Given a Captive Audience…

This evening I threw a party for (the overlapping categories of) friends, judges, barristers and journalists to celebrate my elevation to Silk. I had a few words to say. I wrote them sober but uttered them otherwise. They approximated the following.

I became a tenant at 11 New Square tax chambers in 1998. Back then being a tax lawyer was about as interesting as being an actuary. I was wont to quip that I kept a list of hosts of dinner parties to which I had not been invited; when those hosts became wealthy I would refuse to go.

Particularly influential then was Peter Trevett QC. “Young man,” he told me, “there’s money to be made in delivering to people the advice they want to hear. That’s not what we do here.” That’s a homily that still resonates with me now, as those of you who suffer my cramped prose on waitingfortax will know.

As my practice grew, I benefited hugely from working with Jonathan Peacock QC. His coolness under fire frustrated the attempts of judges and opponents alike to get to the result they just knew was right. When I was younger I would often ask myself, ‘what would Jonathan Peacock do?’ An advantage of getting older is that it liberated me to act otherwise. Being yourself might make you more, or it might make you less, successful as a professional. But there’s no skin more comfortable than your own. That’s the thought I try now to carry forward.

Professional practice has changed hugely too. For us benighted tax practitioners the credit crunch came like a huge boot, kicking away the rock beneath which we had gone about our business. We scurried for shade, we and our clients. I don’t think we’ve yet managed to adapt to the sunlit world in which we now find ourselves.

Here’s a short prescription. Rather than bemoaning the limited understanding of public and media, we should work to improve it. I speak to a lot of journalists – several a day – and I’ve only ever spoken to one who wasn’t interested in the truth.

But we need to be transparent about the premise from which we proceed. When we act in a professional capacity it’s right that we talk our own book. Everyone understands that we sometimes speak as lobbyists. But it’s important to signal when we do. Otherwise we become part of the problem. If we merely stand on the sidelines and criticise, we don’t merely ignore Gandhi’s injunction to ‘Be the change you wish to see in the world.’ We thwart it.

Of course, now is a not a moment when sensible discussions about tax – or much else – can happen. I’m oft reminded of Walsh’s devastating line to Jack Nicholson: “Forget it, Jake, it’s Chinatown.” But it’s the gap left by our absence from the debate that politicians are compelled to occupy with measures like the Google Tax. It is the work of our own hands we curse. And from which in the final analysis we – and our clients – suffer.

I’m not often afforded a captive audience. But you’re all old enough to know there’s no such thing as a free glass of burgundy. So one final thought. It’s not merely that we should measure success in terms of happiness. But also from happiness that we achieve success. That’s a rather barristerial way of saying ‘thank you’ to my wife, Claire, to whom I owe everything.

Final thanks to, in particular, Will and Vince who have made me feel very welcome at Devereux. And to Hui Ling McCarthy who is always around to carry me across troubled professional waters.

Why so few prosecutions of offshore tax evaders?

Back in mid February, at the height of public concern around the lack of criminal prosecutions of HSBC tax evaders, HMRC released a ‘Statement by HMRC on Tax Evasion and the HSBC Suisse Data Leak’ and it said:

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However, as I revealed here many of those convictions were obtained in benefit fraud cases. HMRC were defending their record of prosecuting wealthy offshore tax evaders by pointing to their vigorous prosecution of those who had overclaimed benefits.

Late last week, after the Budget, HMRC released a further document entitled Tackling Tax Evasion and Avoidance. That further document was widely (mis)reported – including by the BBC – as amounting to a corporate tax evasion “crackdown.” But in fact it just announced a series of consultation exercises. There were no new measures to tackle evasion.

On the subject of criminal prosecutions the mistake of the February press release was not repeated. The 19 March document stated:

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No explicit claims were made – or implied – about the number of prosecutions for offshore tax evasion. What we do know is that the 3,600 cases investigated by HMRC in consequence of the Falciani disclosures have led to but one single prosecution.

You might have wondered why this is.

In 2009, we agreed the so-called Liechtenstein Disclosure Facility. But let’s call it what it is: an amnesty for offshore evaders. If you made a disclosure to HMRC under the terms of that amnesty then, however egregious your criminality, you would escape criminal charges. Not just criminal charges: the penalties other evaders faced – of up to 200% of the tax evaded – would be reduced to a maximum of 10% of the tax evaded. And there was other favourable treatment too.

You might have thought from the fact that the amnesty was called the Liechtenstein Disclosure Facility that the evasion offences had to have some some connection to Liechtenstein. Not so. The income you had criminally failed to declare could have come from assets anywhere in the world. But if you moved those assets – and income – to Liechtenstein you could take advantage of the amnesty. This is what the Second Joint Declaration says:

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The key word to focus on is “new”. You could bring “new” property into Liechtenstein specifically to participate in the amnesty.

Now this was quite a sweet deal for the bankers in Liechtenstein. Moving your money to this tax haven became the only way to guarantee you would not face criminal prosecution for offshore tax evasion in the UK. That secretive tax haven would then benefit from the fact it had your money to manage it in the future. Why the UK authorities might have wanted to prefer bankers facilitating tax evasion in Liechtenstein to bankers facilitating tax evasion anywhere else is a question I’m afraid I can’t help you with.

But I digress.

The consequence of not needing a pre-existing connection with Liechtenstein was that anyone, anywhere in the world, who had been evading their taxes could move their property to Liechtenstein and escape prosecution. Indeed, about 500 of those whose evasion in Switzerland had been revealed to HMRC by the Falciani data were actively encouraged by HMRC to move their property to Liechtenstein to take advantage of the amnesty. You don’t need to take my word for that. Just read what Lin Homer, Chief Executive of HMRC, said at Q123 here.

We think about another 500 went in as a result of us encouraging them to do so.

So. You’ve got this worldwide amnesty for offshore tax cheats. Presumably it’s a short thing, right? To give people a one-off chance to put their affairs in order or face the full force of the law?

Nope.

We entered into the Liechtenstein amnesty in August 2009. It was going to run for five years (i.e. until August 2014: see paragraph A of the Preamble). But on 11 June 2012, we extended the amnesty until 5th April 2016.

In last week’s Budget, the Government resiled from that extension. It announced that the amnesty would close four months early at the end of 2015. But it would be replaced by a new amnesty (see para 1.242) which would run from 2016 until mid 2017 with penalties of 30% (instead of the usual 200%) and immunity only “in appropriate circumstances” (whatever that means).

So. Take a big step back. From 2009 until mid 2017, anyone committing offshore tax evasion offences anywhere in the world would have known (1) that they could escape criminal prosecution by making a voluntary disclosure and (2) that they had years to decide whether to do so.

Go back to the title. Why so few prosecutions of offshore tax evaders? Any ideas?

Postscript: this is not a party political story. Neither the Coalition nor the predecessor Government emerges with particular credit from its telling. What matters is that we get it right going forward.

The sleight of hand that will fund Tory tax cuts

The Sunday Times today reported:

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If you have an annuity which pays you 100 per year and you have a 25 year life expectancy the Treasury will have to wait a quarter of a century to take all its income tax rake from that 2,500. If, on the other hand, you sell the annuity today  you accelerate when Treasury gets the tax (moving it from years one-twenty five to year one); but you reduce the amount of income subject to tax (you get considerably less than 2,500 because of the time value of money). The real scandal, though, is that Treasury will treat all of the money in year one as new income available to fund tax cuts. Of course it isn’t; it’s tomorrow’s income which we’re spending today.

I wrote here about how the sleight of hand works. And this will be the fourth huge sleight of hand – giving the impression of more tax receipts without there actually being more tax receipts – in this Parliament. I wrote about a £3.5bn trick around bank losses here. I wrote about the same £4bn trick around accelerated payment notices here. I wrote about the same £3bn trick around pensions ‘freedom’ here.

Selling your annuity will be a bigger sleight of hand than any of those.

The Tories will use it to give the impression that they have delivered a country in rude fiscal health. And that we can afford tax cuts. But neither of those things is true.

The media is ignoring this story: I guess they figure it’s too complicated for the likes of us. The Labour Party is ignoring it too: I can only assume they think the same. But it could hardly be more important; please spread the news.

Fees and Fleas

Even before I reached the heights of silk, I never knowingly missed an opportunity to be sententious: “Risk,” I once observed, “rolls downhill and falls on the little man.”

I was talking, there, of the fact that the mechanisms that transfer the risk of failure of tax schemes from those who enter into them (taxpayers) to those who benefit from them (advisers) are too weak. And I was reminded of that today, as other days, when the FT reported on another push for fees by advisers, this time fees for suing the first lot of advisers, those who put taxpayers into tax avoidance schemes in the first place.

I’ve been pondering on this a lot recently.

The mystery for me is this. Here you are – someone intelligent enough to have earned enough money to be attractive to scheme promoters – but you don’t demonstrate sentience about the likely existence of the golden fruits of the magical tax saving tree. (I know of someone – highly financially sophisticated – who put £2m into a scheme on the back of a cold call.) But the tree hasn’t borne golden fruit and now you’re facing ruinous claims from the taxman. Then along comes someone else – offering qualitatively the same magical fruit as first time round – and you make the same mistake all over again.

Cases against the first class of vendors of golden fruit are difficult to win. I am only aware of one case against scheme promoters. Although the judgment delivers 1,439 paragraphs of crushing blows to the claimants’ case, it can perhaps be boiled down to what the judge says in his 1,437th:

Although the Claimants were understandably aggrieved to lose their cash contributions and receive back only limited tax relief, there are obvious risks in going into aggressive tax schemes which offer the prospect of almost immediately doubling your money.

It is, however, fair to say that a case against the professional who advised you could be easier. But not much.

Many equivalent points might be made about a further group of advisers, often ex-Inspectors of Taxes, who promise privileged access to settlement deals with HMRC because of the relationships they enjoy with their old colleagues. HMRC are bound to, and rigorously do, comply with their Litigation and Settlement Strategy. There is no privileged access.

My father, a man with an aphorism for every occasion (a fact enjoyed by his immediate family every bit as much as you might think), is wont to observe:

Each flea has on his back
Another fee to bite him
And on that flea another flea
And so on infinitum

Michael O’Connor, who tweets as @StrongerinNos (follow him), rendered literal that metaphor this morning

So if you have lost out in a tax scheme – and many who have merit genuine sympathy – please exercise care.

(I am grateful to Heather Self for pointing out a case in which an adviser has been successfully sued).

The Google Tax: Some Further Reflections

Announcing the Diverted Profits Tax (the Google Tax to you and me) at last year’s Conservative Party Conference George Osborne quite reasonably observed that the quid pro quo of our low rates of business tax is that businesses should actually pay that tax. Picking up on his theme, when the detail of the measures was announced last year, I wrote that there was a case for action to secure a “new and more fiscally satisfactory world in which tax better reflects the economic substance of transactions.” Too often in the old world it did not.

Those opposed to the Google Tax have argued that such a new and better world is best brought about by the OECD’s Base Erosion and Profit Shifting (“BEPS”) project – one which has broad international support – rather than by individual countries going it alone. This is a compelling proposition. Logically one can only resist it by arguing that the BEPS project might fail, that there’s a compelling need to act now rather than wait, or that the scope of the BEPS project is too narrow. Unfortunately the Coalition – which should be roundly applauded for the vigour with which it has set about tackling tax avoidance – hasn’t conspicuously sought to engage with those arguments (I mean no criticism by this). And although I would like to examine them, beyond noting that an oft-cited criticism of the BEPS project is its breadth, I sadly lack the expertise.

But what I can do is ask how well the Google Tax succeeds on its own terms. Does it impose a liability to UK tax on transactions that ought to be subject to UK tax? And does it only impose a liability where a liability should be imposed?

The starting point is, perhaps, this. The Google Tax is intended to be punitive. In that sense it’s like a number of other recent (and contemplated) moves in the tax avoidance sphere. It marks out territory on the fiscal map which is susceptible to tax avoidance – and then sets a series of landmines. Step on a mine and you face a penalty tax rate (of 25% more than the general corporation tax rate). Enter the territory and you’ll also face a long period of uncertainty as to whether HMRC will impose a penalty rate along with a hugely complex and uncertain compliance regime

You don’t like that? Well then don’t enter that territory.

And it’s absolutely the case that the Government would rather you didn’t. We have decided to pursue a strategy of a low corporation tax rate with an expected increase in the tax base through increased investment. A lower rate applied to greater receipts is the logic. And that it’s Government’s purpose that the Google Tax shouldn’t disrupt this strategy can be seen in the low anticipated direct yield from the tax. The real tax benefits will, presumably, be felt in the form of higher receipts from the corporation tax.

All of this seems (to me at least) sensible in principle. But in practice I do have one particular concern.

The language used by the draftsman to mark out the ‘bad’ territory on the fiscal map is, as the Treasury Select Committee noted, “long and highly complex… and likely to be a source of uncertainty.” I’d go further. At times it has the precision of those cartographers of old who shrugged their shoulders with a “there be dragons.”

This creates very considerable practical difficulties for technicians, HMRC, taxpayers and the courts. It will also roll back, and substantially, conventional notions of what ‘bad’ corporate tax behaviour looks like. Many ‘vanilla’ transactions – to use a once convenient signifier now regrettably oxidised by Lord Fink – will attract the tax.

Given the speed with which the Google Tax was introduced, and the lack of consultation, can we be certain that all of these consequences are intended? Reader, we can not.

But it’s worse than that. The Google tax does not simply tax those transactions: it applies to them a penal rate.

In other areas of the tax code where we have adopted penal anti-avoidance measures, we have been careful to confine those measures to transactions which are clearly abusive. The draftsman of this regime, on the other hand, recognises quite explicitly (in draft section 19(1)(a), for any technicians reading) that it will penalise not only activity which avoids UK corporation tax – but also, remarkably, activity which attracts it.

It is not easy to discern why this should be so. If we have a corporation tax rate of 20% and an activity attracts that rate, 20% is (an idealist might think) the rate of tax that should be paid. It may be that a different rate of tax is likely to form an important part of our defence to the contention that the tax does not breach our Double Taxation Convention obligations.

So how do we address these problems? HMRC have been out and about in numbers, whispering sweet nothings into the ears of business: of course we will apply these rules sensibly, they say. Now I’m sure those feelings are ardently felt now, but business has seen enough of the world to know that HMRC might see things differently later on, when the Diverted Profits Tax has been put to bed on the statute books, and Margaret Hodge starts demanding fiscal purity. Business can’t take long term decisions based on sweet nothings.

I try to deal in the art of the possible when I write. Life’s too short to spend it scratching your spots. And the Coalition has invested, politically, too much in the Google Tax to pull it for further consultation just before a General Election: Labour would make electoral hay. And for its part, there is no prospect of Labour presenting the Conservatives with a fiscal open goal by blocking the measure (something the Opposition is uniquely able to do in the final Finance Bill before a General Election). In any event, there is (I continue to think) much that is good about the legislation.

The drafting which will go forward as the final text for enactment will be an improvement on the present version (particularly around the rightly criticised notification requirements) but it is not expected to resolve the problems I have identified above. But I would like to suggest – to both parties – one adoptable measure which might have some positive impact.

We should introduce an ‘overriding objective’ at the start of the legislation. We need a measure that tells HMRC, taxpayers, and (most importantly) the courts (who will have to make sense of all of this) what the purpose of the Google Tax is. We need something that will give to those HMRC whisperings a touch of justiciability, a written promise that what was ardently felt the night before will be acted on the morning after.

I’ve suggested something below.

Clause A1

The Overriding Objective

(1) The objective of the Diverted Profits Tax is to prevent the avoidance of corporation tax by companies with business activities in the UK which enter into contrived arrangements to divert profits from the UK.

(2) The overriding objective shall be given effect to by tribunals and courts in interpreting provisions in this Part.

My thanks to the tax department at Freshfields Bruckhaus Deringer for its help with certain aspects of this post. Blunders – in the unlikely event of doubt about this – are mine and mine alone.

A Ten Billion Pound Sized Lie

In the normal world, the world that you and I occupy, you and I and everyone else, income is income and expenditure is expenditure. So if you’re XCo and you project your profits for the next ten years they’ll look, let’s say, like this

Table One

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Over ten years, XCo will have 100 of income, 70 of expenditure and 30 of profits.

Did I say everyone else? I meant everyone else except the Government. What Government does is look at a fixed term, typically five years, and any cash it can shovel into that five year term it treats as income. So if Government devises a legislative measure which enables it to move income in Years 6-10 to Years 1-5 it will treat that income as income of Years 1 to 5.

Let’s assume the Government does this with those tens in Years 6-10 in Table One. You then have a table which looks like this

Table Two

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Over a ten year time frame? Same same. Same income, same expenditure and same profit. But over a five year time frame? Not so much. Profits of 65 – an extra 50.

Accelerating your profits is a bit naughty – even though every little helps – but it’s what the Government does with them that really stinks.

Here’s George Osborne on 2 December 2014 announcing the largest “revenue raising” measure in his Autumn Statement

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And here’s the fiscal impact of that measure (from the so-called ‘Green Book’):

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Take a step back.

If you’re making a profit today, it’s rather nice to have made losses yesterday. You can set them against today’s profits and use them to reduce today’s tax liability. What George Osborne did was to say that instead of using all those losses today, banks would have to share them between today and tomorrow. This means banks pay more tax today – so the Government gets more income today (my Table Two). But over today and tomorrow, the banks pay the same amount of tax and the Government gets the same amount of income (compare with my Table One).

Why does all this matter? Go back to my Table Two. Over Years 1-5 the Government appears to have 50 more of ‘profits’. It uses these ‘profits’ to tell the public it has reduced the deficit. And it ignores the fact that in Years 6-10 it will be 50 worse off. And it has. And it does.

But let’s call this what it is. It’s a lie. In no meaningful sense has the Government brought down the deficit by those five 10s. Or, putting the matter another way, it has brought down the deficit by 50 in Years 1-5 only by increasing the deficit by 50 in Years 6-10.

You should be mightily cross about this. Of all the measures in the Autumn Statement, bank losses restrictions were said to have the biggest yield by far. But the actual yield from the measures is the time value of getting the money early. Which in a low interest rate environment is zero.

And it gets worse.

This isn’t the first time the Coalition has pulled this trick. The biggest ‘yielding’ measure in the 2014 Budget involved an identical sleight of hand. As did the second biggest. Add those three measures together and you have a £10bn sized lie. Told in a single tax year.

It’s an Ill Wind

The Court of Appeal’s decision in the Ingenious case was released yesterday. If rumours are true, it was a case HMRC did everything imaginable – indeed, if they’re true, some things barely imaginable – not to have to fight. And it’s a case which HMRC has now won twice: once before Mr Justice (now Lord Justice) Sales in the High Court and now again, on appeal, before the Court of Appeal.

I don’t usually write about cases on this blog. But this case is rather interesting – it concerns (quite explicitly) the question whether the law prevents HMRC from serving the public interest.

The facts don’t especially matter (is there a more welcome phrase a tax lawyer can utter?) but because they’re engaging I’ll give them to you anyway.

Alexi Mostrous, Times Journalist and Inventor of the Tax Scoop, met with David Hartnett to discuss some information that had come into Alexi’s possession and which he thought might be of interest to HMRC. Accounts of the basis on which that meeting was held vary but during the course of it the subject of Ingenious (the largest promoter of what it would style film investment structures) and its architect, Patrick McKenna, cropped up. And this exchange ensued:

Mr Mostrous: With McKenna do you think he is enacting any active schemes or any schemes that could be used to deprive the Revenue of tax now?

Mr Hartnett: I don’t know

Mr Mostrous: He’s not on your radar?

Mr Hartnett: Oh, he’s never left my radar.

Mr Mostrous: What do you think of him because he presents a very different profile.

Mr Hartnett: He’s an urbane man, he’s a former Deloitte partner, he’s a clever guy, he’s made a fortune, he’s a banker, but actually he’s a big risk for us to so we would like to recover lots of tax relief he’s generated for himself and for other people. Are we winning? I would say, beginning to. I think we’ll clean up on film schemes over the next few years”

Mr Mostrous: That applies to Mr McKenna as well as film schemes in general?

Mr Hartnett: I think we’ll clean up on film schemes over the next few years. You may end up laughing at that statement because maybe we’ll lose it in the courts, litigation’s a hell of a risk, but you won’t find anybody here at all, even the most pro-wealthy people, and I’m not sure we’ve got any, who thinks film schemes are anything other than scams for scumbags.

Mr McKenna and Ingenious took exception to what they said was a breach of HMRC’s public law duties (found in s.18 of the Commissioners for Revenue and Customs Act 2005). They said it was unlawful for Dave Hartnett to have disclosed what he did. And they said that the fact that the disclosure was in the public interest was irrelevant.

The Court of Appeal disagreed. It roundly endorsed what had been said below:

In general, it is legitimate for HMRC to seek to maintain good and co-operative relations with the press. The efficient and effective collection of tax which is due is a matter of obvious public interest and concern. Coverage in the press about such matters is vital as a way of informing public debate about them, which is strongly in the public interest in a well-functioning democracy. HMRC have limited resources to devote to the many aspects of their tax collection work, and it is legitimate and appropriate for them to seek to maintain relations with the press and through them with the public to inform public debate about the tax regime and the use of HMRC’s resources. It is also relevant to the exercise of HMRC’s functions to provide proper and accurate information to correct misapprehensions or captious criticism regarding the exercise of their functions (such as any misplaced suggestion that they had engaged in unduly lenient “cosy deals” with certain taxpayers), in order to maintain public confidence in the tax system. If such confidence were undermined, the efficient collection of taxes could be jeopardised, as disaffected taxpayers might withhold co-operation from the tax authorities.

And it observed that the exception to HMRC’s obligation not to disclose information was a wide one. Now, I should note that the principle in Ingenious won’t justify every public interest disclosure – but it will justify many.

The ratio of the Court of Appeal’s decision echoes a throw away observation made by Lin Homer (HMRC’s CE) in the Public Accounts Committee last month where, in response to Q172, she observed to Margaret Hodge:

One of the conversations that we have had with you in my three years has been about whether we are unduly defensive about confidentiality. We have, on a number of occasions, tried to take that advice from you and move further into transparency.

This recognition is welcome – as is the Court of Appeal’s decision. But I don’t want to get carried away.

There is a world of difference between HMRC recognising that there is no legal impediment to it acting in the public interest by enhancing transparency – and HMRC actually acting in the public interest. The former can be (and hopefully now has been) accomplished in consequence of the Court of Appeal’s decision and several brutal and public Hodgeings. But we get to the latter only through internal cultural change. Let’s hope we now see some.