are movements of currency overseas and the economy going into meltdown). There would be a huge incentive to suppress, given that the sales tax rate would have to increase so dramatically. Do you really think the reduction in the driver to avoidance represented by the removal of VAT exemptions/reduced rates would be sufficient to outweigh this?