My address to the Chartered Institute of Tax

Can I begin by sympathising with the organisers of this evening’s dinner?

They had high hopes of the after dinner speech being delivered by a senior member of the Government. Someone who could speak frankly and with authority about the pressing tax issues of the day. Shortly in advance of the first budget of a new Government. They had those hopes and – if it consoles them – I had those hopes too. I know it’s heresy to blame the electorate – but it is their votes (a mere 2 million of them) that stood between you and a much more interesting after dinner speech.

But the organisers must muddle on. And so must I.

The hysteria around tax towards the end of the election campaign will be fresh in all of our minds. In a rather poor Channel 4 story, the sins of his father were visited upon David Cameron. As, indeed, the sins of her forebears were visited on Margaret Hodge. And Ed Miliband. ‘What is to be done?’ was the question I heard asked time and again by thoughtful professionals – like you. And my answer was invariably that which Jack Nicholson gave at the end of his best film: “Forget it, Jake. It’s Chinatown.”

It was Chinatown then. But is it Chinatown now?

A number of things have changed. Margaret Hodge has gone, for one. More meaningfully, the election campaign is over. And those rather silly stories do seem… rather silly. I was asked a week or so ago to comment on a tax avoidance story by a leading Conservative politician – one of the really big names – and by a leading broadcaster too but I said I didn’t want to be involved.

So things have calmed down. But I don’t think they will return to where they once were. It’s as well to remember that “The more things change the more they remain the same.” That line is often attributed to the 19th French journalist Alphonse Karr. But modern audiences will credit the late 20th century librettist Jon Bon Jovi. But those who fritter away their one and only life rowing with strangers on Twitter – where’s Stephen Herring? Strangers and friends – will know that tax continues to form a central thread in a continuing political narrative around inequality.

That narrative isn’t going away. And so we should expect continuing media interest in our field. Not at the feverish pitch we’ve seen recently. But not absent either.

So how do we, as a profession, participate in the debate? That’s what I want to talk about this evening.

There are a lot of different debates.

There’s a debate about political involvement in our tax system. “Those bloody politicians,” you will hear said, “they’re ignorant and they make bad law. We need to help them get better.” You may hear that said. Some of you will even have said it. And there’s a debate about us as a profession – what moral component is there to our actions in offering tax advice? And should regulatory oversight of our profession increase? There’s a debate about whether there’s any place for morality in tax.

How do we participate in that debate? Let’s start by looking at the first one – about tax and politics.

Let me take an example. Last week the IFS and CIOT ran a joint event to try and identify some tax policy priorities for the new Government. One of the issues – a perennial – that came up was about merging National Insurance Contributions and income tax. The proponent (this time) was Gavin Kelly, he’s the Chief Executive of the Resolution Foundation. If you don’t know it, the Resolution Foundation is a hugely impressive charity that examines the evidence around, in particular, in-work poverty.

Gavin Kelly joined representatives of the Taxpayers Alliance, the Institute of Fiscal Studies, the (Thatcherite) Centre for Policy Studies, PWC, the Centre Forum (a liberal think tank), Judith Freedman, UKIP – I could go on – in making that call. That’s a pretty broad church. And who here thinks it would be a good idea? They are after all both income taxes.

It would mean that (at least) five significant curiosities would be brought to light.

  • It would expose a not terribly progressive tax system: once you include primary and secondary NICs, income tax starts (for the employed) at over 40% on income above £10,600. And it rises to more than 53% – even ignoring the 100-120k anomaly.
  • It would expose the bias in favour of unearned income (which doesn’t suffer NICs).
  • It would expose differing rates of tax for the employed and self-employed: sometimes differing by more than 11%.
  • It would reveal that raising the income tax personal allowance doesn’t actually help the poorest.
  • And it would demonstrate that we pay really quite high rates of income tax.

How would Government address the fall-out from each of these curiosities? Would it live with a single income tax that evidenced them? If not, how would it alleviate them? What would the costs be? Let’s just look at those curiosities in a little more detail.

  • A not terribly progressive tax system? Would the Government reduce the basic rate of tax? (It’s difficult to see it pushing up the higher rate or the additional rate.) What would be the cost of this reduction? Might it be a spur for adopting a flat tax?
  • A bias in favour of unearned income. How would living with this bias play with an electorate that already tagged the Conservatives – unfairly or fairly – as being the party of the rich? Could the Government increase income tax on unearned income without sledge-hammering the five year tax lock? If it could, would this play in the City: how would it be received by the very wealthy who already pay a huge proportion of our aggregate income tax take? Would it drive them to leave the country?
  • What about differing rates of tax for the employed and self-employed? This is an enormously vexed question. There are those who say the difference is not justified – and that it simply leads to people gaming the system by entering into contracts of self-employment in circumstances that look more naturally like employment. And sometimes they are right to say so. There are others who say we need to reward risk taking. And there’s a very compelling school of thought that, but for the flexibility of the UK labour market, the country would not have enjoyed the huge decline in unemployment that we have seen. What would requiring all of those individuals to be treated and taxed as employees do for the labour market? This is a huge question, which Government would need to grapple with before it could contemplate merging the two income taxes.
  • What about the effects of raising the personal allowance? The Government has promised to raise the personal allowance to £12,500 by the end of this Parliament. But tax at a rate of 20% would still be paid on the employment income of those earning around £8,000. This Government wouldn’t be the first to adopt the politically attractive route of cutting the headline rate and recouping the cost of those cuts in the detail. And it won’t be the last. But raising the NICs floor so it matches the income tax floor would be another hugely expensive commitment. Will Government tackle it? It’s not impossible to imagine it might – but certainly not in order to deliver the technical win of unifying the two taxes.
  • And, finally, the very high rates of income tax that we pay. People might be shocked to hear that employment income above £10,600 bears an effective tax rate of over 40%. One can see that shock as being enormously politically helpful to a party that believes in a smaller state. So there is an argument in favour of merging the two taxes. It would absolutely be a helpful stepping stone on that path. But, gosh, this Government has some rather uncomfortable shoes to don before it takes that first step.

So. Look at the world through Government’s eyes. All things being equal, it would undoubtedly prefer to simplify the tax system. No serious doubt about that. But unless we face up to these anomalies. We’re asking it to invest rather a lot of political capital in a tidying up exercise. And that’s even before we look at what a merger would mean for pensioners.

“Ah!” you may say, “But politicians do tidy up the tax system.” But let’s look at the evidence.

Take, by way of example, the Autumn Statement changes to the slab system for SDLT. They were sold to the press as “reforms that aim to address the distortions of the old system” (that’s the Financial Times). Or a “scrapping of the much hated ‘slab’ system in which stamp duty bills rocketed as soon as the price hit a new threshold” (the Daily Mail).

But, of course, if they were really about removing the slab system, why were they structured in such a way that they cost £800m per annum? There’s no reason why reform of the the slab system could not have been accomplished in a revenue neutral manner. £800m is a pretty chunky sum – 2/3rds of what Labour claimed the Mansion Tax would raise. So there were obviously some other policy objectives that were being met at the same time. Policy objectives that it might have been expedient to hide behind a story about merely rationalising a bonkers tax.

When we look at the pure tidying up exercises have been done over the last few years – we have the Tax Law Rewrite project; we have the work of the OTS; but (with great respect to the extremely talented people engaged in each of those projects) they are real tidying up exercises which haven’t really faced these huge political challenges.

So the more interesting question then becomes, how do we as a profession work to achieve that change? If we want this change, how do we de-risk it for Government? Because that’s what has to happen to achieve the technical change that we (as a purely politically neutral profession, of course) want.

And that is where we can come in. Because, so long as the public doesn’t know of these anomalies a merger of the two income taxes carries political risk. So I see a role for us in pointing out these consequences – explaining them to the public through the media. Working to improve transparency.  I should also add that any discussion about what tax changes Government should make that doesn’t condescend to look at the political consequences of making that change runs the risk of being a wasted discussion.

Let me turn to a further debate in the media. About the moral content of our actions as a profession.

Now, we’ve all seen advice about the prospects of some piece of tax planning working. With the benefit of hind-sight, some of the advice we’ve seen might look a little optimistic. Indeed, with the benefit of hindsight, some of the advice we’ve given might seem a little optimistic. But it’s a small group of advisers only who haven’t been interested in the quality of that advice – and who have given unjustifiably positive advice for money. Vanishingly small if you look at the tax profession as a whole. So let’s leave them aside.

What about the work that the rest of us do? Do we have a role to act as moral overseer to our clients? I find that a rather difficult proposition. Here’s some things I can readily accept – and let me make explicit this is my personal view. You may well have – and you are clearly entitled to have – a different view.

We have a duty to help our clients transact at the point on the risk spectrum that works for them. So if an idea works by delivering a result that the draftsman can’t have intended I think we have to tell our client that the transaction is counter-purposive. If a transaction achieves a result that we think the draftsman intended but it achieves this through taking steps that serve no commercial purpose, I think we have to tell our clients that the transaction is artificial.

There are a number of reasons why I think we have to do this. One is that these features will have an impact on the propensity of a court or tribunal to accept that the planning delivers the desired outcome. In my experience, if a transaction has these features it is less likely to work. Another is that I think we have to help our clients make an informed decision: informed with regard to its reputational risk for them, with regard to its relationship with HMRC, its impact on their senior staff, its potential to impact on their pre-tax profitability. And so on.

But I don’t find myself able to go further and say it’s morally wrong of our profession to advise a client who wants to engage in an anti-purposive or artificial transaction, a client who’s properly informed. Just like it’s not morally wrong for a journalist to write a silly story about tax avoidance because that’s what his or her editor has asked for. The moral agent is the client or the editor – it’s his or her moral call.

Nevertheless, it is the profession that gets tarred. So here’s what we do:

  • we don’t deny there’s tax avoidance. If we do then we are taking on the moral taint of our clients. It’s commercially tempting – but it brings the profession into disrepute.
  • we make sure our professional conduct rules are fit for purpose. This is what we’re being encouraged to do by the Government – reasonably so, I think – and I think there’s more to be done here. I’ll come on to talk about what this looks like. If we don’t, we risk having them imposed on us from above.
  • we listen and engage with public concern rather than just badging the public as ignorant. I’ve never been persuaded of anything by being told I’m ignorant. Even if I am. Perhaps especially if I am.

A couple of asides: first, I do understand that some (possibly many) of you won’t accept there’s any morality in tax. In other words that there’s a perfect alignment between tax law and morality: the fact that something is legal makes it moral. You will appreciate I don’t agree. But perhaps more importantly, I don’t think it’s a winnable argument with the public. It’s the equivalent of shouting at the telly – it may make you feel better but you should proceed from the premise you will accomplish no more than short term relief.

Second, I accept that between the plainly anti-purposive (or artificial) and the plainly pro-purposive there is a huge spectrum. That raises an additional layer of complexity that I haven’t addressed.

I just want to finish with some remarks about professional regulatory regimes.

Shortly before the election the Government said this:

HMRC “is asking the regulatory bodies who police professional standards to take on a greater lead and responsibility in setting and enforcing clear professional standards around the facilitation and promotion of avoidance.”

The response from the profession has been mixed.

The ICAEW responded:

“ICAEW already has a Professional Code of Conduct in relation to tax advice, which is revisited and updated on a regular basis. We are keen to work with Government to ensure that the code continues to be fit for purpose and retains public and political confidence.”

And reading between the lines that means: we’re not quite sure what more you want of us. And it might well be that, reading between the lines of the Government statement, they’re not quite sure either.

The CIOT and ATT issued a joint statement saying much the same – but over slightly more paragraphs. I haven’t been able to find any response from the ACCA, the BSB or the SRA.

Roll back the clock a little. With the help of the profession I drafted some Badges of Tax Risk: a series of questions I envisaged clients might ask of their advisers to satisfy themselves that they understood the advice they were getting. It is a very common complaint of individual taxpayers who engage in transactions that don’t work that they didn’t understand the advice they were getting. And sometimes that complaint is justified.

What then happened was that an influential member of one of the professional bodies suggested that it might become a regulatory requirement for members to go through those badges – or a variant on them – with clients before offering tax advice. That was all in the Autumn of last year. I’m not sure what then happened – but it might be an idea worth revisiting.

The reason – a reason – I bring that up in this context is that it then creates a narrative of what our profession does that we can take to the public. Skeletally, the narrative looks like this:

  • the tax system is complex. That complexity sometimes creates opportunities for taxpayers to transact in different ways which involve them paying larger or smaller amounts of tax;
  • it is for taxpayers to choose – and not for us to tell them – how much they want to pursue lower tax bills;
  • it is our job to give our clients clear advice about the risks of pursuing lower tax transactions – and we are professionally obliged to do so;
  • but ultimately it is for them to decide how they want to transact bearing in mind those risks.

Thank you.

37 thoughts on “My address to the Chartered Institute of Tax

  1. Hi Jolyon,

    Very well put. Just wanted to check something re your comments about tax and morality. Did you mean to write the double negative: “,,,I don’t think it’s not a winnable argument with the public…” or “I don’t think it’s a winnable argument with the public”?

  2. Was written in some haste… Will amend. Thanks!

  3. It happens to the best of us. I’m sure readers understood what you meant.

  4. “Anti purposive” will almost certainly be picked up and used by a judge near you, soon.

    I do wonder whether the “moral” test and the badges, are subject to a time dilation effect? What might have been regarded as acceptable 20, 15 or 10 years ago, is now unacceptable or abusive? Perhaps it’s not time based but instead linked to the nation’s need for funds?

    It does however highlight that reading morality into law is at best a task to be approached with some caution.

  5. Oh, it’s far from the first time me, or anyone else, has talked about “anti-purposive” transactions.

    As regards timing, I am of course focusing on prospective tax planning. But if you think the idea of tax and morality is new you should read clusters of cases around 1910, the late 40s and the early 80s. This isn’t new – but we need to learn it all over again.

    Finally, on “reading morality into the law” I think I’m making a couple of discrete points. The first is that judges are guided on what the law means by their notions of morality. So it is already there. Second we shouldn’t only judge the quality of our actions by reference to whether they are lawful – there are other tests ad well.

    But thanks for your thoughts.

  6. I think I’m not suggesting that the idea of morality in tax is new, but rather that viewing a transaction (and applying the badges of tax risk) say 10 years ago and doing so today may produce different results?

    Ultimately with so many viewpoints this is perhaps more akin to a journey rather than a destination.

  7. Interesting you comment about the morality of tax. Care to comment on the morality of retrospectively changing tax law? Like S58 in 2008. About 2000 of us are affected. Many facing bankruptcy. 1 suicide so far. The case has been going on for 7 years now! 7 years! Retrospection is illegal in most countries of the world. And about time the case was closed off to give those affected some certainty.

  8. I’d like to hear something on the morality of systematically crushing the weakest and smallest, while pretending to act tought on “tax avoidance” and actually leaving the big, well-connected players continue business as usual.

    The current APN assault, which seems to focus on single moms, middle-class families, and small-time contractors, is a great example of this jackal mentality in action.

  9. An excellent speech.

    The profession has a huge role to play in educating a currently ignorant public about taxation. How it works and what the real numbers are and what they mean.

    That of the pot of money an employer might have to give an employee, at least 40% goes to the state on incomes above levels as low as £10,600 should be an eye opener for all.

    I think the will is there in the profession for this education. I wonder if the same will exists in the media?

  10. “Anti-purposive” has been used in reported decisions already. The first mention of “anti-purposive” on BAILII is the Tribunal in Lower Mill Estate – – see paras.39 and 40, and picked up again in para.99 (and also on appeal). Was that your coining, Jolyon?

    I think we can all agree that some things that are legal but not moral (adultery, say), and some things are moral but illegal (taking from the rich to give to the poor, perhaps). The question surely is how and where morality sounds in tax affairs. Are we expecting HMRC or the courts to police our consciences? If so, the judges are not keen – see

    Or is a question of shaming people for choices that someone (you?) consider to be immoral? Or perhaps encouraging them to engage their moral reasoning when considering their tax affairs?

  11. Although in many cases there will be tax relief for the employer, of course, which can reduce the effective cost of the £60 actually received by the employee to about £80 (less, if the employer is an income tax payer).

  12. Courts read their own notions of morality into the law. Judges (at least in many circumstances) chaff against the notion that the law should permit immoral outcomes. But morality in this context is a fairly open textured expression, of course.

    But I’m pretty explicit that I’m not seeking to impose my views of morality on anyone else. I do point to where the public is which, like it or not, is the audience we have to persuade of the morality of our actions – if we want to bother. Some will, others may not.

  13. Thank you for the references.
    I’ve worked for people whose attitude towards the scheme they joined is that it can be justified on various grounds ranging from “everybody does it”, thru “I don’t agree with how the tax is spent” to “I’m more deserving of the money than somebody else”. I don’t judge them because at least they went through an internal exercise of weighing the situation.
    I also work with people who have bought into glib promises of “100% compliance” etc and who have effectively put their morals into the hands of others, where it is often abused. Where I wonder does the moral test lie there?

  14. I have bemoaned – and do bemoan – the fact that HMRC takes bad points. I don’t think it’s necessary and it’s certainly not desirable.

  15. Agree with Jolyon that being told you’re ignorant is not the best place to start the tax debate with the public. Speaking as an international tax journalist, I think the concept of an ‘informed public’ is a difficult one to pin down. How informed do you want them to be? They are never going to be as informed as a tax professional, so it’s subjective.

  16. Thanks.

  17. Tax is all about morality. The purpose of tax is to bring about a public good, a civilisation that is unachievable without it; weren’t the first taxes levied in order to fight wars?

    Tax is about redistribution of wealth, it is progressive and behavioural, so of course there is a moral dimension.

  18. Wars are fought to bring about a public good? Ah…
    Too bad that levying tax, like waging war, quickly becomes an addiction.
    Remember that many a revolt was sparked by tax that was confiscatory or deemed unjust on principle by the people. The English Peasants’ Revolt of 1381 comes to mind.

  19. Interesting comparison – highly paid tax avoiders and medieval peasants.

  20. Not all “tax avoiders” are “highly paid” – but nice try amalgamating the two.

  21. The contracting sector may be an exception to the general rule that the overwhelming majority of tax avoiders are (by normal standards) very wealthy.

  22. £400 a day is a lot of moolah.

  23. I’m afraid this may be a misconception that it is in the interest of HMRC to perpetuate – but a misconception nonetheless. Still, thanks for admitting that the contracting sector may be an exception to the rule. The problem is that this sector is right in the crosshairs of the ongoing APN campaign, as the proverbial low hanging fruit.
    This onslaught has already started destroying the lives of ordinary persons, whose only sin, one might suspect, is to have engaged in something reserved for members of the elite, without belonging to the elite.

  24. I really struggle to see why a single parent or indeed a middle class family should get an APN.

    What tax planning would they do that would attract a DOTAS number or GAAR challenge?

  25. Many of the contractor “schemes” entered into by single parents and others, have DOTAS numbers and are being actively pursued by HMRC.

  26. Mass-marketed EBT schemes to give just one example.
    You may never read about them in the media, but there are 1000s of NOT “high worth individuals” now affected.
    Easy meat for HMRC.

    A non-negligeable fraction of contractors joined these structures seeking some certainty amidst the uncertainy introduced by the fiasco that is the IR35 legislation. Unintended consequences and all that.

    Pre-2011 these schemes were widespread and marketed as effectively another form of umbrella company.

  27. I don’t understand why, if they had participated in a tax avoidance scheme, they wouldn’t get an APN.

  28. I think one issue is that many were duped into thinking that what they did was not avoidance and that view was reinforced by HMRC taking no action for years whilst they “investigated”.
    Judging the schemes they did by the avoidance rules at the time APN’s became part of the landscape is also a source of frustration as it feels like retrospection for a group that has suffered legal retrospection already.

  29. Duped, or, were keen to try out an artificial scheme that cost up to 40% of the tax saved, but promised lots more. Don’t suppose we’ll ever know for sure what their thinking was.

    Why “investigated”?

    Not sure the final paragraph makes sense but it may be my fault. APN’s are a mechanism for paying what you owe, subject to a few get out clauses, I don’t think they amount to retrospection. They are the result of legal process and are based on follower notices issued because of tribunal decisions.

  30. APNs where never meant to me sent to ALL users of ALL DOTAS arrangements.

    If you go back to Finance Bill 2014, to the APN/FN legislation. If you go back to the consultation document. You’ll find that the official narrative, the justification for APNs, was that they are necessary to “encourage” (force) certain difficult, stubborn taxpayers, who have an ongoing dispute with HRMC and have been using “delaying” or “stalling” tactics for years, to show more good will and advance matters.

    Fast forward to 2015. What do we see? We see people who used a DOTAS-registered structure in 2005, who had an inquiry opened into their tax return for that year in 2006, followed by **9 years of absolutely NOTHING** (no letters, no request for information, nothing), and who are now getting bills out of the blue (often based on little more than back-of-the-envelope calculations).

    Far from being a tool to encourage unrepentant tax avoiders to change their ways, APNs are used as a vulgar money extraction tool – and a retrospective one at that.
    And they are used against those least able to fund a legal challenge and have the arrangements examined on their own merits.

    Yet another glorious example of a legislation that is used for a purpose absolutely at odds with what was “sold” to Parliament.

    And FYI: APNs have no relation to FNs, and are in no way the result of a tribunal decision.

  31. Not based on any FN (yet). All APN’s to date that I’ve seen are for DOTAS registered schemes which in itself is using those rules for a purpose never intended. And the effect of an APN is retrospective because it’s based on the point at which tax remains in dispute and because HMRC failed to action enquiries etc for a considerable period, you now have an alleged 2005 liability being collected 10 years later when nobody actually knows what might be due.

  32. In my view, vague approaches encouraging tax avoiders to show goodwill are doomed to failure. It seems reasonable to me that legislation should be formulated to be targeted at all users of avoidance schemes. Fair and equal.

    I’m not sure what you mean by vulgarity. How is an APN vulgar? Simple perhaps. Aggressive, maybe. Could be they’re ingenious. Just like tax avoidance.

    Maybe the users of tax avoidance schemes in 2005 could now be characterised as stubborn and difficult, who use stalling tactics. It’s just a matter of perspective.

    Taking your case to a Tribunal doesn’t cost anything.

    My mistake, I apologise. Although, it has to be said that APNs are not targeted at the merely “higher paid”, the so-called low hanging fruit, as opposed to wealthy tax avoiders. My understanding is that HMRC have to account for tax yield, so, although I am mixing my metaphors, logic dictates that their net will not have small holes.

  33. Pingback: Waiting for Godot | Age related biases in the tax system

  34. Completely off topic – but very interesting:
    Principals of NT (‘No Tax’) Advisors were up before the ICAEW disciplinary committee – on charges which include not having professional indemnity insurance!
    Item Number 5 at

    Given what’s happened to some of their schemes – and subsequent attempts to go after them – the lack of professional indemnity insurance is big news.

  35. I should probably qualify that they got PII retrospectively, but it does make me wonder about some of the other entities operated through.

  36. Jolyon

    Sorry I have come to this so very late, I am very impressed indeed by what I read.

    A small but possibly important point: do you think we would maybe need to find a new term for a merged income tax/NIV replacement? At times you have referred to a post – merger charge as income tax; at others ‘income tax’ is Income Tax as it presently is. A statement such as “raising the income tax personal allowance doesn’t actually help the poor” is debatable anyway, but which debate we might have depends on which ‘income tax’ we are discussing.

Comments are closed.