Monday, May 21, 2018


BLOG 188


I have been reading the FTT decision in Elliott Knight Ltd v HMRC (TC 6338).  It is an odd case but seems to me to have wider implications.  HMRC issued a penalty notice to the company on the basis that it had breached Regulations 7, 8, 14 and 20 of the Money Laundering Regulations.

At the Tribunal hearing, Counsel for the company cross-examined the HMRC Officer who had imposed the penalty.  She accepted that there was no requirement for the company’s risk assessment policies either to be in writing or to be in English, so there was no breach of Regulation 7.  She also accepted that there was no fixed time after which the due diligence records should be re-examined if it was up to the trader’s judgement.  There was accordingly no breach of Regulation 8.  She also accepted that her report on which the penalty was based did not demonstrate any breach of Regulations 14 or 20.  When Counsel specifically asked at the end of his cross-examination whether she considered there were any breaches of any of the four Regulations, she replied “No”.  HMRC then asked for an adjournment and, on resuming, said that HMRC were withdrawing from the case.

Elliott Knight then sought an order for HMRC to pay its costs.  The Tribunal could make such an order only if it considered that HMRC “has acted unreasonably in bringing, defending or conducting the proceedings” (Tribunal Rules, para 10).  To paraphrase, did HMRC act unreasonably in defending a penalty assessment that they had raised when, had they carried out a detailed analysis of the penalties both as to the facts and the law, they would not have identified anything to justify raising the assessment?

HMRC referred the Tribunal to an Upper Tribunal case.  In Tarafdar v HMRC (2014 UKUT 362 (TCC)) the Tribunal has said that in considering an application for costs, a Tribunal should ask itself three questions:

1.      What was the reason for the withdrawal?
2.      Having regard to that reason, could that party have withdrawn at an earlier stage?, and
3.      Was it unreasonable for that party not have withdrawn at an earlier stage?

Based on an earlier Court of Appeal decision, the Tribunal said that ““Unreasonable” conduct includes conduct which is vexatious and designed to harass the other side rather than advance the resolution of the case.  It is not enough that the conduct leads in the event to an unsuccessful outcome.  The test may be expressed in different ways.  Would a reasonable person in the position of the party have conducted themselves in the manner complained of? …  Is there a reasonable explanation for the conduct complained of?”.

HMRC also pointed out that even if conduct is found to be unreasonable, the Tribunal is entitled to exercise its discretion and is not compelled to award costs.

So far, so good.  An award of costs is intended to be exceptional.  Losing a case does not imply it should never have been pursued.  If the law was always clear, there would be no need for a Tribunal system at all.

But Elliott Knight is a case where a penalty was imposed for a breach of the statute and the Tribunal did not even have to decide if the statute had been breached, because when the HMRC Officer was taken through the law by Elliott Knight’s barrister, she agreed that the law had not been breached and HMRC’s barrister (presumably after taking instructions from her client) promptly withdrew from the appeal.  That certainly suggests that had HMRC’s solicitor or barrister themselves considered the facts and the law earlier, they would have settled the appeal without the need for a hearing.

So, what was the reason for the withdrawal?  Because, said HMRC, the decision-making Officer was persuaded to agree with Elliott Knight’s barrister that her decision was flawed and should not stand.  Yes, said the Tribunal, “But we do not think we could say that every Officer of HMRC faced with this line of questioning would do as Ms Dunsmore did.  We do not think it could be said that the withdrawal would inevitably have happened as a result of the lack of analysis of the type Mr Jones suggest was the proximate cause”.  But all that Ms Dunsmore did was give honest answers to the questions posed by Mr Jones.  So what differently could a different Officer have done?  And the fact that Ms Dunsmore accepted that there had been no breach of the Regulations did not mean that HMRC had to concede the case.  They could have said that Ms Dunsmore is not a lawyer and her understanding of the law does not actually reflect the law and their barrister could have herself explained how Elliott Knight had breached the law.  Withdrawal from the case as a result of the cross-examination certainly suggests that once the law had been explained to Ms Dunsford and she accepted that she had not grounds to raise the penalties, HMRC accepted that in fact there were no such grounds.  It is hard to see that they would not have reached the same decision had they discussed the law with Ms Dunsmore prior to the hearing.

Could HMRC have withdrawn at an earlier stage? No, said the Tribunal, the taxpayer should have made clearer why they were opposing the penalties instead of leaving it to HMRC to work out for themselves that it was because the taxpayer had not in fact breached the law.  “Faced with such limited and unspecific grounds of appeal, they cannot be blamed for pursuing the case”.

I find that astounding.  It seems to be saying that if HMRC assess a penalty, they have no obligation to ensure that the law entitles them to do so, but it is up to the taxpayer to tell them that they have no legal basis for the assessment and if the taxpayer is ignorant of the law (as most are), it is fair game for HMRC to extract cash from the taxpayer under false pretences.

Of course this case relates to a claim for costs before the FTT, a fairly rare occurrence.  But it is based on what is “reasonable”, which is an ordinary English word.  In 2008, it is a word that the then government agreed to sprinkle throughout Schedule 36 as a “safeguard” for taxpayers.  But if the Tribunals do not think it unreasonable for HMRC not to at least try to satisfy themselves that there is a legal basis behind an assessment before taking it to the FTT, it is hard to understand what sort of “safeguard” the insertion of “reasonable” in fact provides to taxpayers.


Monday, April 23, 2018


BLOG 187


I hope that both the ICAEW and the CIOT are going to strongly oppose the proposals in the government recent issued “Employment Status Consultation”.  This has ostensibly been issued to work out how to give effect to the proposals made by the Taylor Review of Modern Working Practices.  The government have said that they accept all of the Review’s recommendations except in relation to tax.  Tax was actually specifically excluded from Mr Taylor’s terms of reference but he considered it just the same.  The consultation document was issued by the Department for Business etc, but is jointly badged by them with H M Treasury and HMRC.

It says very little about tax – two pages on Alignment between tax and rights – but that is why it is so dangerous.  The likelihood is that HMRC will piggy-back onto its conclusions.

The real problem is that it starts from the wrong place, so its conclusions are bound to be flawed.  It suggests giving statutory effect to the principle laid down by the Courts.  While acknowledging that will result in a loss of flexibility, it suggests that is a fair trade off against clarity and certainty.  That may be right, but it should not be overlooked that inflexibility can, and often does, result in unfairness, so it is not reasonable to ignore (as the consultation does) that certainty and fairness rarely make good bedfellows.  Certainty caters for the norm.  The unfairnesses arise from abnormal cases.  Furthermore, Courts do not “lay down principles”.  They interpret the law in the context of the specific facts before them.  The Courts are accordingly fundamentally flexible in the sense that a different set of facts may well produce a different nuance on the principles discerned by the Court.

But that is not my real concern.  It starts, as any test of employment status must do, with the statement by MacKenna J in the 1968 Ready Mixed Concrete Social Security case.  “The servant agrees that, in consideration of a wage or other remuneration, he will provide his own work and skill in the performance of some service for his master.  He agrees, expressly or impliedly, that in the performance of that service he will be subject to the other’s control in a sufficient degree to make that other master.  The other provisions of the contract are consistent with its being a contract of service”.  (The underlining is from the consultation document; note particularly that nothing in the third sentence is underlined).

It there infers “This has developed into the following main characteristics –

·         Mutuality of obligation …
·         Control …
·         Personal service …

If these three characteristics are present, the Courts will then consider other criteria relevant to the case that are consistent with a contract of employment or service”.

Tax specialists will know that this is indeed how HMRC like to interpret the cases.  Can we find control and personal service (mutuality of obligation means no more than there is consideration so as to make the arrangement a contract)?  If we can, it is an employment unless you can show a good reason why it is not.  But MacKenna J’s test is not “control”; it is “control in a sufficient degree to make that other master”.  In other words it is looking for a master/servant relationship.

The way the two Courts seem nowadays to be interpreting MacKenna J is that there is a two-part test.  Is there mutuality of obligation, a master/servant relationship and an obligation to personally perform the service?  If so, the arrangement is capable of being an employment; if not, it cannot be an employment.  If the arrangement passes test 1, test 2 is to look at the facts, untramelled by test 1, and ask whether or not the facts are consistent with employment.

This is not hair-splitting.  It is fundamental.  The consultation document test does not clarify Court decisions; it usurps them.  Before looking more closely at why control per se is the wrong test, it is helpful to pose the question as to why does the distinction between employment and self-employment matter.  The answer is that it doesn’t for most of us.  I do not care whether my dentist’s receptionist is employed or self-employed; I only care that she makes my appointments.  I do not care whether my gardener is employed or self-employed; I only care that he keeps my garden trim.  I do not care if my electrician is employed or self-employed; I only care that he procures that my electricity supply functions.

The only reason it matters is that the State has created a distinction – or rather, a number of different distinctions.  The question therefore ought to be whether those distinctions, most of them created the best part of a century or more ago, are either still necessary or the right distinctions in modern society.  To look at how to define the distinction is treating the symptoms, not the disease.

The State has drawn a distinction in three distinct areas, employment rights, welfare rights and tax.  But in all three it has drawn the dividing line in a different place, so it is unsurprising that the categories of people who are not self-employed should differ between the three.  Introducing a common test of employment cannot therefore work unless the line is drawn in the same place for all three, which requires the State to revisit the reason why the line is where it is.

I am not an historian (albeit that I know a fair amount about the history of tax) but I think it is fairly clear why the lines were drawn as they are.  In the 19th and early 20th century some employers exploited their workers mercilessly.  The State cannot let people starve on the street.  Accordingly if a worker can be dismissed peremptorily or is not paid or paid a pittance, the State has to pick up the slack.  Workers’ rights ensure that workers are treated fairly and that the costs of doing so are borne by the employer, not the State.  Social Security in the Beveridge era was insurance based.  Everyone would pay into a common fund and be paid out of that fund when in need.  The problem with that is that the self-employed do not have regular income so cannot be expected to make regular contributions.  Accordingly for an insurance-based system to work, they could insure for long-term benefits (pensions and health) but had to be excluded from short-term benefits (unemployment, maternity, etc) where Beveridge based entitlement to benefit on short-term insurance contributions.  Tax started from capacity.  Initially employees were not taxed.  Only the self-employed and, later, office holders paid tax.  It was only when an effective way could be found to tax employees that they were brought into the tax net.

It is therefore unsurprising that the tax line was drawn between the employed and the self-employed but when it came to welfare, it was accepted that was the wrong place to draw the line.  The Employment Rights Act 1996 confers rights not only on employees but also on workers, which it defines as “the individual undertakes to do or perform personally any work or services for another party to the contract whose status is not by virtue of the contract that of a client or customer of any profession or undertaking carried on by the individual”.  This recognises that a person can perform personal services for another and yet be neither an employee nor a business owner.  It assimilates the worker with an employee whereas the tax law assimilates the worker with the self-employed.  Again, unsurprising, as the employment laws wants to pass responsibilities to others so as to prevent workers having to be supported by the State.

The impetus for both the consultation document and the Taylor review is of course the growth of the “gig economy”.  This creates self-employed workers whose business is limited by reference to the needs of their major (or generally only) customer.  This generally means that the worker/businessman does not need a business organisation as his customer carries out his business for him.  Even that is not new.  The aspiring pop singer of the 1960s or 1980s who signed a record contract was in a similar position.

What is new is that people are today telling self-employed people that they are being exploited by not being offered employment.  But being treated differently is not exploitation.  No one is forced to be self-employed.  Of course if one wants to cycle around London all Summer the chances of getting employed to do so are very limited.  Self-employment as a courier is the only real option.  But no-one is forced to be a courier either.  A person who does not want to be self-employed can find employment in the retail food industry fairly readily.  Why should a person who chooses an occupation that entails self-employment expect to be treated differently to any other self-employed person?

Even that is perhaps the wrong question.  A better one is probably that if the State wishes to provide benefits to a large number of self-employed persons who work mainly for a single customer, why should that prompt a change in the definition of employment?  It is far more sensible to create a category of quasi-self-employed people and to decide what rights that category should be entitled to and legislate to provide such rights.  This has never been a problem in the past.  For example, at one stage the then government decided that actors ought to have the National Insurance benefit applicable to employees.  They did so by deeming actors to be employees for NIC purposes; they did not change the definition of employment but left actors accepting the remaining disadvantages of self-employment.

Of course every status has both advantages and disadvantages.  The Taylor Committee looked almost wholly at the disadvantages of the gig economy.  But for many workers in it the advantages – in particular flexibility – are far more important than Mr Taylor’s perceived disadvantages.  Re-drawing the line to turn such people into either employees or workers could well result in a loss of those disadvantages, as the administrative costs of calculating employment or workers’ rights for flexible workers may well make the use of such people uneconomic.


Monday, March 12, 2018


BLOG 186


I am intrigued at the ambivalence the Press (and sometimes MPs – see Blog 136) seem to show towards tax avoidance.  Tax avoidance by the rich and large companies is wicked, anti-social and immoral.  Tax avoidance by the middle classes in contrast is a wholly reasonable activity which, far from attracting disdain, attracts sympathy for the avoider (or rather attempted avoider as most avoidance schemes are ultimately held to be defective) and often calls that it is unreasonable for the bully State to seek to collect the tax due from the would be avoider as he has used the tax money to enhance his standard of living and it would not be reasonable to expect him to pay to the State money that he has spent.

Curiously this suggestion that those who do not pay their tax because they have sought to avoid it should be let off, does not seem to extend to those who have not paid their tax because they have invested the tax money in their business or have not set money aside to meet a tax bill that they surely knew would arrive in 10 to 22 months’ time (the 31 January after the end of their accounting year).  The proposition seems to be that such people have only themselves to blame.  Not setting aside money to meet tax is unreasonable; paying someone to magically make the tax bill disappear and then spending the money in the hope that the magic works seems to be acceptable behaviour.

A good example is a recent article by Sam Meadows in the Sunday Telegraph last month.  Sam told his readers that successful IT consultant, John Simon, was introduced to a tax specialist who claimed to be able to significantly reduce his tax bill …  The scheme recommended to Mr Simon was perfectly legal – or so he was told.  It involved setting up a company and drawing income in the form of loans, with repayment dates that would roll over.  That way, income tax could be largely avoided.  Did it sound far-fetched?  Not to Mr Simon (nor his real name) …  a Supreme Court ruling last year involving Rangers Football Club found in HMRC’s favour.  Now thousands of people who used the arrangements … face demands for huge, and in some cases unaffordable, sums.  The Simon family, for instance, need to find £300,000 within months – something that is likely to force the sale of their family home.  They have two children still at school.

There are some curiosities here.  Firstly, what does Mr Meadows mean by “or so he was told”?  If the scheme was not perfectly legal, shouldn’t Mr Simon be in jail?  Because if it wasn’t perfectly legal, it was a fraud on the tax system.  I do not know what tax scheme Mr Simon entered into.  The Rangers Football Club case involved an Employee Benefit Trust but Mr Meadows’ description of the scheme does not look like such an arrangement.  Does Mr Meadows know something to suggest that Mr Simon’s scheme was not perfectly legal?  If so, he should surely take it to the police!

I suspect the reality is that the scheme was indeed perfectly legal.  But there is all the difference in the world between something being legal and the arrangement achieving the end result that it was designed to achieve.  A couple of weeks ago, I bought a loaf of bread but for various reasons have not eaten much bread in the last fortnight and the bit I have left has gone mould so I can’t eat it.  That does not make the sale of the loaf to me illegal.  It simply means that my purchase has not achieved the objective that I anticipated when I bought it.

And how about “Did it sound far-fetched?  Not to Mr Simon”.  How naïve can one be?  No wonder Mr Simon does not want to reveal his name.  His friends would undoubtedly laugh at his almost unbelievable naivety.

As a successful IT consultant, surely he knew that there is a legal requirement to pay tax on one’s income.  HMRC constantly tell us in Spotlights (where they list on their website tax schemes that are on their radar to warn people off them) that “If it sounds too good to be true, it is probably not true”.  But most of us do not need HMRC to tell us that.  Commonsense tells us not necessarily that it is not true, but certainly that there is a significant risk that it is not true. 

So this is what Mr Meadows would have us believe.  A stranger is introduced to a successful IT consultant.  They converse:

Stranger:         I am a tax specialist
IT consultant:   I do not want to pay tax on my earnings
Stranger:         Why not?
IT consultant:   I think there are enough other people around to pay for the NHS, my defence, my children’s schools, and the other State-provided facilities that make for a civilised society, and that I should be able to keep and spend every penny I earn, not have to pay towards such things.
Stranger:         Simple, instead of earning money for your work, form a company, let it earn the money and you borrow the money from the company.
IT consultant:   That sounds too good to be true.
Stranger:         No we have discussed it with HMRC and they have told us they think it is a brilliant idea and they agree that anyone who uses it need pay no tax on their earnings.
IT consultant:   Thank you very much.  I did not realise that the government is so generous that it will allow me to have the use of the money in this way and not pay any tax.  Now you tell me, it seems to me such a reasonable approach for the government to have taken that I do not for one minute think it improbable.  It also sounds to me just the sort of reassurance that I would expect HMRC to give those who seek to avoid paying tax.

Another puzzling point is that if I borrow money, the lender expects me to repay it at some stage.  That does not mean that I can use the borrowing to increase my standard of living.  On the contrary, it normally means that I will need to restrict my standard of living as I have to set aside money to repay the loan.  So why can’t Mr Simon use his loan repayment monies to pay his tax bill?  After all, he owes this money to his own company so it will surely wait a bit longer for repayment.  I suspect that you are thinking that Mr Simon will not have a loan repayment fund as he never intended to repay the loan.  But that cannot be the case.  It would then not be a loan at all; it would be a pretend loan, and if it was only a pretend loan, Mr Simon could not reasonably have believed that it would have had the same tax effect as a real loan – and it would of course also have been fraud to pretend to HMRC that there was a real loan.

I have no sympathy for Mr Simon.  I don’t mind him having tried to avoid paying his fair share of tax.  He is entitled to do so.  However, I do object to him trying to pretend that it is not his fault that the government now wants the tax and he does not have the money to pay it.  Of course it is his fault.  In entering into a tax scheme he took a risk that the scheme might not work.  None of these schemes come with a guarantee of success.  I have no objection to his having taken that risk, but I think he acted wholly unreasonably in not setting aside funds to be able to cope with the tax should that risk materialise.  I am sorry for his wife and children.  They were probably unaware that Mr Simon was gambling their future in taking a chance of beating the government (and society).

The other fascinating point is that £300,000 is equal to tax on £750,000 at 40%.  Of course it will relate to a number of years, but not more than 6, which is £125,000 of earnings p.a.  I am intrigued that Mr Meadows thinks that such a level of earnings makes Mr Simon middle class.  Of course the £300,000 figure probably includes interest and the 2% National Insurance, but the 40% tax rate only applies to income in excess of around £42,000 p.a. so £125,000 is probably a ball-park figure of income.


Monday, December 18, 2017


BLOG 185


Do you think we have a fair tax system?  Government Ministers and HMRC officials keep telling us we do, but I’m not so sure myself.  As it’s near Christmas, I thought I’d tell you a story.

Are you sitting comfortably?  Then let us begin.  Once upon a time in a far away country called Ghana a kind teacher called Freda decided to set up a nursery school.  It was very successful and in 2008 she decided to expand the nursery school.  She mentioned this to her daughter (who lived in England) when the daughter came on a visit to Ghana.  Returning home to England the daughter told her husband Edwin, who had also come from Ghana.  Edwin had bigger ideas.  He volunteered to help Freda create a private school to take pupils right up to Junior school level.  He saw the project as his chance to give something back to the country of his birth.  Edwin entered into a partnership with three other people to create the school.  He put in £21,000 of capital and collected money from others to support the school.  By September 2009, it was clear that the school needed much more money than had been raised but Freda and other family members had become unhappy with Edwin’s “hands on approach” to the school and were losing interest.  When it opened, it attracted only nine pupils, had difficulty hiring teachers and quickly collapsed.  Edwin and everyone else lost their investments.

Some of you are probably thinking that Christmas stories ought to have happy endings.  Others may think what’s that got to do with fairness and tax?  So I’ll tell you Edwin’s story too.  Edwin had a job in IT.  Indeed, he had two jobs.  When he started the school project, he was employed by a large IT company, TPI Eurosourcing.  However, he had previously worked for a smaller one, Mphasis, and continued to do a bit of freelance consultancy work for Mphasis because he hoped that as they grew, they would want him to work for them again.  Edwin wanted to keep his Mphasis fees separate from his TPI salary so decided to open a second bank account.  Sadly, he had a poor credit rating but his brother agreed to open an account at Barclays in his own name and let Edwin run the account.  Edwin did not look at that account very often as he did not do a lot of consultancy work, but when he started to collect money for the school, he put it through the Barclays account.  Edwin’s self-employed earnings for 2009/10 were fairly low.  This prompted HMRC to open an enquiry into his tax affairs.  That’s obviously fair.  If someone is self-employed and he cannot live on the income he declares, he is obviously understating his tax.  It would clearly not be reasonable for HMRC to look at the rest of his return and see that he had a full-time job elsewhere so his consultancy income was unlikely to be significant. (Sorry, as its almost Christmas I must try harder not to be so sarcastic).

Well HMRC looked at the Barclays Bank account.  They discovered 7 round sum bankings of cash totalling £6,740, 5 items that Barclays described as “Ezeoke OM Purchase” totalling £8,670 plus two marked “OM Ezeoke Bill” totalling £2,120, one marked “CN Martins Barclays” of £2,120 also and 2 items marked “S Rojer Mark”, totalling £1,250, a total of £20,900.

“Ah ha”, thought Mrs Scrooge, the HMRC Officer (not her real name). “If I add £20,900 to the declared income, the total comes to a much more reasonable figure for someone to live on”.  So Mrs Scrooge invited Edwin and his accountant to a meeting to explain why they thought the £20,900 should not bear tax.  Edwin produced a letter from his father in Ghana saying he had lent Edwin £14,169.  He produced a letter from Mr Eze Oke in Nigeria saying that he had lent Edwin £14,160 towards a school in Ghana.  He produced a letter from Freda saying that she had received 117,000 Ghana Cedis from Edwin towards the building of the school.  He produced a letter from a firm of solicitors in Ghana saying that they had been instructed to draw up the partnership agreement for the school.  Unfortunately the figures in the letters did not reconcile with the amounts in the bank account though.

“Not sufficient”, said Mrs Scrooge.  “Where are the loan agreements”.  Sadly there were none.  Perhaps in Ghana people trust their friends and relatives whereas in England of course no one would dream of lending money to their son without instructing a solicitor to draw up a loan agreement first.  (That doesn’t sound right.  I’m English and over the years I’ve lent money to lots of people, never thought of asking for a loan agreement and have always been repaid.  So perhaps HMRC families operate differently, as had I been Mrs Scrooge, I certainly would not have expected there to be loan agreements).

In any event, Mrs Scrooge then, I assume, explained how the fair English tax system works.

1.      She decides that £20,900 paid into a bank account set up to bank freelance earnings is likely to be income in the absence of any proof to satisfy her otherwise.

2.      It is then for Edwin to prove it is not income.

3.      HMRC use a principle called the “assumption of continuity”.  This enables Mrs Scrooge to assume that if Edwin had undisclosed earnings of £20,900 in 2009/10, he would have similar undisclosed earnings in 2008/09, 2010/11 and 2011/12, a total of £83,600 undisclosed income.

4.      Edwin has deliberately omitted the £20,900 from his tax return as he did not regard it as income.  Deliberately omitting income is very serious.  Accordingly in addition to the tax on the £83,600, Mrs Scrooge wanted a penalty equal to 54.25% of that tax.

Assuming income tax at 40%, that meant that Mrs Scrooge wanted Edwin to pay £51,582, because he had not proved to her that the £20,900 was not income.  Does that sound fair to you?

Edwin appealed to the tax Tribunal.  HMRC told the Tribunal that the law says that if there remains any uncertainty in the judge’s mind, then Edwin will not have discharged the burden of proof, so must find against Edwin and give HMRC their £51,582 of flesh.  “Wrong”, said the wise judge.  “Edwin has only to show that it is more likely than not that the £20,900 was to build the school”.  “He struck us as a straightforward and reliable witness”, they said.  “We take account of the discrepancies in the figures.  But we also take into account that the type of IT work he does is not compatible with offering services to individuals on an ad hoc basis.  We also do not think that the fact that someone opens a separate bank account for his consultancy income creates a presumption that everything in that account is income.  We think that Edwin has demonstrated to our satisfaction on the balance of probabilities that the £20,900 was not undeclared taxable earnings”.

So there’s the Christmassy happy ending.  They all lived happily ever after (probably) – well, possibly except for Mrs Scrooge who might have got a bonus for creating £51,852 for HMRC out of £20,900 of non-taxable receipts, but I suspect she feels there are plenty of other taxpayers to be fleeced so what’s one defeat.  If so, she is probably right.  Many people are scared of going to the Tax Tribunals, so I suspect most people in Edwin’s position pay up. 

Oh, and while the assumption of continuity is a concept that has been endorsed by the Appeal Tribunals, it is one that applies only where the omissions are of a type that is likely to recur, which was not the case with Edwin’s receipts (even if they had been income).

So congratulations to Edwin (for the technically minded, he is Edwin Bekoe (Case TC 6181)) and to his accountant for this well-deserved victory.  And a happy Christmas to all my readers.


Monday, December 11, 2017


BLOG 184


One of the documents the government published on Budget day was a Treasury Position Paper on “Corporate tax and the digital economy”.  I have just finished reading it.  To be honest, I did not find it at all convincing or, indeed, very logical.  However I think it important because it sets out the Treasury’s justification for the Chancellor’s new withholding tax on royalty payments and its thinking on taxation in the digital world.

It starts with a statement of principles.  “The important question when applying corporation tax to a multinational group is what amount of profits should be taxed in the UK compared with the other countries in which the group operates.  The answer to that question is currently determined by an international tax framework which was developed in the early 20th century …  The overall principle underlying that framework is to tax a multinational group’s profits in the countries in which it undertakes its value-generating activities.  That is a principle that the government continues to support.  It does not, for example, believe that another country should have a general right to tax profits that a UK business generates from a product that is designed in the UK, manufactured in the UK, marketed in the UK and then sold remotely to that country’s customers …  Instead countries should have the right to tax business profits derived from productive activities, enterprise and human innovation in their jurisdiction, irrespective of where shareholders and customers are located”.

So far, so uncontroversial – or, at least, nearly so!  The international tax framework actually is that a country can tax the profits generated worldwide by its own companies (but in doing so should give credit for tax paid on those profits elsewhere) and can also tax profits made in its country by foreign entities that have some form of business organisation in its country (such as a branch).  Even then it should only tax the profits derived from that branch.  In determining what profits are derived from a branch, the host country will take account of productive activities, enterprise and human innovation of that branch.  So, nearly right, but that is not what worries me.

The Treasury goes on to assert that “while the government continues to support the principle of aligning profits with value creation, there is a clear need to consider the situations in which that principle is not being delivered by the existing international tax framework.  In particular, it is important to consider how the international tax framework is being stressed by digitalisation and whether it is flexible enough to take account of the differences in how certain digital business models operate and generate value”.

“Why”, you may ask.  It is certainly not clear to me how the international tax framework is being stressed.  Take, for example, Amazon.  As far as I am aware, Amazon does not have a branch in the UK.  It has warehouses here but the international tax rules exclude warehouse from being a branch – sensibly, because a warehouse does not create value or by itself generate profits.  It simply fulfils international contracts created in another country.  How does digitalisation make Amazon any different from, say, Marks & Spencer?  I do not know if Marks & Spencer has warehouses in the USA, but if it does, I suspect that the Treasury would be pretty upset if the USA were to want to seek to attribute a US profit-earning element to sales made by Marks & Spencer in the USA.

Indeed, the Treasury emphasises that “the mere consumption of a good or service in a country should not, by itself, entitle that country to tax the profits of the business providing that good or service”.  But the bottom line is that, while conceptually it believes that the US, not the UK, should have the right to tax profits on sales made in the UK by Amazon and Google and Facebook and other large US corporations, it recognises “the growing public dissatisfaction that the corporation tax payments of digital businesses are not commensurate with the value that they derive from the UK markets”.

I am a bit puzzled by this.  I have never heard anyone say that they believe Google or Facebook or whatever “derive value” from the UK market.  I read quite a lot but have never read an article suggesting that such companies “derive value” from the UK market.  There is certainly an irrational public dissatisfaction that they appear to pay very little tax anywhere.  Irrational, because under the international tax framework they ought to pay their tax in the USA, so the US public have the right to be dissatisfied but it should be no business of the British public how the USA wishes to tax American corporations.  Indeed, the creation of the USA derives from the fact that its citizenry in 1776 felt strongly that the UK had no right to charge its corporations to UK tax unless it integrated the US colonies more firmly into the UK.

The US policy is based on the premise that the US wishes US corporations to reinvest overseas profits overseas in order to expand US influence throughout the world.  Accordingly it does not seek to tax such profits until they are brought into the USA.  That is not an unreasonable system; indeed it is the system that the UK itself decided to adopt a few years ago (with an exception, like the USA, for passive income such as interest and dividends).  Different countries adopt different tax policies.  It is no more unreasonable for the USA to decide not to tax profits of US groups which are retained overseas than for the UK to have adopted “one of the most competitive tax systems in the world” by imposing corporation tax at 19% in the hope that, say, a US company wishing to establish a branch in Europe would prefer to pay UK tax at 19% in preference to basing its branch in France and paying French tax at 33.3% instead.  No one would suggest that a US company that is enticed to establish its branch in the UK should have to pay extra taxes on sales in France because it is “avoiding” French taxes by having its branch in the UK.  Yet that is the logic of the UK public’s – and I suspect the UK Treasury’s – gripe that the USA chooses not to tax Google or Facebook.

The Treasury has however come up with an ingenious argument to justify its desire to tax Google and Facebook.  It says that in reality you and I work for Google and Facebook, so it is our activities in the UK that enable Google to make money from UK sales, so the UK should tax that money.

So how do we work for Google?  I’ll give you an example.  I follow baseball.  I am a fan of the Chicago Cubs.  For a modest annual subscription I can watch all of the Cub’s games live on my computer by signing in to the website of MLB (Major League Baseball) who run baseball in the US.  I access the Chicago Cubs website via Bing (which is part of Microsoft) because Lenovo (a Chinese company) installed it on my computer before I bought it.  (I do not actually use Bing to go to the MLB website because Microsoft Edge refuses to let me watch baseball, so I use Firefox to do this and Firefox uses Yahoo.  However they are all US companies so it does not affect the principle).  When I access the Cub’s website, it includes a number of adverts, some from US companies and some from UK ones.  Why should Fortnum & Mason (on the website today) advertise on the Cub’s website?  I doubt they can sell much in Chicago.  The answer is that they don’t.  They advertise on the version of the website that Microsoft puts in front of me.  They advertise to me because I bought something on line from them a couple of months ago.  Microsoft has incorporated software in Bing that records what websites I browse.  This software was probably devised in Seattle and I imagine is operated by Bing from Seattle.

You probably know that already.  So how do I work for Microsoft?  The UK Treasury’s argument is that Microsoft’s software enables them to tell Fortnum & Mason that I view the Chicago Cubs website every day during the baseball season and for a fee that they will put Fortnum’s advert in front of me every time I do so.  Of course Fortnum’s are not interested in me.  But if Microsoft tells them that 100,000 UK people go on baseball websites every day during the baseball season and they will put Fortnum’s advert in front of them all, Fortnum’s may decide to advertise these.  So, say the Treasury, every click I make on my browser earns Microsoft the ability to generate advertising revenue.  Because it is my work clicking that does this, the UK ought to be able to tax the profit Microsoft makes from Fortnum’s through putting Fortnum’s advert in front of me (using their US developed software monitored from the USA).

Personally I find this wholly unconvincing.  It is a bit like saying that Sainsbury’s know what I like to buy because they track this through my Nectar card.  Accordingly if Sainsbury’s were to open a shop in Chicago, the UK would be entitled to tax part of the profits that they would make when I shop in Chicago because they have the ability to target special offers at me when I shop in Chicago in the same way as they do when I shop in the UK.

The other obvious fallacy is that when I visit Chicago (as I do every year) I access the Cubs’ website as much as I do here.  Why should the UK be entitled to tax Microsoft based on clicks that I make in Chicago?  I very much doubt that Microsoft differentiates my Chicago clicks from my London ones when both are made on my i-Pad.  I also doubt that either Microsoft or Fortnum’s care where I click, so my clicking cannot provide a rational basis of taxation.

The Treasury also have another odd concept.  Again starting “from the position that profits are taxed in the countries in which a business has genuine economic activities” it concludes that “to maintain confidence in the international tax framework and avoid competitive distortion in local markets, it is crucial that multinational groups are prevented from being able to realise profits in low-tax entities that are not justified by local economic substance.  That is partly about ensuring a robust international transfer pricing framework and pursuing multinational reforms to address the limitations of that framework in aligning taxable profits with value created”.  Let’s examine that conclusion.  Let’s take Starbucks.  Starbucks does not make much profit in the UK.  The head of Costa complained a few years ago that Starbucks overpays for its sites, which probably explains why it makes little profit here.  What is profit?  It is the difference between sales and costs.  What are Starbucks main costs?  The purchase of coffee, rent and rates, staff costs, and a payment to use the Starbucks brand and marketing concepts that were created in Seattle.  Any reasonable definition of profits requires the deduction of all of those costs.  Starbucks purchases its coffee from an overseas related company.  HMRC need to be vigilant to ensure that it does not overpay for that coffee.  HMRC also needs to be vigilant to ensure that the price Starbucks in the UK pays to access the Starbucks intellectual property created in Seattle is not excessive.  Its transfer pricing specialists are adept at meeting both of those challenges.  If Starbucks UK makes a payment to Starbucks US and HMRC are satisfied that the payment is at the right level, are the UK entitled to nevertheless tax those payments to the US because, say, the payment is based on the number of coffees you and I buy in the UK?  Most people, including the Treasury, would say, “Of course not”. So, why should the UK suddenly be entitled to tax that profit simply because Starbucks USA decides to sell its intellectual property to Starbucks BVI or whoever?  Provided that the UK company is paying the right price, it is surely irrelevant to UK tax who that price is paid to.  How can what Seattle chooses to do internally damage confidence in the international tax system?  It surely can’t!

Of course it is not easy for HMRC to check whether the price paid for use of the intellectual property is a market price.  But it is no more difficult to do so if that price is paid to Starbucks BVI than if it is paid to Starbucks USA.  It may be that the Treasury questions the competence of HMRC.  But, if so, it is HMRC’s paymaster.  If the management of Marks & Spencer was felt by its shareholders to be incompetent, they wouldn’t say, “We must find a different way to sell our socks and undies that by-passes the Marks & Spencer stores”.  They would tell the Board to replace the CEO with someone with greater competence to sort out the problem.

I am a bit surprised that the Treasury do not equate my purchases of coffee from Starbucks with my clicks on Bing.  They look very similar to me.  I can only conclude that the Treasury feels that my coffee purchases are a ridiculous basis for a system of international taxation.  If so, great, but surely my clicks form an equally ridiculous one?


Monday, December 04, 2017

THE 2,000 Euro BTW Scam?

BLOG 183

THE 2,000 Euro BTW Scam?

I tend to watch Panorama each week.  Sometimes they have interesting programmes but I am not sure why I continue to watch their tax output because it is invariably misleading and always strongly biased towards the view that everyone (other than BBC journalists, I assume) is a crook and that privacy (again, other than for BBC journalists, I assume) is such a wicked concept that anyone who wishes to keep their private affairs private must be doing so to avoid tax.  The producers and journalists also seem to believe that everything that happens in the UK ought to be taxed here and the UK’s international treaties that cede to other countries the right to tax their own citizens and corporate vehicles on some receipts from the UK make the UK complicit in tax avoidance.

I think it a shame if the government fix the licence fee at a level which means that the BBC cannot afford to take tax advice in order to ensure that programmes that they make about tax actually reflect the tax system.  I suspect however that it is not budget constraints but a culture within the BBC that integrity is an out-model concept and if a journalist wishes to mislead viewers in order to propagate a personal biased view, that is OK with them – and presumably with the BBC Trust too.

Which brings me to “The Billion Pound VAT Scam” as it was titled.  It is not about a billion pound VAT scam at all.  It is about a few thousand euro BTW scam (the Netherlands equivalent of VAT).

If you didn’t watch the programme, the facts are simple.

a)      The journalist went to China to try to find a smuggler prepared to smuggle Chinese goods into the UK.

b)      He didn’t find one, but did find someone willing to smuggle the goods into the Netherlands.

c)      He purchased a small quantity of goods in China and had them smuggled into the Netherlands.

d)      The goods were then transported from the Netherlands to an Amazon warehouse in the UK.  The journalist (or his editor) did not think it worth mentioning that the EU fundamental concept of freedom of movement of goods means that goods can freely be moved from the Netherlands to the UK without any VAT becoming due anywhere – but that fact would have completely undermined the message that the BBC wished to convey, so it is fortunate that in a half-hour programme, there was not time to mention that.

e)      The journalist registered a UK business with Amazon and sold some of the goods on Amazon.

f)       Amazon did not ask the business for its VAT number.  There is of course no obvious reason why they should do so.  There is no obligation to provide one’s VAT number on a sale to a non-business person and most sales on Amazon are such sales.  In the Budget, the Chancellor proposed to require Amazon to obtain VAT numbers from everyone who uses their platform, so that perceived shortcoming should not be a problem after that has been legislated.  Whether that is “a good thing” is a matter of opinion.  It obviously seriously damages the chances of small UK businesses whose turnover is below the VAT threshold being able to grow.  But the Chancellor clearly believes (not simply in this regard) that killing off small businesses is a reasonable price to pay to raise a bit of extra tax.

g)      The journalist then created another account with Amazon in the name of a Chinese company and it sold something on Amazon for £5 without charging VAT.

h)      Amazon then blocked the Chinese company from selling anything further for 30 days while it investigated it.

i)        The journalist spoke to the new Chair of the Public Accounts Committee, Labour MP Meg Hillier, who was predictably outraged at this so-called VAT avoidance – presumably because she does not know enough about VAT to know that the VAT “avoided” was 0.83p (the VAT on £5) as the supplies by the UK company were well under the VAT registration threshold but there is a nil threshold where a non-established trader sells goods in the UK.  Of course she probably should have been outraged that the UK’s membership of the EU prevents HMRC from taxing movements of goods from EU countries which may exercise laxer control over imports than HMRC does, but she did not express such outrage.

j)        The journalist then spoke to a somewhat bemused HMRC official, Jim Harra, who has a very deep understanding of VAT, told him that he had evaded VAT of a bit over £500 and handed him a cheque.  Jim jovially said for the camera that perhaps he should speak to the journalist off camera.  I hope he did and explained that he had not evaded anything and owed HMRC less than a quid, but thanks for the cheque because HMRC always welcomes people wanting to volunteer money to reduce the national debt.

Of course if the journalist had gone to his editor and said he wanted to do a programme about how to avoid 0.83p VAT and please could the BBC send him to China as part of it, the programme probably would never have got made.  If he had said he wanted to do a programme about how efficient the UK Border Agency is compared with their Netherlands counterparts, that programme probably would not have been made either.

But as it is only licence payers’ money being wasted on misleading propaganda, who cares?


Monday, November 27, 2017


BLOG 182


HMRC commission a fair amount of research from research companies and in the interests of transparency tend to publish the reports.  Some of these reports make interesting reading but some don’t.  I have been reading one on “Understanding evasion by Small and Mid-Sized Businesses” and am wondering what, if anything, HMRC get for their money.  The report is qualitative research which apparently is designed to reveal a target audience’s range of behaviour and the perceptions which drive it with reference to specific types or issues.  It uses in-depth studies of small groups of people to guide and support the construction of hypothesis (per the Qualitative Research Consultants Association).

The report makes fascinating reading.  Unfortunately I have two problems with it.  The first is that I am sceptical to what extent a tax evader (which I assume to be someone who has been caught out in having lied to HMRC) is likely to give honest answers to a researcher probing the reasons for his past dishonesty.  The second is that the key findings do not reconcile with my own experience.  The report identifies four core types of evader:

a)      unthinking evaders, for whom low level evasion is habitual, and often adopted without thought,

b)      invested evaders, for whom evasion is seen as an unfortunate financial necessity in order to stay in business,

c)      lifestyle evaders, for whom evasion enables a life-style otherwise out of reach, which they feel is justified by the taxes they do pay,

d)      systematic evaders, where evasion is actively considered and integral to the business model.

I have a fair amount of experience of tax evasion – from the perspective of helping evaders to come clean I hasten to explain – and I find it hard to fit my typical evader into any of those categories.  This is because under all of those types of behaviours the cash is either spent or invested in the business, yet my experience is that while some of the cash may well be spent, most of it is diverted away from the business and put into some form of savings.  If that were not the norm, I doubt that many tax evaders would come forward and confess their crimes.  If a person has not created the wherewithal to make a financial settlement, it is hard to see how he can make his peace with HMRC.  It is equally hard to see why anyone should want to tell HMRC that he owes them a large amount of money if he can see no way in which he can settle that debt.

I am also concerned about what the report says regarding agents, bearing in mind that the researchers did not actually talk to any agents and there is an obvious risk that a tax evader may seek to shift the blame by saying, for example, “my accountant must have known that I was not declaring everything”.  Thus the report says … “Agents may be unaware of the full extent of evasion taking place …  However where agents are used primarily to reduce taxes due, a minority may be complicit in evasion to some extent”.   The report later says, “A minority appeared to engage in evasion on the advice of an agent (who might for example point out personal expenses that could be put against the business) …  Businesses typically chose not to inform agents of any activities which were known to be high-risk evasion, since it is understood that agents would not be comfortable with the level of risk involved.  Ultimately how the agents was used (and the extent to which that advice was followed) was determined by the business attitudes and perceptions in relation to tax”.  Under a heading of “perceived risk”, it later says, “Evasion behaviours were believed to be safe on the basis that… agent involvement may also have provided a sense of security (on the basis that the agent would not allow anything to appear on record which could cause problems later)”; and under “Opportunity” it says, “In some cases, agents may have played a role (whether knowingly or not) in raising awareness of opportunities or flagging risky behaviours”.

So the report is saying that some of us actively encourage evasion, others turn a blind eye to it knowing the client is evading tax, others are comfortable with evasion provided that it is not documented, and some of us advise clients to change their ways but are indifferent as to whether or not they accept that advice.  Of course the report does stress that it is a minority and does not speculate on how large that minority may be.  Nevertheless it is frightening if the authors are right in any of these respects.  No wonder HMRC seem to have so low a view of the tax profession if that is what their outside advisors are telling them.

So what can be done to prevent evasion?  The authors say that “Actions intended to tackle evasion and improved compliance… could be more visible and [HMRC should] work harder to cut through the dominant media noise, social norms and market pressures in order to meaningfully impact on evasion behaviour and “promote compliance”.  They suggest that HMRC should “increase the perceived likelihood of getting caught”.  This could be done by promoting awareness of HMRC’s capabilities/tools available to catch those who evade.  Yes of course HMRC should do this but, as much evasion takes the form of not declaring cash income or claiming business-type expenses where the motive is a personal, not a business one, it is not readily apparent what capabilities and tools HMRC have available to detect such things. HMRC’s database program, “Connect” is a very powerful tool for collating information, but it cannot identify either non-information or motive – other than to the extent that it can highlight differences between businesses of the same type which can point to large scale evasion but not to a lot of the fairly petty evasion that the report highlights.  For example, it gives as an example taking home toilet rolls purchased by the business.  I suspect no accountant has ever sought to compare toilet roll purchases with likely business usage to try to detect pilfering.  But I also suspect that Connect cannot do this either!

Their second recommendation is to “improve understanding of potential consequences”.  Apart from the risk of getting caught, which seems minimal in relation to low-level evasion, I doubt that many taxpayers (or rather non-taxpayers) are likely to be unduly concerned about either late payment fines or media coverage, which are the only examples the report identifies.

Finally, they tell HMRC to “tap into what matters, beyond the consequence itself”.  They accept that “there is no silver bullet for tackling evasion” and tell HMRC, “In order to be compelling, interventions must be personally motivating, going beyond the immediate impact of the consequence itself, to get under the skin of what this would actually mean to the business”.  They suggest HMRC might play on an individual’s position in, or perceived responsibility toward the State, the consequences of the publication of evaders name through localised channels, the possible impact on employees who may be innocent bystanders to the evasion taking place but would share in the consequences non-the-less; and most effective of all, leverage personal ramifications and broader consequences for the individual and their family.  Leaving aside the fact that HMRC do not have (and probably never will have) the resources to address every taxpayer individually, it is not clear how HMRC are expected to identify who is evading tax so as to decide on the right personal motivation to use.  If HMRC could identify evaders they would not have a need to commission research reports on understanding evasion.

I hope that HMRC feel that this report represents value for money.  As a taxpayer, I do not!