Monday, November 06, 2017


BLOG 181


One of the things for which I will also remember Gordon Brown and his henchwoman, Dawn Primarolo was the politicisation of HMRC.  Prior to that you could, by and large, rely on HMRC press releases and other official publications to explain tax in a factual and honest manner.  Now HMRC seem to see one of their roles as being to preach the political messages of the government of the day.  If that makes what they say misleading or even inaccurate, the truth is subjugated to the message.

Since returning from my annual visit to Chicago at the beginning of September (happy, as the Cubs were doing well and in fact won the National Baseball League Central for the second year running, albeit they did not manage to win the National League Pennant this time round) I have been busy with books, so have rather neglected by blog.  The new edition of my Taxpayer Rights book has now hit the bookshelves and I have nearly finished the updating of my Property Tax book, so I have had a chance to catch up a bit on my technical reading.  Perhaps it is having to read several weeks of HMRC press releases together that has concentrated my mind on just how unhelpful (technically) these have become.

One example is making tax digital (MTD).  Both HMRC and the Chancellor announced that only businesses with a turnover above the VAT threshold will have to keep digital records and only for VAT purposes, and only from 2019.  They reassuringly say that the government will not wish to widen the scope of MTDFB (for business) beyond VAT before the system has been shown to work well and not before April 2020 at the earliest.  What is misleading about that?  Well, the main reason that HMRC want businesses and landlords to keep records digitally is that they believe it will improve record-keeping.  The quarterly reports they also want are likely to be fairly useless to HMRC, other than as evidence that the taxpayer is in fact maintaining digital records.  So what exactly is the difference between the digital records one needs for VAT and those one needs for income or corporation tax.  Nothing, other than that the VAT records also have to record VAT.  Accordingly not widening the scope until the system has been shown to work well is meaningless.  Everyone (except very small businesses) will be required to keep digital records from 2019, not only for VAT but for other tax purposes too, because all the records that are needed for income and corporation tax are also needed for VAT.  All that has been deferred is the final step of pushing the button to tell the computer program to send a report to HMRC.  But no-one would guess that from the HMRC PR.

Or what about employee benefit trusts (EBT).  HMRC say in a blog post of 17 August in relation to the Supreme Court decision in the Glasgow Rangers Football Club case, “The decision stated any payment made through an EBT should be considered a taxable income as opposed to a loan”.  That is very clear isn’t it?  Except it is not what the Supreme Court said at all.  What it said is that earnings from an employment is income of the employee irrespective of whether it is paid to the employee or a third party.  That means that where an EBT makes a loan, one needs to consider as a question of fact whether the payment is earnings or something else, such as a loan.  In the Rangers case, the evidence was that the money was already earnings before it went into the EBT.  But it by no means follows that any payment from an EBT is earnings.  And even where it is earnings, fascinating questions arise as to who is liable for the tax and whether HMRC may be out of time to collect it.

Then there is the “HMRC guide to tax on payments for image rights”.  This states, “Employers must ensure that all payments made to their employees comply with published guidance for the type of payment made”.  Surely not!  It must comply with the law.  We have not yet reached the stage where the law is irrelevant and we must do whatever HMRC tell us to do.  Admittedly, a lot of HMRC employees do seem to believe that we have reached that HMRC nirvana, as they keep quoting HMRC guidance to us instead of the law.  Fortunately, the Courts still believe in the rule of law.  It is also questionable whether HMRC’s assertion that a payment for the use of an individual’s image rights is taxable as professional income.  That may well be what they would like the law to be, but it is hard to see how, if CBW were to pay me to put my photo on their website (which they are obviously unlikely to do), that is not income from my asset, image rights, whereas if they pay my company to allow them to use my photo, that then magically becomes income from exploiting the image right.  I appreciate that HMRC would like the law to be different, but that cannot justify issuing guidance to ignore it.

My latest gripe is HMRC Guidance on “self-reporting” tax evasion facilitation offences”.  This is for companies to report on their own behaviour where they’ve failed to prevent the facilitation of a tax evasion offence.  Facilitating a tax evasion offence is now a crime for a company or partnership.  To commit the crime, (a) someone must have actually committed the criminal offence of evading tax, (b) that someone must work for the company (not necessarily as an employee), and (c) the company must be unable to show that it had systems in place that would have prevented the crime occurring.  As the only defence is to show you have systems in place, self-reporting seems wishful thinking.  All you can report is that you didn’t install adequate systems, i.e. you can plead guilty to the offence and hope the Courts show mercy.  Of course what HMRC really want you to tell them about is the evasion offence.  They warn you that it can be a criminal offence to volunteer incorrect information and suggest you seek legal advice before saying anything to them.  They say “only provide the information that you already have.  For your own safety, don’t try to find out more information so you can send an e-mail”.  What on earth does that mean?  Unless a person has been convicted or has admitted tax evasion, I have no way of knowing whether he has evaded tax, because one element of the crime is his thought process.  So how can I ever self-report unless I first confront the individual with my concerns?  The money laundering rules allow me to question the individual to decide whether I am suspicious that he has evaded tax, before I need to report that suspicion (albeit, once I or someone has reported it, I can no longer risk tipping him off that a report has been made).  And what does “for my own safety” mean.  I am hardly going to seek further information from someone I think is going to get violent and, although over the years I have met many people who have evaded tax (because part of what I do is to help them to confess to HMRC), I have never had a situation where I feared for my safety.  And whatever prompted HMRC to decide to allocate resources to issue non-statutory guidance on something that well-informed companies are unlikely to do and to word that guidance in such a way as to deter people from actually coming forward?  It’s good to know they have the resources to waste!


Wednesday, October 25, 2017


BLOG 180


Is stamp duty (as the popular Press like to call HMRC) really the problem that prevents young people from getting on the property ladder?

The effect on the average home of the SDLT increases on 3 December 2014 is:

                                                                  Old SDLT                       New SDLT

            £250,000 house                                  1%                               1%
            £500,000 house                                  3%                               3%
            £750,000 house                                  4%                               3.66%

According to the Nationwide House Prices Index, house prices over the period since December 2014 have increased as follows:

                                                            UK                   London           London Metropolitan

Average price in Sept 2017                 210,982           471,761           365,554
Average price in Dec 3014                  189,002           406,730           301,612
Increase                                                21,980             65,031             63,942

Percentage increase                           11.63%                        15.99%                        17.49%

So what is preventing young people getting a foot on the ladder?  The retail price index stood at 257.5 in December 2014 and is 275.1 now, an increase of 6.8%.  I would say it is inflated house prices rather than SDLT!

Perhaps a more intriguing statistic is that the Land Registry say that 30-40% of all housing transactions in September were for cash (25% in London).  Not pound coin cash of course, but purchases without a mortgage.  It is improbable that young people anxious to get on the housing ladder will have saved 100% of the prospective purchase price before trying to climb on.  It is equally unlikely that the Bank of Mum & Dad will have done so.  That suggests that 30-40% of purchases are either purchases by investors or possibly people who have sold their house, moved temporarily into rental accommodation and are now ready to buy again.  As there seems to be a consensus that house prices have largely levelled off and are as likely to fall as the rise much further, this would be an odd time to re-enter the market though.

This suggests that the real problem for young people is that the government are not prepared to reduce the attraction of UK residential property to investors.

The three percentage points SDLT surcharge is not much of a deterrent, i.e.

                                                SDLT by first time buyer        SDLT with surcharge

£250,000 house                                     1%                                         2.5%
£500,000 house                                     3%                                         5.25%
£750,000 house                                     3.66%                                    6.17%

The restriction of loan interest relief to the basic rate is unlikely to have much effect.  It clearly has no effect to those who buy without needing to borrow – probably mainly foreign investors – and the indications to date is that landlords are not rushing to sell up.  Either their rents are sufficient to absorb the extra tax costs or they are looking to incorporate (often unwisely) because the restriction does not apply to investment by companies, only that by individuals and trusts.

It is an odd state of affairs where the government (the Cameron/Osborne government that is, not the May/Hammond one) seems to have decided that UK resident individuals looking for somewhere to live need to be deterred from competing with corporate landlords, many of which are controlled by rich overseas residents.

It is hard to see what the government can do to help the young.  The tiny bits of extra finance that have been made available through Help to Buy ISAS and through the Help to Buy house Purchase Scheme is a drop in the ocean.  There seems to be no political appetite to curb investors, which is clearly the only real solution to young people’s problem.


Wednesday, February 22, 2017


BLOG 179


Some years ago, I was on the Consultative Committee for the reform of the tax tribunal system.  I was the lone representative of the accountancy profession.  I remember sitting around a table with about 14 lawyers and a couple of other non-lawyers and bemoaning the impending demise of the General Commissioners.  For younger readers I should explain that these were volunteers who gave up their time to settle tax appeals locally.  When asked by Stephen Olive (later Sir Stephen) who chaired the Committee what was good about the Commissioners, I said that they applied commonsense.  He retorted, was I suggesting that lawyers could not apply commonsense!

The recent decision of Judge Christoper McNall, a barrister, whose website tells me that he aims “to bring a robust and practical approach to all my clients’ cases”, in the First-tier Tribunal case of Coomber v HMRC, seems to me to prove my point.

Mr Coomber owed income tax for 2015/16.  He sent a cheque to HMRC on 2 February 2016, which was received by them on 4 February 2016.  They banked the cheque and it bounced.  No one knows why it bounced.  Mr Coomber had sufficient funds in the account to meet it.

Mr Coomber’s accountant spoke to HMRC on 1 March 2016 and were told that his tax payments were up to date; he owed nothing.  In early March Mr Coomber received his bank statements and noticed that the cheque had not gone through.  It is not clear what happened next.  I assume the accountants spoke to HMRC again and this time were told that they had not received payment.  Apparently when they spoke to HMRC on 1 March, HMRC had not got around to updating their records.  Mr Coomber eventually sent HMRC a replacement cheque on which HMRC banked on 17 March.

Where tax due on 31 January is not paid before the end of February a 5% surcharge applies unless the taxpayer has a reasonable excuse for the late payment.  The issue for Judge McNall to determine was whether Mr Coomber had a reasonable excuse for not having paid his tax by the end of February in circumstances where he had sent HMRC a cheque at the beginning of February, knew that he had sufficient funds in the account to meet it, had not been told by HMRC that the cheque had not been honoured, indeed, had in fact been told by HMRC that he had duly paid what he owed, and had no knowledge that what HMRC had told him (through his accountants) was incorrect until it was too late to avoid a surcharge by sending a fresh cheque.

Do you think that in that combination of circumstances Mr Coomber had a reasonable excuse for paying his tax late?  I certainly do.  But reasonableness is a subjective concept and what matters is what Judge McNall thinks and he thinks that Mr Coomber acted unreasonably.

So what would a reasonable person have done in Mr Coomber’s circumstances?  Should he have called his bank every day to check that it had cleared?  Personally I think that would be an odd thing to do.  If everyone did it, I would expect the banking system to collapse.  But that is precisely what Mr McNall believes that a reasonable person would have done.  “Santander offers telephone banking, and his bank statement gives a Freephone (0800) number at which the bank could be contacted.  No reason is put forward why Mr Coomber, having made this payment by cheque, could not have checked with his bank to see if it had been cleared.  I do not see any reason why he should not have done so”. 

Personally I think it would have been a very odd thing to do.  If I send someone a cheque and it bounces, I would expect the recipient to contact me very quickly to demand an explanation.  Isn’t that what normally happens?  Well, apparently not in Mr McNall’s commonsense world.  “Mr Coomber advanced the proposition that it is “normal practice” if a cheque is dishonoured for some reason for the creditor (here HMRC) to contact the payer to inform them of the same.  But there is no evidence or other material before me as to this alleged practice and, if it exists, whether it is indeed “normal” as alleged and, if, even if it is normal in other contexts, whether it applies to HMRC”.

I find that incredible.  It needs evidence to indicate that if a cheque bounces it is normal for a creditor to contact the debtor and demand his money?  What sort of a world does Mr McNall live in?  I must admit though, that I like the suggestion that even if that were to be normal, it is not reasonable to assume that HMRC will act like any normal person; one can rely on what normally happens only if you can show that HMRC is staffed by normal people!

But probably Mr McNall had to except HMRC from normality because it had told him that when a bank bounces a taxpayer’s cheque, it simply throws it away!  Nowadays I do not have any day to day dealings on behalf of clients with HMRC, but back in the days when I did my recollection is that if a client’s cheque bounced, HMRC were on the phone demanding an explanation straight away.  Has the ability to impose penalties for late payment resulted in HMRC no longer bothering to seek to collect unpaid tax, except tardily?  I talk to a lot of accountants and while many believe that HMRC use penalties to increase the headline amount of what they collect, none has ever told me that they don’t try to collect at all.

Mr McNall clearly thought Mr Coomber should not have paid by cheque.  “Whilst he was entitled to do so, he was nonetheless, in doing so, taking a risk that, if anything went wrong with the cheque, or (for example) if it went astray in the post, payment would not be made in time”.  He said that Mr Coomber should have used “some other means (for instance BACS, Faster Payment or Direct Debit) which would have given him the immediate knowledge and assurance that the payment had been safely received”.  Would it?  I pay my tax electronically.  I get immediate knowledge that it has left my account, but I have no knowledge that it has reached HMRC’s account or even that it has left my bank.  I still take the risk that the bank might make an error.

Mr McNall was also clearly upset that no-one could tell him the full facts.  In particular he was annoyed that he did not have a copy of the cheque itself.  Not annoyed with HMRC for destroying it, of course.  Annoyed that Mr Coomber had not said whether or not he had asked his bank whether, as part of its ordinary cheque-clearing processes, it scanned and kept a copy of the cheque which it was dishonouring.

This appeal was dealt with as a default paper case, i.e. Mr McNall decided the case without a hearing but by simply reading the taxpayer’s notice of appeal, HMRC’s statement of case and the taxpayer’s comments on it.  That meant Mr Coomber and his accountants had to guess what Mr McNall would expect to be evidenced and what he would be likely to himself know from his own knowledge of life.  It also meant that Mr McNall had to make guesses to fill in gaps in what he had been told in order to write his decision. 

The idea of default paper cases was not simply to save Tribunal time.  It was felt that some taxpayers would forgo their appeal rights rather than have to appear before a Tribunal but would pursue an appeal if all they needed to do was write a letter setting out their case.  This case perhaps demonstrates the downside of the default paper procedure!


Monday, January 23, 2017


BLOG 178


I am reading a lot in the Press about business rates.  One effect of growing old is that one remembers why things happened in the days when most of today’s practitioners were at school or still to be born.  The current version of business rates – Uniform Business Rates or Non-domestic Rates as it is actually called – dates from 1 April 1990.  Its introduction was hailed by business at the time as preventing far left local authorities from being able to impose inordinately high imposts on local businesses.

The idea was very simple.  Value every non-domestic property in the country, add up the values, decide how much business as a whole should contribute to local government and divide one figure by the other to arrive at a rate per £ of value (or a multiplier as bureaucrats described it).

So rates are all about fairness between different businesses.  Of course the world has moved on since 1990 and in the internet age it is questionable whether a property tax is still a sensible way to raise local funds from business.  Nevertheless the government, after consultation, has decided that it is.  So today business rates are the way to divide business’ contribution to local expenditure fairly between users of business properties.

The multiplier was 34.8p in 1990/91 and it is 48.4p for small businesses in 2016/17.  £1 in 1990 was worth £2.25 in 2016.  Accordingly if the value of the property owned by a business has not moved, the increase over the period has been well below inflation.  The problem is that the value of almost all properties has moved.  In addition the national stock of commercial property has changed.  Nevertheless business overall has not done badly if the aggregate value of all commercial property in 2017 is 2.25 times or more of the aggregate value of commercial property in 1990 (or 1989 when the 1990 valuations were arrived at).

But of course nobody looks at things globally.  Most people’s perception is at individual property level.  Properties do not increase uniformally across the country.  If a shop in Camden High Street was worth 100 in 1990 it could well be worth 500 today, whereas the equivalent shop in Liverpool or Stockport may only have doubled in value over the period.  So is it fair for the shop in London to pay 2½ times the rates of the shop in Liverpool?  The value of a shop largely reflects its ability to generate income, in which case that seems fair to me.

And what about the shop in Watford High Street that was worth 100 in 1990 and is probably not worth much more now because the shops in Queen’s Road, a relatively quiet street behind the High Street, were demolished and replaced by the Harlequin Centre which has taken away a lot of the trade from the High Street and whose value today is far greater than in 1990.  Doesn’t fairness mean that today the Harlequin Centre ought to contribute more per square foot to Watford BC than the High Street?  That will be reflected in the values of the properties.

The real problem is that we do not have enough revaluations.  They ideally ought to take place every year but the work involved makes that impractical.  Parliament in 1988 (when the legislation was put in place) compromised at every five years.  Sadly when the time came for the 2013 revaluation the government put it off for a couple of years so the current rates are based on 2008 values and those for 2017/18 will be based on 2015 values.

This posting was prompted by some sad stories in The Times the Saturday before last.  For example, the crafts shop in Southwold High Street mainly run by volunteers whose only aim is to break even.  Their rates will go up from £152 p.a. to £7,500 p.a. (by the time the transitional relief runs out).  “How can that be fair” asked the shop manager, “It’s totally perplexing”.  I think it’s fair.  Why should any shop (other than one operated by a charity, which the crafts shop could probably become if it wished) pay less than £3 a week in rates?  Why should the crafts shop keep out of business the person who could run a shop selling something else that could justify £7,500 p.a. in rates?  As rateable values reflect rental values, what has happened to the crafts shop’s rent?  If it has increased since 2008, why shouldn’t the rates increase too?  If it has not, it is hard to see how the rates could have gone up so much unless the landlord is subsidising the crafts shop.  And if he is, why should other businesses in Southwold or elsewhere subsidise it too.

Similarly with the Two Magpies Bakery.  The owner does not understand why she should pay the same rates as Costa Coffee a few doors away whose rates are increasing by less.  Well why shouldn’t she if her shop is worth the same as Costa’s?  If her customers are not prepared to pay more to buy her freshly baked bread, so she cannot afford to pay the real cost of her shop being where it is in Southwold, why should Sainsbury’s and Tesco subsidise her?

Of course I feel sorry for all of these people and for Alex Pose-Gill whose family have run his Coffee Lounge near Buckingham Palace for three generations.  He has had to put an extra 60p on the price of his full English breakfast.  But surely that is what should happen.  The cost of his premises is the aggregate of his rent, rates and utilities.  His prices need to absorb those costs.  But it is not reasonable to blame the government if the rates element of that package goes up but to accept as a fact of life if the rent element increases.

It is certainly reasonable to moan at the government for continuing with rates rather than find a better way for businesses to contribute to local authorities so that internet businesses do not have an unfair advantage over those that trade from buildings.  But it is not reasonable to criticise the fairness of a system that seeks to allocate a tax on buildings between buildings according to their values.  It is hard to conceive a fairer way.

It is also unreasonable to have allowed new businesses to be created in a fool’s paradise where their economic model was based on paying an artificially low price to occupy their premises, so that the substitution of a more realistic price will destroy the business.  However that is not the fault of business rates.  It is due to either the lack of adequate advice to micro-businesses or the failure of such businesses to seek proper advice before starting up.


Wednesday, January 18, 2017


BLOG 177


I keep reading in the press that Mr Osborne’s increases in SDLT have killed the housing market.

The latest is Simon Heffer in last week’s Sunday Telegraph who tells me that “Among George Osborne’s disasters as Chancellor was his ramping up of stamp duty to a level – 12% on properties over £1.5million – that has killed the London housing market and caused revenues to plunge”.  He exhorts Philip Hammond “to cut the tax in order to increase revenues”.

I hope that Mr Hammond ignores this suggestion.  It seems to be based on a number of fallacies.  Leaving aside that stamp duty is not imposed on property transactions and that Mr Heffer cannot apparently tell the difference between stamp duty and SDLT (although of course he is a journalist and has to write half a page every week for the Sunday Telegraph so perhaps does not have time to check such details), prices are determined by markets, not by taxes.

Of course if a person is prepared to pay £1.6million to acquire a house, the imposition of a 12% SDLT may well mean that he is prepared to pay only £1,428,571 so that the £171,429 SDLT brings his total cost to his target figure of £1.6million.

Accordingly an increase in SDLT might well cause house prices to fall, although personally I think it more likely that they will still increase but at a lower rate than before.  That may however depend on the greed of vendors who may be reluctant to sell at a lowered market price in the hope that the slowdown is temporary.

The 12% rate is not something introduced recently.  It has applied since 4 December 2014, which is now over two years ago.  So how far have London house prices in fact fallen in that period?  The House Prices Index indicates that London house prices have risen, not fallen, by 7.6% over the 12 months to November 2016.  This roughly reflects the average rise in all UK cities and exceeds the UK residential growth figures overall of 6.7% fairly comfortably.  Hometrack predict a 4% increase in city level prices in 2017, again not a fall at all.

HMRC’s own statistics do show that the number of UK residential property transactions has fallen over the six months to the end of November 2016 from 683,340 to 625,280, a reduction of around 8.5%, but the 2015 figure was itself significantly higher than the 2014 one and a better comparison may be that the six months 2016 sales falls midway between the comparable figures for 2013 and 2014.  They also show that the SDLT yield from residential property did fall from £7.5million in 2014/15 to £7.310million in 2015/16 but the latter figure is still well above the £6.450million yield in 2013/14 and indeed above that for every year from 2006/07 onwards.  The total value of residential property sales actually rose from £304.155million in 2014/15 to £321.530million in 2015/16.

None of these figures support Mr Heffer’s claim that revenues from SDLT have “plunged” since the 12% rate was introduced in December 2014.  On the contrary, the indications are that receipts have in fact increased.

Another interesting point is that Mr Heffer’s 12% applies to owner-occupation acquisitions.  Since 1 April 2016, the rate on second homes and most buy-to-let investment has been 15%.  This 3% addition was announced in November 2015.  The number of residential property transactions has been running at around 100,000 a month.  Unsurprisingly, this leapt to 171,370 in March 2016 due to bringing forward purchases planned for April and May, but the figure returned to the 100,000 level in June and remained at around that level up to November 2016, which is the latest figure available.  Accordingly even that surcharge does not seem to have actually had a long-term effect on sales.  Of course there may have been a shift from buy-to-let purchases to owner-occupier purchases, which is what the surcharge was partly intended to achieve, but as most property purchases are largely financed by mortgage and the owner-occupier has to pay his mortgage interest out of net income, whereas in most cases the buy-to-let investor has the advantage of paying it out of gross rental income, so receiving a substantial subsidy from the exchequer, that seems unlikely.  Suppose the annual interest on a £1.5million purchase is £80,000 p.a.  The owner-occupier needs to earn £133,333 to pay this (after tax of 40% and ignoring national insurance).  The cost to a landlord is £80,000, a saving of £53,333.  Accordingly one year’s tax saving on the interest far outweighs the one off extra £45,000 of SDLT.

It’s a long time since I studied A level economics, but my recollection is that market prices are a reflection of supply and demand. If supply increases and demand remains constant, prices will fall.  If supply decreases and demand remains constant, prices will rise.  In a property context, demand is largely fuelled by the availability of mortgages and the purchaser’s ability to borrow enough to meet the shortfall between the purchase price (including SDLT and other buying costs) and the purchaser’s own available cash.  The sub-prime mortgage debacle illustrated that where there is a ready available supply of mortgages, demand will increase substantially.  The controls that have been imposed on mortgage lending are accordingly far more likely to account for the slowdown (not plunge) in residential property prices than any increase in the one-off SDLT cost of the acquisition.


Wednesday, November 23, 2016

HMRC's "hardline" decision to collect tax due nine years ago

BLOG 176

HMRC’s “hardline” decision to collect tax due nine years ago

Last Saturday’s Times contained what seems to me to be an extra-ordinary article by Alexi Mostrous, their Head of Investigations.  It began, “The hardline decision by HM Revenue & Customs to issue huge tax demands to hundreds of wealthy investors in the Eclipse film partnerships marks the culmination of a four-year campaign against such avoidance schemes”.

The complaint seems to be that those wealthy individuals are being asked to pay the tax and interest on their income but they have spent all the money on the assumption that their tax avoidance scheme would work.  Accordingly many are facing bankruptcy and some are considering suicide.  I am not clear what Mr Mostrous thinks HMRC should do.  HMRC are required to collect the tax that Parliament decrees.  Doing just that does not strike me as a hardline decision.

I have never made a secret of my views on tax avoidance.  I do not think that there is any morality in tax.  Tax is a creation of statute.  If the statute says that transaction A attracts £X of tax, the tax ought to be paid.  If the statute says that transaction B creates an expense that can be deducted in calculating the tax on transaction A, the taxpayer is entitled to make that deduction.  There are numerous cases where HMRC collects tax that is not morally due.  Regular readers of this blog will know that I highlight some of these from time to time.  HMRC’s rationale is that they have a duty to collect the tax parliament lays down, however unreasonable that impost may be.

I think that works both ways.  If a person seeks to avoid tax and his scheme fails, he should pay the tax that he sought to avoid.  He is not entitled to look for special treatment because he has spent the money.  Thousands of people who have never attempted to avoid tax do not set aside the tax money but spend it on other things and face financial hardship and bankruptcy when the time to pay the tax arrives and their coffers are bare.  I am not aware of Mr Mostrous having ever proclaimed it “hardline” for HMRC to seek to collect the tax from such people.

In practice HMRC do not like to bankrupt people.  That reduces the person’s earning capacity and therefore their ability to pay future tax.  HMRC are normally willing to enter into a time to pay arrangement.  But they do expect the taxpayer to do his best to pay the tax as quickly as is practicable.  They do expect a wealthy individual to realise assets, to re-mortgage his house, to downsize to release funds, or whatever else is needed to produce the cash.  If a person lives an expensive lifestyle and has accumulated assets, it would surely be an affront to the general body of taxpayers to allow the person to continue to live the high life using money that is due to the Exchequer.

What have these wealthy taxpayers who have gained Mr Mostrous’s sympathy done?  The Eclipse Film Partners No 35 tax avoidance scheme was won by HMRC in the Court of Appeal in February 2015.  The Supreme Court refused leave to appeal on 13 April 2016.  They normally refuse leave only where they believe that the decision of the Court of Appeal is so obviously correct that there is no public interest in its being challenged.

The scheme related to the tax year 2006/07.  The members of the partnership collectively put £50million of their own money into it and also put in an extra £790million that they borrowed from a subsidiary of Barclays Bank.  The partnership paid £44m to Future Films, the promoter of the scheme.  Accordingly virtually none of the members’ £50million went into films.  The scheme was nothing to do with the members helping the film industry; any such help came from Barclays Bank.  The partnership lent £293m of Barclays Bank’s money to the members as an advance against future profits and the members paid that money back to Barclays Bank as a prepayment of 10 years interest on their loans.

The scheme was a deferral scheme.  The idea was that Barclays’ money would be used to buy film rights from Disney Corporation which would then be licenced back to Disney for 20 years.  The licence fee would be income of the partnership and as such taxed on the partners.  However the partners would never see that money; it would be used to repay the Barclays Bank loan.  Accordingly the members thought (or if they did not understand the scheme, should have thought) that they would get tax relief in 2006/07 but would have taxable income in each of the next 20 years for which they would have to fund the tax out of their own resources (or, of course, enter into further tax avoidance schemes each year to seek to shelter that income from tax) as the income itself had to be paid to Barclays.

In general the UK tax system does not grant tax relief for interest on borrowings to make investments.  You do not get tax relief for interest on the mortgage to invest in your house; you do not get tax relief for interest on a borrowing to invest in shares in, say, BP even though you expect the investment to produce taxable dividends; and you do not get tax relief for interest on a borrowing to invest in film rights even though you expect those rights to produce taxable licence fees. (Curiously if you rent your house and borrow to invest in someone else’s house you do get tax relief on the interest by treating it as an expense of generating the rental income.  Personally that does not seem either rational or moral, but it is what parliament in its wisdom has decided and, as I said earlier, in my view we ought to/are entitled to take the tax system as we find it).

If I carry on a trade, I do get tax relief for interest on money that I borrow for the purpose of the trade.  It is a business expense.  If a partnership carries on a trade, a partner can claim tax relief on interest on money that he borrows to finance the trade (presumably parliament feels that such interest is in reality a trading expense of the trade).  The members of Eclipse 35 believed it was carrying on a trade so that they could set their advance loan interest payments against their overall income for 2006/07.  The Courts have held that the partnership’s activities were an investment in film rights, not a trade.  Accordingly they have no right to tax relief for the interest payment in the same way as no one else has a right to tax relief on money borrowed to make an investment.

The issue that seems to have attracted Mr Mostrous’s sympathy is that by now the investors owe tax not only on the £293m income of 2006/07 that they sought to shelter by the interest payment, but they have “received” getting on for half the leasing receipts on which they also owe the tax (as they always expected to do).  These investors have known since April that the tax was due - and because all of the First-tier Tribunal, the Upper Tribunal and the Court of Appeal have held that the partnership did not carry on a trade, they have at least known the tax might be due since the FTT decision in 2012 and so have had four years to find the money.  2006/07 tax was due for payment by 31 January 2008, which is almost 9 years ago.  How much longer does Mr Mostrous think that the Exchequer should wait for its money?  The tax on the licence fees would have been payable even if the activities had amounted to a trade so it is not clear why the partners should still owe the money.  They ought to have been declaring that income and paying the tax on it year by year.

A judge once commented in relation to tax avoidance that he who plays with fire cannot complain of burnt fingers.  That seems to me to be precisely what the investors in Eclipse 35 are now doing.  They want to say the whole thing was a ghastly mistake and HMRC ought to pretend nothing happened and simply collect tax on the £293m.  But that is an extra-ordinary concept.  They entered into real transactions and even convinced the Courts that they were real, not pretend transactions.  They may not like the tax consequences of those real transactions but it is not reasonable to criticise HMRC for enforcing those consequences.

HMRC are not being hardline.  They are simply enforcing the laws laid down by parliament.  That is what they are there to do.  Of course parliament could change the laws.  Mr Mostrous can write to his MP and suggest that parliament should retrospectively exempt from tax those wealthy investors who sought to avoid it and have spent the money because they felt that their fair contribution to society is somewhat less than parliament has decreed.  That would be a perfectly legitimate thing to do.  I somehow doubt that parliament would think such a suggestion reasonable though!


Monday, November 14, 2016


BLOG 175


HMRC recently issued a note about calculating the 2014/15 tax gap.  This tells us that the tax gap for 2014/15 was some 6.5% of the total tax and duties due to HMRC.  It also says that “the estimate announced for the previous year has been revised upwards from £34bn to an actual figure of £37bn”.

I am not sure that it is helpful for the government to lie to the citizenry.  But I suppose that when it ought to be obvious that it is a lie – as it is surely not possible to “estimate” an “actual figure” that may not matter too much.  One can replace an estimate by an actual figure and one can refine an estimate to produce a more accurate estimate – which is what HMRC have done – but there will always be a fundamental difference between an estimate (an educated guess) and an actual figure (a fact).

The briefing note is of course little more than an advertising puff for the full 86-page report, which is a lot more honest.  So what is the tax gap?  HMRC say it is the difference between the amount of tax due and the amount collected.  They point out that it is impossible to collect every penny theoretically due, “for example, we cannot legally collect taxes from companies that owe tax and are insolvent”.  I like that word “legally”.  If HMRC believe that there are illegal ways to collect tax from people who have no money, perhaps they should explain what they are.  In the real world if a person has spent all his money he cannot pay anything.  But I digress.  The full report breaks down the tax gap as follows.

Criminal attacks                                  £4.8bn                                     13%
Evasion                                                  5.2bn                                     14%
Hidden economy                                 £6.2bn                                     17%
                                                                                    £16.2bn           44%

Avoidance                                                                       2.2bn             6%
Non-payment                                                                  3.6bn           10%
Legal interpretation                            £5.2bn                                     15%
Failure to take reasonable care            5.5bn                                     19%
Error                                                    £3.2bn             £13.9bn             9%    
                                                                                    £35.9bn          103%   

I have totalled the first three items together because they are all different forms of theft.  I assume that HMRC have split them because they try to counter them in various ways.

This is an interesting table.  44% of the £6.5bn shortfall, or £2.86bn is lost due to theft.  That is obviously an estimate.  If HMRC knew how much had been stolen from taxpayers they would also know who stole it and would presumably recover it.  The reality is that they do not know, because nobody knows.  Many put the figure much higher.

Bearing in mind the vast amount of both government expenditure and new legislation designed to combat tax avoidance, it is interesting to learn that this actually cost taxpayers only £2.2bn in 2014/15 and represented a mere 0.39% of the tax shortfall.  Indeed the vast majority of this figure is not a shortfall at all.  It will be collected (with interest at a rate that exceeds a commercial rate) in later years because most attempted tax avoidance fails and the tax has to be paid (or will fall into HMRC’s non-payment category) in a later year.  Where avoidance is successful, it is not part of the tax gap either (under HMRC’s definition) as the tax will never have been “an amount of tax due”; it is an error in HMRC’s calculation of the tax due, arising from a misunderstanding by HMRC of the tax laws.

Non-payment is factual and there is not much to say about it; even HMRC cannot stop people becoming insolvent.

The three remaining items are all estimates.  How accurate they are is questionable.  HMRC enquire into a small number of cases.  Those enquiries throw up areas where the taxpayer has taken a different view from HMRC.  In most cases the two sides compromise.  HMRC then consider imposing a penalty for the extra tax that becomes collectible as a result of their challenge.  If the taxpayer accepts a penalty, that extra tax is labelled as arising from failure to take reasonable care; if he doesn’t, it is attributed to error.  If the dispute has not been resolved by the time HMRC prepare their statistics, the tax HMRC are claiming is labelled as lost due to legal interpretation.  The statistics are generally based on HMRC random enquiries.  They do a very tiny number of random enquiries.  I do not know how many but I would be surprised if it is more than 1,000.  They then assume that the extra tax they pick up from that small number is representative of the whole body of taxpayers.  So if they pick up extra tax on, say, 200 of their 1,000 random enquiries they assume that 20% of the 9 million tax returns they receive are similarly wrong.  That may or may not be a correct assumption.  I have no doubt that it is a statistically reasonable one. 

The legal interpretation category is a bit more controversial because most challenges of legal interpretations take years to resolve.  Some, or indeed all, of that £5.2bn may be tax that will ultimately be collected.  It may equally not be tax at all but an amount that HMRC thought was due because they misunderstood the law.  This means that projecting from the sample to the general body of taxpayers is fairly pointless.  It is improbably that other taxpayers will be interpreting or misinterpreting exactly the same bits of legislation.

The real breakdown of the tax gap is therefore as follows:

tax stolen (estimated)                                                                                    £16.2bn
tax lost because HMRC did not manage to collect it in time                3.6bn
tax lost because HMRC have not been given the resources
   to do more enquiries                                                                        £13.9bn

tax that will be paid late as a result of attempted
avoidance will never have actually been due as HMRC
misunderstood the law                                                                           2.2bn

This raises interesting questions about HMRC’s use of resources.