HMG and HMRC have developed an unhealthy obsession with tax avoidance (a perfectly legal and perfectly logical practice) in their desperation to raise money to keep the ship of state afloat.
In HMRC's recent consultation document "High-risk areas of the tax code: Relief for income tax losses" (published on 30 June 2011) the phrases "robust defences against avoidance" and "the strategy focuses on preventing tax avoidance before it occurs to protect the Exchequer and increase certainty for taxpayers" appear in paragraph 1.1 on page 4.
Paragraph 1.5 then goes on to say:
"However, loss reliefs that can be used to reduce or eliminate tax on general income or capital gains have regularly been used for tax avoidance purposes."
So what?
Avoidance is legal, even though the government (members of which use tax professionals to minimise their tax payments) would like avoidance (except when they are practising it) to be made illegal.
Paragraph 1.6 "HMRC’s internal review has identified the income tax loss reliefs that are most prone to misuse for tax avoidance purposes."
"Misuse"??
Does HMRC regard avoidance as a crime?
Paragraph 1.8 offers the reader some hope that HMRC have finally realised that tax legislation has become far too complex:
"Continued attempts to prevent avoidance through legislative change have made the legislation unwieldy and complex, meaning there is also some potential for simplification."
However, that hope is crushed by paragraph 2.14 that asks for more legalisation:
"It is desirable, and would be more cost-effective for both taxpayers and HMRC, to have a legislative structure that provides certainty and deters tax avoidance involving sideways loss relief at the outset. This would eliminate the need for HMRC to investigate and litigate each individual case on its particular facts."
HMRC require feedback by 30 September, feel free to let them know what you think of it and also to advise them of the various tax avoidance measures currently used by members of the government, MPs and the companies which they run.
Given the obsession with avoidance, I suspect HMRC would have some rich pickings if it went after our "respected" elected representatives.
Wouldn't that be fun?:)
Tax does have to be taxing.
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Apart from the moral aspects of aggressive tax avoidance - using convulted structures and tax havens to avoid tax, some schemes have found when tested in court to be illegal.
ReplyDeleteTax avoidance schemes are marketed aggressively unlike tax evasion so the loss to the Exchequer can be considerable. They should be tested and any revenue collecting agency anywhere will have a strategy to investigate them.
Theres an article in private eye - see http://www.private-eye.co.uk/sections.php?section_link=in_the_back
"Britain’s “leading tax accountant” can also take credit for the abortive Project Slag, designed to dodge £100m and earn Deloitte £10m, and Project Aircraft, under which the car company started leasing aircraft to Thomson Travel purely to soak up tax allowances with the help of Barclays bank.
Under Cruickshank the firm’s tax division, a tribunal recently exposed, also ran a £140m scheme for bankers from Deutsche Bank to dodge tax on their bonuses via a Cayman Islands share scheme.
Such scheming is commonplace though the tax avoidance industry and HMRC contrive to keep as much of it as possible secret. But the Eye has now learned of a new high value scam being punted around by none other than… Deloitte.
Known as the “derivative derecognition” scheme, it involves a company entering a swap contract which has income and expense elements then issuing special shares to its parent company that make the income element magically disappear for tax purposes. Since this exploits tax laws that industry specifically asked for to help investment, even a member of the tax industry told the Eye: “It really is taking the piss.”
To quote a former Chancellor
"The difference between tax avoidance and tax evasion is the thickness of a prison wall"
11:08,
ReplyDeleteIt's good to see I'm not the only one with nothing better to do than bang my head against this particular brick wall. ;)
Unfortunately, part of the difficulty is that Ken - like many commentators on the issue - uses a misleading definition of the word "avoidance" which includes everything from using a personal allowance (which in reality isn't even tax planning; it's just part of the computation!) right up to ... well, it's hard to say where Ken thinks the line should be drawn, because strangely he seems rather reluctant to acknowledge that things as blatant as the derivative derecognition schemes go on, but I assume that they would probably come within his definition.
What this does, of course, is allow such commentators to portray anti-avoidance measures - entirely misleadingly - as attacks on things like ISAs and personal allowances and brand them as "dangerous". A classic (and, I have to admit, quite clever) straw man argument.
That's why I now generally steer clear of the "A" word when commenting here.
Stew G
Ken,
ReplyDeleteJust four quick questions for you:
1) Did you read the "Tackling tax avoidance" statement published by the Treasury in March and referred to in section 1.1 of the income tax losses ConDoc?
2) Do you agree that, when HMRC uses the word "avoidance" in the ConDoc, they are referring to "reducing tax liabilities by using the law to get a tax advantage that Parliament never intended" (p3 of the Treasury document)? If not, what leads you to consider that the word is intended to refer to something else when it is used in the ConDoc?
3) Do you consider it inappropriate for a tax authority to take steps to make it more difficult for people to reduce tax liabilities by using the law to get a tax advantage that Parliament never intended? If so, why?
4) Do you not agree that the fact that certain MPs have been shown to have reduced their tax liabilities using a range of methods, including both evasion and using the law to get a tax advantage that Parliament never intended, makes it all the more understandable that significant numbers of the public are now demanding that more be done to make it harder for people (including MPs) to reduce tax liabilities by using the law to get a tax advantage that Parliament never intended?
I look forward to your reply with interest, though I fear that 11.08 and I will be told by someone else that we should concentrate on unspecified "more important aspects" than this pile of "complete horsewank". :)
Stew G
I will save you having to wait too long before being told to worry about other things rather than this load of "complete horsewank".
ReplyDeleteHave a nice day.
Stew
ReplyDeleteTaking your questions in order:
1 No
2 No, because I am cynical and don't think any state body should be trusted/given leeway to take more powers etc
3 No, because it's not an unelected bureaucracy's role to re-engineer parliamentary laws
4 No, it's MPs/Gauke who are pushing this not the public.
Stew G , we won't get any sympathy from Ken - he's a firm believer of Flat Tax for a start - something that would benefit the wealthy considerably.
ReplyDeleteEven if tax was 5p in the pound I suspect that aggressive tax avoiders would still be looking at ways to get around this.
11.08
Funny how when the economy was doing well the, ahem, 'Wealth Makers' were happy to line their pockets as much and as fast as they could. Now when times are harder they want to use agressive and morally illegal tax avoidance practices to continue their lavish lifestyles while also slagging off civil service pensions, which are a largely pittance for the rank and file.
ReplyDelete11:08
ReplyDeleteFlat tax rate +
Personal allowances of around £20-25K +
Shortfall in revenues made up by VAT increase (food and other zero rated items to remain zero rated), which even the "wealthy" pay
"Even if tax was 5p in the pound I suspect that aggressive tax avoiders would still be looking at ways to get around this."
ReplyDeleteI for one did not go into business in order to pay as much tax as possible so it could be wasted by HMRC and other government departments or given away to people who simply sit around on their backsides and do nothing about getting work.
I have no problem paying what is due and do so every year. But I can assure you I will not hand over anymore than I have too by law. And you can sod the idea of abiding by the "spirit of the law".
Ken,
ReplyDeleteThank you very mutch for answering my questions. It is enlightening to get some more insight into where you're coming from on this. Forgive me for flogging (or...erm...doing something to) the dead horse, but I'd like to pose a couple of follow-up questions. Using the same numbering:
1) OK
2) Can you please expand upon your reasoning here? I too am deeply concerned about the possible implications of state bodies being granted too many powers. However, I'm confused as to why you consider that this has a bearing on the definition of "avoidance" as it is used in this ConDoc.
3) What do you mean by "re-engineer"? Are you suggesting that HMRC's intention with this ConDoc is to introduce new legislation without it being subjected to the usual Parliamentary process (i.e. approved by the - elected - Minister, debated etc in draft form in Parliament before being voted on by Parliament) and if so, what gives you that idea?
Alternatively, are you suggesting that, even though HMRC is accountable to Parliament and takes direction from the elected Government of the day, it is inappropriate for HMRC to be doing the work of actually drafting tax legislation? If that is the case, could you suggest a workable alternative system for improving (including simplifying) legislation that would require less or no HMRC input?
If we assume for the moment that such a system could be put in place, would you accept that a Government has a responsibility to put in place systems to make it more difficult for people to use the law to get a tax advantage that Parliament never intended and if not why not?
4) Question 4 wasn't about this ConDoc, it was about the demands that certain sections of the public are making. I'm confused as to why the person "pushing" the ConDoc has any bearing on your answer.
Kind regards,
Stew G
The Personal allowance/ISA argument is quite ridiculous really.
ReplyDeleteTax avoidance is where clever firms exploit loopholes in the law to reduce the tax bills of large corporations/'financially independent' individuals to such an extreme that they may as well be sticking two fingers up at the general public.
Tax planning is, well, just that really. Unfortunately HMRC won't help you very much if at all with tax planning but that is only because it is not the function of the department to do so (in the same way that the land registry won't help you get a good deal on a house or the foreign and commonwealth office won't be personally sponsoring your visa application etc. to a foreign country) unfortunately that's just a fact of life and those who require HMRC to be nanny to them seem to be the ones that like it the least when nanny administers an admonishment.
The personal allowance, however, is set by the government each year. It's not avoiding anything! It's a deliberate part of the statute books! The same goes for ISA's and the previous 'government approved tax free investment' products.
For someone who is a 'Fellow of Chartered Accountants' amongst other professional qualifications, I fail to see why Ken refuses to make the distinction and instead skews the meaning of the word towards somewhat deliberate ambiguity.
@4 July 2011 18:41
ReplyDeleteIf you would care to give the name of your firm so that your customers are aware that you 'sod the spirit of the law'.
I'm sure that they'll appreciate that you probably treat them with the same contempt as you do the government e.g. no after sales care etc. 'because you don't have to....'
I'm willing to bet the last four letters are 'TRAD'
18:41,
ReplyDeleteAgain a couple of questions, because I'm trying to understand where you're coming from.
Have you ever entered into a scheme designed to reduce your tax liability by using the law to get a tax advantage that Parliament never intended? If you're unsure, a good (though not definitive) indicator is whether you have had to provide HMRC with a Disclosure of Tax Avoidance Scheme (DOTAS) reference number.
I strongly suspect the answer is no, because (no offense intended, but) I'd be very surprised if somebody with the money to enter into such a scheme would be spending their time anonymously defending their decision to do so on here, but I'm willing to stand corrected.
So, assuming you haven't, are you comfortable with the idea of others who do gaining competitive business advantage through the use of such schemes without steps being taken to prevent them continuing to do so?
Finally, what leads you to consider that the ConDoc referred to here has something to do with anyone having to "hand over anymore than [they] have too [sic] by law"?
The way anti-avoidance basically works (and, contrary to Ken's assertion that this is something that has "developed" in recent years, the way it has basically worked for decades) is:
1) Identify schemes
2) Figure out whether they work (i.e. if the scheme involves handing over any less than required by law)
3) If they don't appear to work, litigate (i.e. have the courts decide if they work)
4) If they do work, change the law so they don't work in future, but let the claimed treatment stand for schemes entered into before the change.
In other words, nobody pays more than the law says they should. People might end up paying more than they thought they would when they entered into a scheme, but only if the scheme turns out not to work in accordance with the law - in which case they end up paying the amount the law said they would. Simples.
Stew G
"HMG and HMRC have developed an unhealthy obsession with tax avoidance (a perfectly legal and perfectly logical practice)"
ReplyDeleteAs I have said before tax avoidance is only illegal if it works. Suppose it doesn't like this:
http://www.bailii.org/cgi-bin/markup.cgi?doc=/uk/cases/UKSPC/2007/SPC00636.html&query=prudential&method=boolean
What do you think should happen to the persons who use these illegal methods?
Let's face it you haven't got much of a clue.
Yawn!
ReplyDeletePlease change record.
I fancy a little Osibisa, The Dawn;
"Ayeko Beeayeabeeayea Ayeko Beeya"!
2 Kenyan Doctor's sat in the cafeteria in a London teaching hospital arguing loudly, on e says to the other
ReplyDelete" No it is WUMB!"
the other says "No, no! It is WOOMB I tell you"
A snotty Brit Paedeatrician interrupts and says loudly " You are both wrong it is WOMB damn you"!
The first Kenyan Doctor turns to the ignoramus and says "My dear Sir it is obvious that you have never heard an elephant fart in the wild, now fuck off there's a good chap"!
21:19,
ReplyDelete"As I have said before tax avoidance is only illegal if it works."
I take it you mean it's only legal if it works?
Stew G
Yes, tax avoidance is "perfectly legal and perfectly logical". After all, everybody would like to reduce their tax bill.
ReplyDeleteUnfortunately, that shouldn't make it morally acceptable. Whilst many of the less well-off are being hammered hard by reductions in benefits, the rise in VAT, soaring prices, pay freezes, pay cuts, pensions cuts, etc, the very rich are able to enjoy life without the burden of appropriate taxation.
Yes, what they're doing is legal, but ethically dubious. It seems to me that this is what HMRC and the Government should be trying to control.
We've seen much discussion of late regarding public sector pensions and how they "aren't fair". Compared to private sector pensions, there is a clear disparity, yes. Personally, I'd like to see a campaign to improve private sector pension provision rather than engage in a harmful 'race to the bottom'. But, if we're talking fairness, how is it 'fair' that the majority of us pay the appropriate taxes, thus helping to keep GB PLC afloat, while many others see it as their main aim in life to NOT contribute?
I've mentioned in a previous comment about the Arcadia Group, with Philip Green as the very visible head, but his wife Tina Green as the boss on paper. This led to an avoidance of some £285 million tax in 2005. That money could have been going towards the provision of schools, policing, the NHS, you name it. Instead, it sits in the Green family coffers in Monaco.
And there was I thinking that "We're all in it together."
Tax avoidance on the scale it has grown to is indefensible. I don't think Ken is going to get a huge amount of support on this one.
I always thought Stew G had a pinhole view of life.
ReplyDeleteHe obviously can't read between the lines or understand double entrende.
Re-read the words from a wider view Stew!
07.28,
ReplyDeleteSorry, I'm obviously missing it. You'll have to enlighten me. Which words exactly have I misinterpreted, as there are quite a lot here now?
Stew G
When ever I see this one flare up I wonder what HMRC blunder is about to be reported.
ReplyDeleteAlthough I guess it could just be people trying to justify their strike action because they did not get public support.
08:57,
ReplyDeleteYou can cast aspersions about our motives all you want. Personally I'm just trying to get a handle on Ken's reasoning; I'm still hopeful that he or 07:28 will talk me through it.
In the meantime, am I to understand that you disagree with the main point being made here by myself and others, namely that it is important that steps are taken to tackle the practice of reducing tax liabilities by using the law to get a tax advantage that Parliament never intended? If so, why?
Stew G
It's not that I disagree with where you are coming from fully, but I would like to see departments like HMRC sort themselves out before criticising others for not paying tax that is not actually due.
ReplyDeleteI see the 'morally wrong' argument used a lot but is it not also 'morally wrong' that we contribute a lot of money in tax that is then wasted by HMRC and other departments.
If HMRC was actually efficient and collected the money due correctly and timeously all these posts would be redundant.The massive tax hole would not exist, there would be no need to raise taxes and no need for as many people to try avoidance schemes.
ReplyDeleteThis lack of efficiency is not the fault of the front line troops but of utter twats in senior management.
That includes the numpties that cannot organise a contract for any kind of requisite equipment such as IT systems.
BTW who ordained that everything in life had to be FAIR. No such legislation exists on earth or anywhere else in the Universe.
If HMRC was actually efficient and collected the money due correctly and timeously all these posts would be redundant
ReplyDeleteThis doesn't seem to be keeping in tone with some of the posts on this board which suggest that if HMRC act correctly and efficiently as you suggest, then they are being 'jobsworths'.
Which is it to be? Do HMRC staff from bottom to top follow both the spirit of the law whilst upholding the letter of the law whilst exercising discretion at the same time as vigorously pursuing those who owe tax (and in most cases aware that they do)?
Answers on a polling card please.
HMRC need to sort themselves out internally while working with the government to look at what they deem to be "avoidence" and tighten up the rules if needed.
ReplyDeleteThat way they can stop wasting time and effort trying to get large corporations to enter into the "spirit of the law" while at the same time wasting millions on their own cock ups.
@5 July 2011 18:45
ReplyDeleteExcellent. I don't think Ken will particulalry agree with you about the avoidance bit but him and most HMRC ground-staffers will agree with you about the cock-ups.
The spirit of the law bit is difficult to tackle, if the government wanted to it could be extremely draconian and introduce simple hard and fast rules on what is taxable to the person and taxable to the corporation, make worldwide income taxable (as it is to US citizens) and by what methods both parties could seek to reduce their taxable income however I cannot see the 'big four' liking that very much as they'd all be out of a job and we can't be having that now can we?!
In fact just reading up on the tax obligations on worldwide income makes me wonder why low paid HMRC staff are seemingly required to mother-goose the UK general public (rich or poor) on their tax obligations when it's far worse if they make a mistake and try to claim ignorance in the United States
ReplyDeletee.g. they can pursue you for assessment for almost eternity if you don't file a return or face severe penalties in lieu and you can't just escape by moving elsewhere.
This behaviour which would be seen as aggressive if employed by staff here is from a country that expects every person or family to file a return e.g. the excuse 'my employer does that all for me' doesn't apply.
In the UK your employer doesn't pay your tax, they collect the tax based on information you are personally legally responsible for providing them and HMRC with.
ReplyDeleteThe crystal ball does not extend to knowing that you haven't provided the correct information It's your obligation to provide factually correct information, not your employers, not HMRC's, yours!.
@19:40
ReplyDeleteHave to disagree with you I am afraid. My experience is that even if you provide HMRC with the correct information they still get things wrong.
@5 July 2011 20:28
ReplyDeleteYes. HMRC do get things wrong.
Sometimes they (human beings) misinterpret the cloud of information given to them by various different people (employers/taxpayers/agents) who all report information in a different way (by other human beings).
The department is apparently meant to accept the several thousand different ways that people might choose to present information, yet act/interpret/decide in a uniform manner when that information is received.
Answers on an xml data formatted sheet please.
09:52,
ReplyDeleteThank you very much for your considered response. However, this is absolutely, categorically not about “criticising others for not paying tax that is not actually due”, nor is it about trying to get people to pay tax that is not actually due.
In my comment at 21:07 last night I set out a very rough summary of how anti-avoidance works (or should work if the government took it seriously). A longer, more detailed version is at paragraphs 1.7 to 1.16 of the ConDoc. If you consider that any part of either involves trying to get people to pay tax that isn't actually due, could you please point it out? (Besides, given the calibre of the lawyers and accountants involved in this field it would be niave in the extreme to suggest that such a strategy might be successful.)
If anyone deserves criticism, it's the government (of which HMRC is of course a part) for allowing others to not pay tax that should be due (but which possibly isn't). I think that's a very important distinction.
Stew G
maninblack,
ReplyDeleteYou seem to suggest that HMRC should seek to reduce the “massive tax hole” and yet you apparently resist the suggestion that they should be more proactive in tackling schemes that aim to reduce tax liabilities by creating tax advantages not intended by Parliament, which undoubtedly contribute to the “tax hole”. I am confused, but perhaps I have not understood your point.
“BTW who ordained that everything in life had to be FAIR. No such legislation exists on earth or anywhere else in the Universe.”
I'm struggling to understand this, too. Do you mean to say that you agree that it is unfair for people to be able to reduce tax liabilities by using the law to create tax advantages not intended by Parliament, but that unfairness is just the way of the world so we should not try to do anything about it?
Stew G
18:45,
ReplyDelete"HMRC need to sort themselves out internally while working with the government to look at what they deem to be "avoidence" and tighten up the rules if needed."
Spot on. It staggers me that people seem to see this as either:or. I think HMRC needs to improve across the board: its processes are a shambles, the call-centres are in meltdown, it's treating its staff like sh!te and it's efforts to tackle schemes that reduce tax liabilities by using the law to get tax advantages not intended by Parliament are inadequate.
Stew G
Stew G, just one question - when 'Dame' Leslie Strahie decides to take her £100K per annum early retirement pension, would you be prepared be become Chief Executive?
ReplyDelete10:52,
ReplyDeleteNah. The pay's not good enough! ;)
Stew G
HMRC inefficient? £435bn pulled in a year on a departmental budget of only £4bn per year. So it costs 1p to bring in every £1. I'd love to see a more efficient business than that. I'm a senior inspector and I'd just like to say that I bring in more money each year than I will ever earn in my whole career. I'd love to be on a 10% commission as I could retire after two years.
ReplyDelete