Holding on to the fruits of tax avoidance

It’s difficult to think of a measure that has attracted such universal hostility as the proposals announced in the Queen’s Speech for so-called Accelerated Payments. Badged by the Telegraph as treating taxpayers as “guilty until proven innocent” and by Pinsent Masons as “unconstitutional” and “having the effect of making HMRC judge and jury” they have nevertheless found their way into the Con/Lib Government’s final Queen’s Speech.

These are heavy charges. But are they justified? Do the Accelerated Payments provisions effect some step change to the present system for collecting tax? And if they did, would they be wrong to do so? The answer, in both cases, is an all but unqualified no.

Let’s remind ourselves what the provisions do. Where your tax behaviour looks like ‘bad’ behaviour – defined in ways I shall come on to – HMRC can compel you to hand over the fruits of avoidance pending a final judicial determination. And, err, that’s it. Standing back, the policy rationale is, where your behaviour looks like it’s bad, you hand over the cash now. But should the courts later define your behaviour to be, in effect, ‘good’, you’ll get the money back plus interest.

So the provisions are only about the question ‘who should hold the cash?’ in the meantime.

To, then, the first of the two questions I posed. Do they effect some step change?

Answer, clearly not.

The provisions bite only where you are holding on to the tax fruits of your avoidance behaviour in the meantime. But the question whether you are – or whether HMRC already have the cash – is not a function of some broad constitutional principle that you should enjoy the money until a court compels you to hand it over. It’s a function, instead, largely of fortuity: whether you’re employed or self-employed.

The effect of successful personal income tax planning is typically to remove an obligation to pay income tax on otherwise taxable income. This intended effect is achieved either through the taxpayer generating ‘losses’ which she can set against her other taxable income thus reducing her net taxable income. Or by triggering her entitlement to a tax credit which, again, she can set against her liability to pay income tax.

Now, where you are self-employed, or have other income not subject to deduction of tax at source, you claim the benefit of these losses or this tax credit by saying on your tax return, in effect, I have a liability to pay you 100 but I have losses of 80 so I will only pay you nine (45% of the remaining 20), and then handing over that nine. However, where your income is subject to deduction of tax at source (because, for example, your employer deducts it under PAYE) you claim the benefit by saying, in your tax return, you HMRC have deducted tax on 100 but you should only have deducted tax on 20, so please repay the 36 (45% of 80). Sometimes HMRC do, even where they think your claim to 80 of losses may not be secure, but increasingly they don’t. So if you’re self-employed, typically you’l have the cash. But if you’re employed, generally HMRC will already hold it.

The effect of all of this is that the question ‘who should hold the cash?’ is one which, even under the legislation as it stands, is apt to produce different answers for different types of taxpayer. Or, in a nutshell, no step change to see here, move along.*

My second question was, even if the provisions effected a step change, would they be wrong to do so?

Plainly this is a question in relation to which different people can reasonably hold different views. My starting point is that HMRC is a department of Government, obliged as a matter of proper public administration to act reasonably in collecting tax, and that, where it says tax is due, it is generally likely (I put it no higher than that) to be right. The data in tax avoidance cases supports this proposition: HMRC claims to win over 80% of disputes. Now, one might reasonably ask, in those circumstances, why should HMRC not have the cash pending a determination.

And there are additional safeguards. In order for the accelerated payments provisions to apply, there must be more than a mere statistical probability that  HMRC will likely end up with the cash anyway, to justify them getting it now. For HMRC to issue an accelerated payment notice, they must be able to pass through one of three gates. The first gate is that an independent advisory panel has indicated that the transaction is likely to be “abusive”. The second gate is that the transaction has already been disclosed under the Disclosure of Tax Avoidance Scheme regulations. The third gate is that HMRC must be of the view there is a judicial ruling which, if applied to the case, would deny the asserted advantage.

Now, none of these gates is perfect.** They are all proxies for the (technically challenging) question the subject of the taxpayer’s appeal, what is ‘good’ and what is ‘bad’ tax avoidance. But they are, on any view real safeguards. And they have broadly the effect that only measures which are likely to be ‘bad’ avoidance cases should trigger the provision of an accelerated payment notice. Again, nothing to see here.

Summarising, the accelerated payments provisions are – or so it seems to me – well targeted provisions which seek to reduce tax avoidance behaviour by targeting one of the cash-flow benefits of that behaviour. In that objective, and generally in their execution, they are to be applauded.

*The existing legislation also gets to this result by compelling certain types of taxpayer wishing to challenge a HMRC determination that their transaction is ‘bad’ to pay the disputed tax as the price of pursuing the determination. But again, no step change.

**Indeed, the DOTAS gate is properly amenable of serious criticism. Many taxpayers made DOTAS disclosures out of an excess of caution and/or a desire to be good taxpaying citizens, even where they believed or were advised that their transaction was not disclosable. That they should be, in effect, punished for behaving in ways the Government would wish to encourage is likely to prove hugely counterproductive. The extent to which this generates an undesirable effect – that of a reduction in transparency in taxpayer behaviour – is a known unknown which any sensible Government should wish to guard against. Other, also weighty, criticisms may be made of the Judicial Ruling gate.





24 thoughts on “Holding on to the fruits of tax avoidance

  1. “The provisions bite only where you are holding on to the tax fruits of your avoidance behaviour”

    Rather jumping the gun. That’s what the court still has to decide. Was it (illegal) avoidance or not.

    Say what: let’s just stick everyone we’re going to try for an offence into jail. You’re only trying to hold on to your liberty until the court rules on your guilt after all. And don’t worry. We’ve a compensation scheme for those found not guilty.

  2. You’ve made two points.

    As to your first (the quotation), the simple point that’s there being made (as is clear from the context) is that if HMRC have already got the cash (for no other reason than that you’re employed and have had your claim for repayment refused) then the provisions don’t bite. That is undoubtedly true. In my second question I acknowledge that different people can reasonably hold different views about whether (in the event that because you’re self-employed you end up with the fruits) it’s right that HMRC should be able to compel you to hand them over pending a final determination. I think they should – for reasons I explain.

    As to your second, the analogy, with respect, is not a good one for several reasons. Going to jail carries a stigma which handing cash over (temporarily) does not. And few people would accept cash as appropriate compensation for being deprived of their liberty.

  3. ” Going to jail carries a stigma which handing cash over (temporarily) does not. And few people would accept cash as appropriate compensation for being deprived of their liberty.”

    And how many would accept the interest rate on Gilts as being compensation for he time value of their money? given that most do try to invest elsewhere for greater yield, perhaps not all that many.

  4. It’s certainly fair to say that the interest rate payable by HMRC if it has to return money to recipients of APNs – 0.5%, I think – is less than most would hope to achieve. On the other hand, of course, by handing the money over now, unsuccessful appellants avoid the risk of having to pay interest on otherwise unpaid tax debts – at 3.5%. Given that over 80% of those subject to APNs will lose their disputes with HMRC, recipients as a class might be said to be much better off in consequence of not having to find 3.5% per annum (and out of post tax returns).

  5. “recipients as a class ”

    But we don’t run justice as a class. We run justice as a matter of individuals. We don’t jail people “because they’re a bad ‘un”. We must have specific proof that they have committed a crime. We don’t jail people because they are of the wrong class: Stalin did but we don’t.

    Justice, just like injustice, is a personal matter. I assume you’re a lawyer from your commentary. How can you be such if you think that there is “class guilt”?

  6. No-one’s talking about jailing anyone Tim. No-one except you. And nor have I talked about “class justice”; again just you.

  7. Just a thought. What happens if in taking taxpayers cash by what is technically retrospective law, the taxpayer goes bankrupt/into liquidation and then the case ruled against HMRC. Is there a mechanism for compensation or does the Pubic sector just say ‘oh well’ and carry on as before? just a thought!

  8. Reading the stigma argument. People such as for example Gary Barlow and Jimmy Carr are effectively stigmatised as criminals. To be frank NONE of the politicians have explained that they did nothing illegal and HMRC have brought pressure on all by what is effectively morally dishonest means have they not? This witch hunt is a recent phenomenon of Margaret Hodge and her crusade. Lets be honest the morality argument has no place in law. Members of the Bar such as you and I know that! What right did HMRC have in disclosing Carrs’ tax affairs anyway? Am I correct in believing that as long as they spoke ‘off the record’ they were in the clear re the JR ruling-I’ll have to read the judgment. If I am I’m staggered frankly.

  9. If the taxpayer went bust before winning, the tax and interest would be an asset in the liquidation. Just like any other asset.

  10. I’m no VAT expert but is there a VAT angle to this as well? I understand that the “follower” issue is rare in VAT disputes. There is a test case, it gets decided and all the “follower” cases fall into line. With direct taxes it seems that, regardless of the judicial decision (your third gate), the followers decline to follow the ruling on the grounds their case is not on all fours with it.
    So is there an argument here in terms of horizontal equity, ie all taxpayers in similar positions get treated equally?
    As for high profile avoiders, you just have to read the Chris Moyles judgement to see that the dividing line between evasion and avoidance can seem very thin.

  11. Sorry I meant if as a result of the new legislation a company is forced to pay the tax in advance and as a result the company individual goes ‘bust’ and then wins the avoidance litigation case? What then?

    Thanks for the reply on the other question.

  12. Theres still a stigma who ever these people are of begin akin to doing a criminal act. Criticism is one thing but the effect of this behaviour by HMRC/PAC/Government is to brand the people entering planning as ‘criminals’ I went on to your comments re evasion and I agree but these people are not evaders and no one in authority has made the distinction clear. Peoples careers are being blighted for doing what was and is a legal act. There can be no justification. Isn’t that behaviour by the authorities dishonest (morally repugnant) that I think is a valid criticism.

  13. Company would be restored to the Register. But it’s a fair point: usually regimes don’t operate to force litigants under, absent a court decision: eg security for costs in the High Court.

  14. My main problem with it is that it’s aimed at getting rid of the cash flow benefit of tax avoidance, but is disproportionate. The potential negative impact could be to drive a taxpayer to bankruptcy, whereas the potential positive impact is just to get eliminate the time value of money for the taxpayer.

    The interest on overdue tax is already meant to deprive taxpayers of that time value, and does so without potentially driving them into bankruptcy: the taxpayer has some control over how the economic impact lands, but has to pay the interest price for that. If the interest does not adequately reflect the value of the cash flow, then one should address that issue rather than simply seizing assets.

  15. That is, if interest on overdue tax already deals adequately with the cashflow effect of late payment where tax is clearly due, I don’t see why stronger measures are appropriate where it is not clearly due. If it doesn’t, then it should be fixed until it does – at which point there is again no case for stronger measures in weaker cases.

  16. I suppose one might say that if you’re going to go bankrupt if you lose (and the stats show that most people will) there’s not much advantage to the State in you going bankrupt later rather than sooner. From your perspective, I suppose, it might be helpful to go bankrupt later because you could disperse assets in the meantime. But I’m not aware that ‘anti-dispersal’ is being advanced as a policy objective for the measures.

    I’ve written elsewhere on this blog about the pretty disingenuous way in which Treasury treat the receipts – a post called Spending Tomorrow’s Money today . The fact that these measures accelerate receipts from year five to year one creating a fiscal windfall for Government in a pre-election year might also be a policy objective (although, again, one that isn’t being advanced).

  17. If you take it that bankruptcy is inevitable either way, then fair comment. To the extent that bankruptcy might be brought on for cashflow reasons, though, it wouldn’t be inevitable – say you have a lot of property, so if you thought you might have to pay the tax next year when it gets to court you could start liquidating some assets now, but if you have the tax removed from you now then your legs are cut out from under you.

    So what I’m thinking is that it might be helpful to have some control over when you pay your debts – especially if it’s not yet clear that they are actually debts.

  18. There I don’t agree. If you are only insolvent on the ‘able to meet your debts as they fall due’ basis but you are demonstrably solvent on the ‘net assets’ basis then, in my experience, HMRC will give you time to pay.

  19. At the moment, yes. Will they do the same under these new rules? A lot of the language around time to pay is about helping taxpayers who want to be compliant to do so in an appropriate way – the “can’t pay” type. These rules are all about the “won’t pay” taxpayers, who don’t get the kid gloves.

  20. Thanks for the Blog. I once met JGQC when I was being led by a pal of his so I came across this and read with keenness. Ill keep tuned in and read with interest.


    Best regards


  21. One never forgets meeting JGQC. For better or worse.

  22. Coming late to this, but surely, like a great deal of tax legislation (for example the managed service companies law) this is more important for what it achieves in terms of future behaviour than in actual results. Similar to IR35, which raises very little additional revenue, but protects what would otherwise be a great big hole. This will suggest to those considering investing in tax avoidance schemes that they will not get the cash flow benefits unless and until they win an argument about the technical merits of their plans. They can then make their decisions based on those facts. And in my view are less likely to go ahead.

  23. If any crime has been committed, it has been committed by the companies that set up and market these ‘avoidance’ schemes. In fact they are not marketed as avoidance schemes they are marketed as salary solutions.
    These companies take a sizeable amount of money while assuring the victims that the schemes are 100% compliant and legal.
    The schemes allow the victims to operate their business with minimal administration e.g. invoicing and providing the necessary professional indemnity insurances with the promise of an additional 10% increase income compared to the PLC route (10% lower rate and 20% on dividends).
    That 10% advantage gets spent very quickly on boosting the economy and then several years later HMRC decide that it is not legal and try to recover taxes retrospectively on a PAYE basis…… Now that is criminal.
    Contractors do not benefit from any of the advantages of PAYE, no sick pay, holiday or pension contributions, no VAT relief (if using a salary scheme), short term contracts to provide services when and where they are needed by industry; yet supply work that keeps the economy floating.
    The current plans are equivalent of penalising contractors with a 60% overall tax burden on their earnings retrospectively. The contractors have done NOTHING illegal.
    The companies that set up and market the schemes are the ones that should be chased for any perceived lost income – not the victims.
    HMRC is the bully in the playground and only picks fights it thinks it can win, so the 80% statistic is really quite appalling bad. HMRC are not going to pick a fight with the service providers as they have a team of lawyers who would probably give them a bloody nose as was the case with Rangers FC.
    So please don’t try and sugar coat the reality here gentlemen.
    Contractors are not criminals, they work hard for their remuneration which is damn site more than the shower of bastards residing in the houses of parliament!

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