I have alluded elsewhere on this blog to the challenges that taxpayers face in assessing tax risk. BigXCo may feel comfortable – assuming its audit committee trusts its professional advisers – that it can make a fully informed decision as to the level of tax risk it wishes to take. But MediumYCo or IndividualZ will generally not possess that capacity. And, lacking it, they can unwittingly become participants in – and sometimes victims of – tax arrangements with a higher risk profile than they might choose.
I am not alone in being interested in the consequences of this state of affairs. The consensus view is that, if taxpayers knew what they were getting into, they wouldn’t get into it. And, collectively, we would suffer less the consequences of tax avoidance. But even if that consensus were wrong, a higher degree of certainty on the part of HMRC that taxpayers knew what they were doing would open up other avenues for addressing avoidance. For example, those who chose to participate in high risk transactions could be penalised if they went wrong.
With these policy wins in mind, a number of proposals have been advanced to help taxpayers assess tax risk: kite-marked tax advisors, higher quality explanatory notes, Revenue pre-clearance procedures, and the badging of certain promoters as “monitored”.
This is not the place for me to analyse the strengths and weaknesses of those proposals. Each presents challenges, each has limitations and each has strengths. What, instead, I would like to do is propose a further, and I hope realistic, proposal. A set of diagnostic criteria against which a taxpayer might self-assess the risk of the transaction proposed to him.
The objective of these criteria – or badges as one might call them – is a modest but important one. It is to enable the interested taxpayer to position the contemplated transaction on a risk spectrum that might start with pension contributions and finish near to evasion. He should, with the benefit of that positioning, be able to decide whether or not to transact.
What follows is my first pass at something that might be publicised to taxpayers. I’ve thought about how these criteria might apply to various transactions I have litigated. But please do likewise – and suggest, criticise and redraft.
Badges of tax risk
External criteria. There are a number of externally verifiable signals of tax risk. You should ask the following questions of the person putting the proposal to you (your “Adviser”).
1. Is there a DOTAS number that I will have to put on my tax return? DOTAS stands for Disclosure of Tax Avoidance Schemes and if there is a number that is a strong indicator of high tax risk.
2. Is there a promoter reference number for your transaction? Transactions with promoter reference numbers will have been devised by those identified by HMRC as more likely to be engaged in high risk behaviour.
3. Is there a page on HMRC’s website that deals with this transaction? HMRC publishes on its website very detailed Manuals for its Inspectors which set out the tax treatment of most transactions.If the Adviser cannot direct you to where the transaction is addressed in the Manuals it may indicate the transaction is higher tax risk.
4. What fee are you being asked to pay? If you are asked to pay a fee calculated by reference to tax saved, that is a strong indicator of high tax risk. If your fee is calculated by reference to your adviser’s reasonable hourly rate, that is an indicator of low tax risk.
5. Are you asked to keep the details of the transaction confidential, or sign a Non-Disclosure Agreement? The confidentiality in your tax affairs is generally yours to keep – or waive – and not your Advisor’s. If your Advisor asks you to keep details of the transaction confidential that may well indicate that the transaction is being sold to others and is a strong indicator of high tax risk.
The transaction itself. Why are you transacting – and why are you transacting in this way?
6. Does your transaction advance a non-tax (i.e. either a commercial or a personal) objective? If your only purpose in transacting is to achieve a tax benefit, this is a strong indicator of high tax risk.
7. Is the attractiveness of the transaction a consequence of the tax benefits it delivers? If you would transact without the tax benefits, that is a strong indicator of low tax risk.
8. If your transaction has a non-tax objective, is the manner in which you are transacting a natural way to achieve that objective? Most transactions structured in a normal way will attract the tax treatment Parliament intends. It is a common feature of higher tax risk transactions that they deliver your objective by an artificial route.
9. Does the shape of the transaction give you a better tax result than another economically equivalent transaction? What are the tax consequences of achieving your objective through a different route? A transaction that is not tax maximising has some tax risk but a transaction that is tax maximising has none.
10. Does the shape of the transaction advance your pre-tax objectives? If both the transaction and its shape are dictated by your non-tax objectives that is a strong signal of low tax risk.
The tax effects of transacting. In tax, as with other things, there is rarely such a thing as a free lunch. The difference between tax efficient transactions and tax avoidance transactions is very often whether Parliament intended the tax result your transaction delivers. So, you should ask yourself:
11. Is it likely that Parliament intended this tax result? It is useful to ask this question alongside 3. above: if Parliament did intend it, it is very likely HMRC’s website will say so.
12. Are you being taxed on the economic or ‘real’ transaction that you entered into – or do the tax consequences attach to some other transaction? If you are being taxed on a transaction that differs from the ‘real’ transaction that is a strong signal of high tax risk.
Follow me on twitter at @jolyonmaugham
There are some really good ideas here. I was just musing imagining Gary Barlow reading it! Of course he is pretty likely to read it eagerly NOW, but before? It will rely on quite wide support from Advisers, but such a proposal could be a very useful tool to support our clients.
Excellent stuff 🙂
One quibble: hallmark #4, about the fee being related to tax saved, would apply to a lot of the capital allowances and R&D boutiques which do perfectly mainstream work – indeed, one of my current R&D projects is on that basis.
I wouldn’t say it’s a “strong” indicator of high tax risk, as I think that doing so suggests that it would over-ride some of the others, and almost be sufficient in itself. I think it’s just a indicator.
Although now I come to look at it I find that you classify most of the hallmarks as “strong” one way or the other. That devalues the adjective slightly – is it worth either not weighting the descriptions at all, or perhaps being more selective in your use of “strong”?
Thanks Andrew. Your praise is closely held so that’s a real compliment.
Weighting the badges/hallmarks might lead one in the direction of a Fairtaxmark style ‘pass’ mark – which might be rather strong medicine. That, anyway, was the thinking that led me to stop short. But I’d be delighted if you (or anyone else) cared to have a crack.
Thanks, too, for your comment on CAs and RD.If practitioners from all disciplines run the badges against the work that they do we’re much more likely to get something workable.
Would it be helpful for me to repost updated badges in a week or so, do we think?
I did have in mind Gary Barlow and Katie Melua – but also others who have made the same complaint. Indeed, I spoke recently to an HMRC Inspector who says he is called up all the time by taxpayers saying, plaintively, ‘how was I to know?’ There is absolutely a problem here to be solved…
Oh, and one other quibble: In #9 you refer to “tax maximising”. My first reading of this was that this would mean getting the best tax result, but I think that you actually mean the highest-tax result (so, the best for the Treasury, I suppose). This led me up the garden path briefly.
It may be better to break down some of the jargon – perhaps instead of “A transaction that is not tax maximising has some tax risk but a transaction that is tax maximising has none”, you might say something like “A transaction that gives you a better tax position has some tax risk, but a transaction that results in you paying full tax has none”.
I was thinking along the same lines as Rebecca. This is jolly useful for me as an interested lay person, but I think it’s too much to expect most taxpayers to think through. The response from Barlow, Melua, Carr et al is generally “I asked someone else to think about this so i didn’t have to.”
Since most of the questions you suggest are closed, perhaps it could be turned fairly easily into a risk assessment cover sheet to be suplied by the adviser, where the taxpayer can see at a glance on how many criteria the scheme falls into the high risk category.
Were that to work fairly well, perhaps BigXCo might also be able to reassure the public about its tax position by publishing one for each transaction, say above a certain materiality threshold?
Very interesting – the cover sheet thought.
I’ve been thinking a little about how one might give this idea some traction. One possibility might be to put the badges to an advisor being sued for negligence and have a judge articulate a view on them. Another possibility would be for HMRC to put them to a taxpayer in penalty proceedings. But more on that latter anon…
I think updated badges would be a good idea, once they’ve been knocked around a bit by people. I like the idea of making it a checklist, though I too have doubts about whether pass/fail is a good way to go. The IR35 Business Entity Tests are an excellent example here of a path not to tread.
I’m thinking it might be a good thing to stick on my firm’s website as a tool for clients – we don’t do schemes ourselves, but I’d be happier if some clients had asked themselves this sort of question while talking to other advisors. Would that be a direction you’d be interested in heading?
Absolutely. It’s ‘fun’ (by some definitions, at least) talking about tax but I’m in it to bring about change. What ‘success’ for this blog post would look like to me is absolutely what you describe: i.e. having those working in the tax sector posting these badges on their website and inviting actual and potential clients to consider, against the badges, the fiscal risk profile attached to the transactions they are contemplating entering into.
An excellent list. Along the lines of Andrew’s comment, some of the language needs to be considered for the audience. Think about getting rid of references to what is “normal” in 8 – a layperson can’t easily judge that, and will perhaps be influenced by their advisers (“Don’t worry, I do this sort of stuff with clients all the time…”).
Perhaps the focus should be on how well the client understands what is being proposed. “Do you feel that you could explain the transaction, and why it is being done in the proposed way? A transaction which seems overly complicated to achieve a particular non-tax goal, or a transaction which contains steps which do not serve an obvious purpose, are indicators of higher tax risk.”
Maybe this is edging into question 9/10 territory, but it might be a more accessible way of approaching the same question(s).
Also, is there something to be said for approaching the question of risk appetite head on? I realise this doesn’t lend itself to objective indicators of higher / lower risk, and so doesn’t easily mesh with your list, but it could help to prime people to be thinking in the right way. I don’t think we should underestimate the possibility that sometimes both client and Adviser are bona fide actors, but the client hasn’t properly taken the time to consider their own appetite for tax risk, and the Adviser hasn’t properly taken the time to explore the client’s views on the subject.
“How would you feel if a transaction you had taken part in was queried by HMRC? What if it was actively challenged by HMRC? Have you discussed your feelings on tax and tax risk with your Adviser, in the context of the proposed transaction?”
Thanks Matthew. Really useful contributions. Absolutely there should be an introductory paragraph advising clients (for whom this thing, really, is written) to make clear to their advisors their appetite for tax risk. Perhaps only a lawyer would say this, but I wonder whether they should be advised to write to their advisor setting out their appetite for tax risk (and to retain a copy of the letter)?
I’d echo Andrew Jackson’s comments on #4 and expand on them that it’s very often the client who insists on a fee based on tax savings.
I’d also suggest that #3 is off the mark. Having over the years spent many long hours trawling through HMRC manuals (both before and after I left HMRC) trying to find a match for the transaction I was looking at I would suggest that that there are far more possible transactions there there could ever be pages in HMRC manuals. I can’t see it pointing one way or the other if a particular transaction wasn’t specifically covered.
I suppose that then leads into #11 since without the draughtsman to hand, it might require some mind-reading, extrapolation and guesswork.
Overall, I wonder whether you aren’t asking the average client to aspire to the analytical skill and wisdom of the Supreme Court in looking at the proposed transaction. Those of a nervous disposition are likely to become so flustered they won’t undertake the most basic of tax planning whilst those of a more cavalier disposition will likely proceed after paying only superficial regard to your questions.
A good point on #3. I might go further: in most cases, acceptable transactions are covered by general principles, whereas it is those which require challenge that might have a section of the manual devoted to setting out how to do so.
Obviously there are exceptions, such as EIS or EMI, but I think absence of evidence that HMRC approves a transaction is simply an absence of evidence.
For example, this morning I had someone ask me for the pages of HMRC’s manual that explicitly say you get a deduction for interest on a very simple non-trading loan relationship – they were worried that it couldn’t be as straightforward as I was saying. But the manuals of course don’t say that such interest is OK – the closest they come is to say that interest is generally deductible but it might not be in certain cases (transfer pricing, unallowable purpose, etc).
Demonstrating to someone unfamiliar with the principles that they are not caught by certain anti-avoidance provisions, and that there are no other anti-avoidance provisions that could apply, is slightly awkward. Especially when the legislation uses broad (and almost tautologous) phrases like “unallowable purpose” in a narrow sense…
Still, being made to explain basic concepts clearly to a doubtful listener is a good way to make sure you understand them fully 🙂
I suspect this could be done as a checklist with red (higher risk) and green (lower risk) columns, so Yes (DOTAS) or Yes (promoter reference number) goes in the red column, but no goes in the green.
It won’t be enough to just count points in each column (more greens than reds is not necessarily ok): rather, each extra red cross suggests a higher risk.
(Hmm, putting on a behavioural economics/nudge hat, I wonder, does it make more sense for yes to be red, or yes to be green?)
Anyway, as Andrew (C) suggests, I’m not sure it makes much sense to ask lay clients what Parliament intended. And some of questions 6 to 10 abd 12 seem to be covering much the same ground. How about this:
* Is the transaction mainly motivated by a tax objective? Yes=red
* Does the transaction only make economic sense because of the intended tax result? Yes=red
* Is the transaction more complicated than it needs to be, just to achieve the intended tax result? Yes=red
* Are you getting a tax result which is different to the result that would usually be expected for this sort of transaction? Yes=red
There is also some overlap with HMRC’s warning signs of tax avoidance: http://www.hmrc.gov.uk/avoidance/tempted.htm
Pingback: Tax Research UK » Badging tax risk
From my blog:
Jolyon Maugham has made another interesting contribution to tax debate on his blog, using the above title. I suspect this is in advance of the Hardman Lecture he is giving at the Institute of Chartered Accountants in England and Wales next week, which I will not, unfortunately, be able to attend.
What Jolyon is arguing is that a taxpayer should be able to identify at least twelve factors in a potential transaction recommended to them by a tax adviser that might suggest that the arrangement is inherently risky for tax purposes. I’m not going to reiterate the list here, but think that some of the comments on his blog are relevant, and in particular note what Martin Hearson has to say, which is that many of the questions are too complex for a layperson to answer, and in themselves were precisely what they asked the professional adviser they engaged to consider. This is, I think, because Jolyon has concentrated too heavily upon the nature of the transaction that is being looked at, and not about the environment in which advice is being offered.
I would add to Jolyon’s list of questions in that case, with my focus being upon the tax adviser themselves, because this is the person whose behaviour should signal most tax risk to an astute taxpayer considering using their services. My additions to Jolyon’s list would be, as a result, as follows:
Tax Adviser Risk. All of us have inbuilt risk assessment tools based upon our assessment of the people that we meet and how they behave. We may not all be tax experts but we do have the ability to appraise those who claim to have that status. Just as some people in life are more risk averse than others, whilst some positively relish taking an aggressive stance on most issues, the same is also true of tax advisers. The following questions are an appropriate part of any tax risk appraisal in that case.
13. Is the tax adviser you are talking to a member of a recognised professional body? In other words, are they a barrister, a solicitor, a chartered or chartered certified accountant or a member of the Chartered Institute of Tax? If not there may well be considerably increased risk involved in taking advice from them, including the fact that they may not be insured to provide that advice in the first place so that you will have no effective recourse against them if anything goes wrong.
14. Is the tax adviser using aggressive language with regard to tax, and is their general position with regard to HM Revenue & Customs one of apparent hostility? If so you need to have doubt as to whether they are being truly objective with regard to the advice they provide. A tax adviser can, and should, have an opinion on various taxation issues, but if sentiment clouds their judgement they may not be appraising tax risk objectively, and that can have an impact on your own situation.
15. Does the tax adviser appear organised, tidy, methodical and diligent with all their paperwork? This is an important trait in a tax adviser, because getting everything documented correctly is fundamental to getting anyone’s tax affairs right. If they cannot apparently achieve this themselves, there is little chance that they will deliver for you, and your tax risk will be increased as a result.
16. It may be hard to appraise a person’s opinion on complex tax advice, and on complex tax avoidance schemes, but in that case ask them questions about something that is quite straightforward to do with your affairs, such as how and when you might owe tax, or if a particular type of income is taxable, or what you should do with regard to the children’s tax affairs (if you have any). If they can provide you with straightforward, unambiguous advice in plain language that you can easily comprehend then you have some basis for believing that when they talk about more complex issues they are at least trying to do their best to explain it in terms that you might understand. If you cannot understand their simple explanations, it is best to steer clear of their more complex ones.
17. Do you trust this person? Apply the ‘would you buy a second-hand car from this person?’ test. If you wouldn’t buy a car from them definitely do not buy tax advice from.
These are questions I think anyone could understand.
I have two further suggestions:
1) Did your usual accountant or tax adviser come up with the transactions themselves, or have they introduced you to a specialist tax firm to advise you on the planning strategy? If so, then your accountant may have been paid an introducer’s fee. If you ask, they should tell you about any such fee that they will receive for you carrying out the planning. The existence of such an introducer’s fee is a very high indicator of tax risk.
2) Will the transactions receive pre-clearance from HMRC? Some “normal” tax planning is capable of being cleared in advance, and it is often the case that such planning will be disclosed in full to HMRC and HMRC will be required to agree that the planning is being carried out for bona-fide commercial reasons. This would indicate the planning is low risk.
Thanks for these helpful comments. I will reply, and reblog, overnight. Update to follow tomorrow – but please keep the comments coming.
I feel really quite churlish taking issue with what seems an excellent idea and is, even in its draft stages, a superbly put together piece of work.
What we are trying to say does depend on the intended recipient. You note this yourself when you say, “What follows is my first pass at something that might be publicised to taxpayers”
Yet there are of course taxpayers and then there are taxpayers.
Additionally, the warning you are intending to send also depends, crucially, on what it is you are warning the taxpayer about. And there’s the rub: the sort of schemes you appear concerned about are – correct me if I am wrong – by their nature complex. The sort of transactions to which they are attached are by their nature complex. And they are large! DOTAS references, promoter references, non-disclosure references. All these fit – if that is the right way to put it – with large transactions that could theoretically be structured in alternative ways.
The route usually followed for marketed avoidance is: promoter markets and sells the scheme to the advisor, who points their client towards it. As Andrew notes, the client is often already predisposed to accepting tax risk anyway, but that isn’t necessarily in point here. An exception to this route is usually where the client is itself a large business with its own tax team or at least finance team and acts as its own advisor.
So to whom is this advice intended and is it actually necessary? I would argue that the users of these schemes have tax ‘savings’ in mind of a magnitude that suggest they are already tax savvy and are well aware of the risk they are taking on board. Do they therefore need this advice at all?
I would make the same observation of HMRC’s ’10 Thing You should Know about Tax Avoidance.’ It is an excellent list, but is it wasted on its target audience?
By contrast Richard Murphy’s questions clearly are of use to some taxpayers and will provide information to which they might previously had no access. However, his Questions 13, 14 & 15 do not appear to relate to avoidance. May I suggest the sort of taxpayer who engages with an unqualified advisor is unlikely to be dealing in ‘avoidance’ as such and is highly unlikely to be offered a pre-planned avoidance scheme complete with non-disclosure clauses and the like. It seems we are dealing with two different animals here.
I’m thinking about question 9 in relation to small business incorporation, followed by low salary and the rest of the profits extracted by way of a dividend. I would regard this as pretty plain vanilla tax advice, and there are lots of reasons why a business may prefer to trade through a limited company. But there is also no doubt that this can save quite significant amounts of tax compared to sole trader status. If the debate is about a “fair” amount of tax (a concept I have problems with) is limited company status and low salary, high dividend, maybe even dividends to the spouse a problem or not? I am fairly sure that the PAYE man on the street would regard this as avoidance. I am taking the debate away from the centre ground of what “we” regard as avoidance, but I wonder how these risk indicators sit with HMRC and a wider view of what is acceptable behaviour as regards tax on income. Not a criticism at all, just widening the view finder a little.
I disagree with Everblue650’s point 1 – an introducers fee MAY indicate risk. Introducers fees are standard for R&D claims and capital allowance claims, which are not avoidance schemes but do carry an element of risk. I think Andrew Jackson dealt with this point above. Introducers fees should be disclosed to the client of course.
The HMRC signposts are also a reasonable starting point but there is an underlying assumption that complex planning must be aggressive avoidance or abuse which it is not.
I would be tempted to provide the (acceptable) alternative for most of the questions, for example:-
6) Or is the proposed route merely the most tax efficient approach available which might still be undertaken if there were no taxation advantages?
7) Or are the tax consequences proportionate to the investment made and clearly relate to a government tax incentive?
8) Or, alternatively, are the proposed transactions entered into necessary to ensure that the intended tax relief is not lost through a tax technical impediment.
In essence, I am trying to include a recognition that a taxation advantage is not, per se, tax avoidance. I can think of many complex (“artificial”?) structures put in place to ensure that a relief is not lost e.g. ensuring that an investor in an EZA project obtained an interest in the property to be capable of claiming the 100% tax allowances. Artificial but clearly not egregious unless your think all tax reliefs other than ISAs and SIPPs are tax avoidance.
My belief is that in a number of the high profile cases such as Gary Barlow the client is sold an “investment opportunity” which carries “excellent tax breaks” and thus is not necessarily up for the kind of high risk tax strategy that it turns out he was involved in. I genuinely believe that some of the more wild and woolly schemes are mis-sold to investors who are naive but no more. We may think that they “should” be aware of the risks, but recent experience leads us to conclude that they may not be. Of course this is exactly what Jolyon (and indeed HMRC) are trying to get at – some relatively simple yardsticks to garage whether what is contemplated is high risk or not. I prefer to think of HMRC’s list as the “consequences” which follow, and this list as the way to judge whether you are likely to be in for the downsides that HMRC has kindly listed! The two together form a very useful package for the adviser to go through with his client, so that the client can make a really informed decision about where he wants to be on the tax risk spectrum.
Aww auto correct….gauge not garage….
Seen from a public policy perspective I think this sort of thing goes a long way to fill a space in terms of helping to assess tax risks. But, as some commentators have noted, we need to reflect a little on the extent of its value, how it fits with other methodologies on how to assesses and manage risks., and what more could be done.
It is explicitly aimed at MediumYCo or IndividualZ who (a) have an agent and (b) receive tax advice from them. We know that most companies have an agent (I think it’s about 80%?), with Self Assessment taxpayers in business, and VAT registered traders, also having a high proportion. One would hope that these agents are members of a professional body, or operate to similar standards, in which case this sort of checklist should surely be redundant, or only rarely needed?
Would we not hope and expect that if there is clear evidence of sustained professional (mal)practice that’s goes against Institute guidelines, that we should be tackling that behaviour as well, or even prioritise tackling it? In some ways the list is a bit like teaching motorists how to spot a dodgy car deal, rather than enforcing some minimum standards by garages.
This is not to write off the list, or the complementary suggestions in the comments. I’m sure this idea has great potential value, and could well link into the kind of work that Mazars are promoting on Trusted Tax Advisors and an explicit link to the values of the firm, and correspondingly those of their clients. It’s just that I think we ought also to reinforce the role of standards and the professional bodies.
But we also know that there are millions of taxpayers who never go near an agent, don’t know they exist, and see no reason to review their own affairs. Such people are vulnerable to the activities of alleged “agents” who claim to conjure up repayments and reduced tax bills out of nothing. When HMRC asks a few questions as to the basis of the claim the “agent” is often nowhere to be seen, but has taken their hefty commission. Addressing that type of risk is also something that needs public policy attention. Should HMRC do more to try to warn/protect these taxpayers? Is it something tackled via education using employers?
And in terms of what tax risks we are tackling then, to use HMRC Tax Gap language, we are in the territory of legal interpretation, failure to take reasonable care, and avoidance. All very important but we need to make sure that the other risks (evasion, non-payments, etc.) get public policy attention – maybe the subject for another blog in Jolyon’s very helpful series? At times the boundary between the first three and the world of evasion can be very thin!
In more specific terms of how this checklist approach can best work maybe we can borrow a little from the world of normal risk management? There are a variety of approaches (and HMRC will also use a variety). One is to “score” individual risks (e.g. 1 to 10) and set a threshold to trigger an alert, a review or an action. Another approach, which can run in tandem with the first, is to have certain individual risks that, if answered Yes (regardless of score) have the same triggering effect. Perhaps that initial list already proposed could be looked at to see if one or either of these methodologies would provide a way for taxpayers to make a Y or N decision on whether to accept the advice, or at least ask some questions?
Such risks need not be quantitative (e.g. how much tax is saved or under consideration). HMRC has published in its manuals the approach it takes to assessing risk in the larger businesses it deals with. In HMRC Manual TCRM 1000 onwards there are references to things like
• Inherent Risk (How is the customer’s ability to make accurate tax returns affected by their size, complexity and the nature of their transactions?)
• Assessing Behaviour, what does the customer do to mitigate this inherent risk in terms of their relationship with HMRC, their attitude to tax avoidance and the strength of their systems and processes?
Perhaps another question to add to the list would be whether, having implemented the advice under review, could the taxpayer (and the adviser) honestly regard itself as (still) low risk in the eyes of HMRC. To them a low risk large business would possess a tax control framework that is part of the business control framework; solid tax risk management, real time transparency, a history of accurate and timely returns, declarations, claims and payments across all relevant taxes and duties, and a tax strategy that does not structure transactions in a way which gives a tax result contrary to the intentions of Parliament. It is interesting to see that many of these features appear in Jolyon’s draft questions.
Interested to see what the next instalment of this blog has to say on this subject. So a big thanks to Jolyon for leading and stimulating the discussion.
What does tax efficiency mean?
And why ‘efficient’?
This is not pedantry – risk and ‘tax efficiency’ seem to me to be heavily related concepts
Building somewhat on what Rebecca Benneyworth and Stephen Herring have said, I’m thinking the points Jolyon has listed have in mind tax “schemes” (Gary Barlow being referenced) but it’s then suggested that this is publicised to taxpayers generally.
An awful lot of structuring is done for primarily tax purposes without that structuring being exotic or artificial. I’m thinking for example of management being members of an LLP rather than employed by a TopCo. Saves on employers’ NIC (might be a bit of a company car tax benefit too) and that’s why it’s done.
I suppose my point is, what’s wrong with something being done purely to save tax, provided it’s not artifiical? If Parliament gives two (or more) legal alternatives why shouldn’t tax be a (or even the) deciding factor in which alternative is chosen?
I would imagine that most people today would view tax ‘efficient’ as meaning paying the least tax using non-artifical means.
For example operating through an LLP and being taxed under self-employment rules rather then operating through a Ltd company and paying oneself a salary would save employers’ NI and would be seen as tax efficient and certainly not ‘risky’.
It’s ‘efficient’ in the same way that paying £2 for a box of pencils rather than £5 for an identical box of pencils would be seen as efficient.
‘Efficient’ is euphemism, it means saving tax. I agree wholly with Andrew Carter on the legitimacy or otherwise of Tax efficiency; it depends.
Likewise ‘Tax Risk’ is euphemism. Should this post be headed “Badges of Tax Avoidance”?
The avoidance debate has real effects on people’s decisions, to the point where some taxpayers don’t claim reliefs and allowances that they are entitled to for fear of taking part in avoidance.
A checklist like this could give real confidence to taxpayers that their advisers are not leading them astray. It would have to be properly implanted, so that businesses could use it without fear of damaging the relationship with their adviser.
Businesses must also have confidence that the checklist does NOT interfere with their desire to reduce tax bills as low as legitimately possible.
Tax is subjective and complicated. Many actions carry an element of risk, which cannot be reduced – this is the system we have. The checklist must accept that risk will be present.
Finally, some commenters pointed out – the checklist can’t rely on HMRC’s website, especially in light of the move to gov.uk as we simply don’t know what will happen to the current website or how reliable gov.uk will become.
Pingback: Waiting for Godot | Tax Avoidance – Game Over? The Hardman Lecture 2014
To me it seems this idea is getting the all-important engagement from across the board.
I would suggest putting up a MediaWiki site with a Wiki page (for the latest consensus on methodology) and a Talk page (for the discussions and arguments).
Make it creative commons so that others can take what they want from it and develop ‘forks’ and see if it flies. I think it would.
Thanks Paul. Creative Commons idea a good one. Can I embed a wiki page in wordpress? Am a bit reluctant to split the discussion between two sites…
With hosting your own wiki there are a number of options available; here’s a couple:
Option A) Install a wordpress plugin – (e.g. https://wordpress.org/plugins/wordpress-wiki-plugin/ )
Upside: reasonable easy to set up.
1) Mingled with WordPress database, cannot be easily separated later.
2) I also think it requires Post Edit permission for users to participate; may be security vulnerability. (but I only had a quick look at this one)
Option B) Drop MediaWiki into a subdirectory (e.g. https://waitingfortax.com/badges/ ) –
Check out MediaWiki here: http://www.mediawiki.org/wiki/MediaWiki
1) separate database thus portable later.
2) users and permissions controlled by MediaWiki core (being the software that Wikipedia runs on)
3) Contains “extensions” capability which enables the creating of bespoke logic, such as creating weighting matrixes etc.., including doing things like over-riding risk weightings (akin to Andrew J’s point about CAs)
Downside: More complex to set up than WP plugin.
Hope that all makes sense.
I think the points raised in this blog, and in the comments as well, are really interesting – and a lot of them are totally consistent with what I believe. In particular, I would echo the thoughts of Richard’s post regarding testing the advisor (on top of, or indeed instead of, the planning). Some of the tests proposed by Jolyon are complex (but still valid nonetheless). So, whilst this proposal has its merits, my view is that what is really needed is for taxpayers to be confident they are working with reputable advisers in the first place (as Richard alludes to). That way they should be able to feel secure that any tax planning that is raised with them has already been run through these tests by the advisor, rather than high risk and likely to land them in a difficult situation down the line. This would obviate the need for them to run their own tests if any tax planning is suggested.
I would compare it to if you were to buy an electrical appliance from a reputable retailer (a large high street brand for example) – you would feel confident that the Fridge or whatever you were buying was compliant with relevant safety standards and not going to burn down your house. You wouldn’t feel the need to get any sort of electrical checks done on it because you would be able to take it on trust that such a reputable retailer would only sell you something that was safe. However, if something did go wrong, you would have a method of redress. If you were buying your Fridge from somewhere less reputable (from a personal ad in your local shop for example) then you might well ask an electrician to take a look at it – or indeed not buy it at all.
Thanks for engaging.
Certainly, if you could create a market in which taxpayers knew who was ‘pukka’ and who wasn’t, the need for the ‘badges’ would be much less acute. But I don’t know how you create that market from this highly fragmented market.
The oft mooted solution – a trusted advisor type scheme – has as its principal difficulty, as I perceive it, this: as soon as you give a particular type of advisor a ‘kitemark of tax goodness’ you create an incentive for poor advisors to chase that kitemark. How, before the advisory event, are you going to police their entitlement to it?
Answer that and, as I see it, you’ve got a decent alternative to the badges.