On that OBR Forecasting

As of yesterday, the OBR’s expected deficit (or Public Sector Net Borrowing) for the year ending April 2015 was £90bn: see OBR table 1.3.

Here’s a chronology of some earlier forecasts.

22 June 2010: George Osborne delivers his Budget forecasting a deficit for 2014-15 of £17bn (table C.6). He fell short by £73bn.
12 October 2010: George Osborne confirms his aim of eliminating the deficit by 2015. He fell short by £90bn.
23 March 2011: George Osborne delivers his Budget forecasting a deficit for 2014-15 of £46bn (table C.8). He fell short by £44bn.
29 November 2011: George Osborne delivers his Autumn Statement forecasting a deficit for 2014-15 of £57bn (table C.7). He fell short by£33bn.
21 March 2012: George Osborne delivers his Budget forecasting a deficit for 2014-15 of £52bn (table D.6). He fell short by £38bn.
29 November 2012: George Osborne delivers his Autumn Statement forecasting a deficit for 2014-15 of £62bn (table B.6). He fell short by £28bn.
20 March 2013: George Osborne delivers his Budget forecasting a deficit for 2014-15 of £71bn (table B.6). He fell short by £19bn.
5 December 2013: George Osborne delivers his Autumn Statement forecasting a deficit for 2014-15 of £84bn (table B.6). He fell short by £6bn.
20 March 2014: George Osborne delivers his Budget forecasting a deficit for 2014-15 of £95bn (table D.5). He overshot by £5bn.
3 December 2014: George Osborne delivers his Autumn Statement forecasting a deficit for 2014-15 of £91bn (table B.5). He overshot by £1bn.
18 March 2015: George Osborne delivers his Budget forecasting a deficit for 2014-15 of £90bn (table C.5). He gets it right.
8 July 2015: George Osborne delivers his Budget forecasting a deficit for 2014-15 of £89bn (table 1.2). He falls short by £1bn.

The purpose of this exercise is not to be rude about George Osborne’s – or the Office for Budget Responsibility’s – forecasting skills.

Forecasting is a tricky business. However well run, and independent, the OBR is.

So why does any of this matter?

Well, as is now well understood, yesterday the Chancellor got a £33.8bn windfall, mostly from modelling changes but also some modestly improved forecasts of receipts (see Table 4.8).


And that’s a £33.8bn change in OBR forecasts since July.

And he’s already spent two-thirds of it, according to the Resolution Foundation.



Spending it is bold, given the OBR’s forecasting record. You have to really want to believe – really want to – that all of those earlier forecasting errors were anomalous. And that now, at last, the OBR’s going to get it right.

I’m not saying Osborne was wrong to slow the pace of spending cuts (as those on the left put it) or spend more (as those on the right do). I’d be ejected from the Labour Party if I said that.

It’s more that all of this bouncing around from Osborne feels a touch… unstrategic. An opportunistic, rather than a long term, economic plan?


The Social Care Precept: hitting the poorest hardest

Here’s George Osborne delivering his Autumn Statement:


But, assuming it is taken up, who will be the real winners and losers from the Social Care precept?

Arguing in the New Statesman back in July against rises in the Personal Allowance I noted this:

Council tax is highly regressive. In 2013/14, even net of Council Tax Support, it represented a staggering 13.5 per cent of the earnings of the poorest 20 per cent of households and only 1.9 per cent of the richest (source ONS) (6.4 per cent/4.3 per cent/3.1 per cent for intermediate quintiles).

Increasing Council tax bills to fund social care obligations will make this situation even worse. The proportion of earnings of the poorest quintile of households consumed by Council tax, including the precept, will rise to 13.9%.

And that poorest quintile will bear 13.7% of the £2bn cost of the social care precept (16.1%/19.7%/23.1%/27.5% for the remaining quintiles). Had the rise been funded through income tax, by way of comparison, the burden on the lowest quintile would have been 1.7% (5.1%/11.6%/21.9%/59.7% for the remaining quintiles). (Both calculations from Table 14A here).

So the precept will fall heavily upon the poorest households. I genuinely struggle to think of another tax raising measure, consistent with our direction of fiscal travel, which could place a heavier burden on the poorest.

But who benefits?

In March 2014, the National Audit Office published a report into Adult Social Care. It revealed, unsurprisingly, that 68% of users were adults over 65 (Figure 4) and that adults over 65 consumed 50.8% of all Adult Social Care spending (Figure 12).

Median pensioner incomes are, of course, higher than those for the rest of the population (say the IFS). And only a tiny fraction of those incomes are comprised of earned income – so the diminution in income consequential on a pensioner requiring care is modest.

Means testing for local authority provision (helpfully summarised here) should mean that the poorest pensioners benefit the most from the precept. But the lifetime cap on care costs – of £72,000 – will only benefit wealthy users of Adult Social Care.

So the social care precept clearly involves a transfer from the poorer. I do not have the evidence to say it is to the richer. But it may well be.

Autumn Statement Alternatives

Later today you will hear George Osborne say there is no alternative to his plan to slash a further £20bn from lean public services by 2020-21. He will also say that there is no alternative to £9bn of cuts to tax credits, cuts that will hit the poorest hardest, cuts of thousands of pounds per annum to the incomes of millions of households.

But there is.

As I outlined here the Conservatives plan future tax cuts which benefit, disproportionately or exclusively, the wealthy. Suspending those future tax cuts for the wealthy would save, by 2020-21, £9.3bn per annum.

I also explained here that a mere 50 of our 1,156 tax reliefs cost us over £100bn per annum. We don’t know how much the other 1,106 reliefs cost us – because Government doesn’t monitor them. And we don’t know what public benefit they deliver – because Government doesn’t check.

What we do know, as I explained here, is that they disproportionately and regressively benefit the wealthy: an average of £190,400 per annum for the wealthiest.

And we know, too, that they include (amongst the more than 1,000 uncosted reliefs) the £1bn plus ‘Rights for Shares Scheme’ – badged by the Chancellor as for workers but identified by a leading law firm as designed for the wealthiest.

Simply by asking a question that the Chancellor chooses to ignore – do these 1,156 reliefs deliver value for money – it is entirely possible that £10bn or more extra in taxes could be collected without any loss of  public benefit.

To this £19bn, we might add the indiscriminate provision – both direct and indirect – of public money to wealthy pensioners.

Those above basic state pension age enjoy a tax subsidy of up to 12% on earned income.

Moreover, this Office for National Statistics data (see Table 18) reveals that the 10% of wealthiest retired households – some 714,000 households – have gross pre-tax and pre-benefit private income of on average £43,983. Yet still they enjoy average cash benefits from Government of £11,500 per annum.

Means testing benefits to exclude that top 10% of retired households would save £8.2bn per annum. And why, you might wonder aloud, should means testing be thought by the Government appropriate for the working age population, yet a heresy for retired households?

Add in abolition of that unprincipled tax subsidy and you’ll save even more.

So there are alternatives. Clear alternatives. Good alternatives. Alternatives that enable those with the broadest shoulders to bear some share of the pain. Don’t allow yourself to be persuaded otherwise.


Who benefits from tax expenditures?

I’ve banged on about tax expenditure reliefs already. Twice, in fact: here and here.

I made a few points in those posts. We know tax expenditures are hugely expensive. They cost us – through tax revenues we don’t collect – more than £100bn every year. But no one knows quite how much they cost us because Government doesn’t collect the data. And no one knows either whether we get value for money from them because… Government doesn’t ask.

So in governance terms they’re – there’s no putting lipstick on this pig – a disgrace.

I also asked why this state of affairs persists?

Why is Osborne’s Spending Review focusing solely on cutting £20bn from already lean departmental budgets but doing nothing to trim the fat from the revenue side of our profit and loss? Why does he – quite literally – not want to know about the public costs and private benefits of tax expenditures?

What I want to focus on here is a few points about who benefits from tax expenditures. And I’m going to look at income tax expenditures.

There’s no published data – or at least none that I’m aware of – on this. That tells a story all of its own. But I think I’ve been able to reverse engineer some. So as not to clog up the narrative, I’ve set out in detail how I’ve done the calculations at the bottom. Do have a look: if I’ve got them wrong, obviously I’ll hold my hand up.

It is possible to extrapolate from Table 2.5 (with a little help from 2.6) for 2015-16 here something of how the benefit of tax expenditures is spread amongst income tax payers.

This first chart below tells you how much the average income tax payer in certain income brackets has their tax bill cut by (some) income tax expenditures.

The “(some)” is because as I set out at the bottom of this page the data only enables me to infer the distribution of a subset (about £13.5bn of more than £32bn of so-called ‘principal‘) of income tax expenditures. Capture

As you can see, if you earn more than £2m per annum (and the average taxpayer in this earnings bracket earns £4.76m per annum) you benefit (from income tax expenditures alone) to the tune of on average more than £190,000 per annum. But if your income is between £30,000 and £50,000, for example, they benefit you £382 per annum.

It is worth noting that the distribution of the remaining so-called principal income tax expenditures follows the distribution inferred here then you would increase those numbers by 240%. So the average income taxpayer in the £2m plus bracket would derive over £450,000 per year from income tax expenditures.

My second table shows that these tax expenditures do not only benefit high earners more in absolute terms. They also benefit high earners more in percentage terms. Put bluntly, they are regressive. This is exactly as you would expect: those paying higher rates of tax are more incentivised to seek out income tax reliefs. And those earning more are better able to engage in the sorts of activity that attract tax reliefs.


The third table shows you how the benefit of these inferred income tax expenditures is shared amongst some taxpayers.


As you can see the top 2% of income tax payers (which is broadly the top 1% of earners – because only just over half of over 16s earn enough to pay income tax) receive 43% of all inferred income tax expenditures. And the top 10% of income tax payers (the top 5% of all earners) receive 65% of all inferred income tax expenditures.

Startling though these results are, there is good reason to think them conservative. The (rather puzzling): “Allowances given as tax reductions” line in Table 2.6 here shows 70% of those “allowances given as tax reductions” going to the highest earning 1% of income tax payers.

The Calculations

Table 2.5 sets out for each of the earnings brackets (a) the number of taxpayers in that bracket, (b) the total income of those taxpayers, and (c) the total tax paid by those taxpayers. From (a), (b) and (c) you can calculate (and Table 2.5 does) the average rate of tax paid by those taxpayers.

For any individual taxpayer in that bracket you could identify what tax she would have paid after her personal allowance but before any other reliefs. Tax practitioners call this the ‘blended rate’ (it’s ‘blended’ from the personal allowance, basic, rate, higher rate and additional rate).

Of course we don’t have an individual taxpayer. But if we take (a) and (b) for each of those brackets we can construct what the average individual in that bracket would earn. I have taken that average individual and worked out her ‘blended rate’.

If you deduct the average rate from the blended rate you get a percentage which is accounted for by, I believe, certain types of tax expenditures.

You also need to take into account that not all income is taxed at the same rate. In particular, dividends are taxed at 10%, 32.5% and 37.5% rather than 20%, 40% and 45%. Pro-rated by number, this effect isn’t particularly material for basic rate taxpayers so I’ve ignored it for them. This will mean that the amount of tax reliefs inferred for basic rate taxpayers is overstated.

But for higher rate taxpayers, tax on dividends amounts to 10% of all the tax they pay. And for additional rate taxpayers it amounts to more than 14% of all the tax they pay (you can see this from Table 2.6 for 2015-16). By my calculations this difference will typically account for about 1% of the difference between the blended rate and the average rate for additional rate payers. And 0.75% of the difference for higher rate payers.

So I have deducted this (1%, 0.75%, or 0%) from the difference between the blended percentage rate and the average percentage rate.

If you then apply the resultant percentage to the gross income of that average individual in each tax bracket you can infer a tax reduction which is ‘unexplained’ by other means and which, it seems to me, must be attributed entirely (or virtually entirely) to tax expenditures.

Let me illustrate the calculation.

There are 5,000 taxpayers earning more than £2,000,000 per annum. They earn aggregate income of £23.8 bn. And they pay aggregate tax of £9.43bn. This gives an average rate of tax of 39.7%. The average taxpayer in that bracket has income of £4.76m per annum. Pre-reliefs, that taxpayer would pay income tax of £2,128,143 (a blended rate of 44.7%). 44.7% – 1% (dividend effect) – 39.7% = 4%. 4% of £4,760,000 = £190,400.

If you multiply £190,400 by 5,000 taxpayers you get the aggregate inferred tax expenditures enjoyed by taxpayers with income of more than £4.76m (or £952m). If you do that exercise for every income category you can then work out the figures in my third table. The taxpayer income percentiles come from here.  They are from 2012-13 but the difference will be, in the scheme of things, modest.

The aggregate inferred income tax expenditures is about £13.5bn. By way of comparison the sum of the ‘principal‘ income tax reliefs for 2014/15 is something over £42bn.

For comparison, my results are more conservative than those produced by the (rather puzzling) “Allowances given as tax reductions” line in Table 2.6 here.

However, I can see no reason why the unaccounted for income tax expenditures should follow different distribution curves to those set out above. Indeed the (rather puzzling) “Allowances given as tax reductions” line in Table 2.6 here suggests that my analysis is conservative. It shows 70% of “allowances given as tax reductions” going to the top 1% of income tax payers.

Shrinking the State? It looks like this.

Last year HMRC collected £515bn through the tax system (page 8).

It would have been more but for a number of ‘tax expenditures’ – a particular type of tax relief which you might think of as a substitute for a subsidy (paragraph 7.3.2). Through them we give away by foregoing income “some £100 billion a year” – according to the (Conservative majority) Public Accounts Committee (page 9).

On 25th of November, George Osborne will publish the results of his Spending Review, designed to cut a further £20 billion from public spending by 2019-2020 (table 1.A). His aim – or more accurately his avowed aim – is to “deliver value for money for the taxpayer” (paragraph 1.2).

Value for money is, of course, what good governance in the public sector looks like. It’s why HM Treasury has a so-called Green Book entitled “Appraisal and Evaluation in Central Government.” The 118 pages of that Green Book are one long argument for the need to understand what we get when we spend public money. There is a need to ensure that “Public funds are spent on activities that provide the greatest benefits to society… in the most efficient way.”

No one is pretending that the Spending Review will be easy. The Introductory section to the Spending Review provides that it will “involve difficult decisions” (paragraph 1.3). Not least because it follows on from “£14.3 billion from efficiency compared to 2010” achieved in the last Parliament (paragraph 2.6).

But here’s the thing.

Why are we taking difficult decisions with spending – but deliberately ignoring easy ones around tax reliefs? Why does “value for money” dictate spending cuts when it is absent from Government thinking about reliefs?

And where is the Green Book assessment of the value delivered by that £100bn of tax expenditures?

There isn’t one.

Here’s what the National Audit Office said in November 2014:

“We found little evidence that HMRC evaluates reliefs to see if their objectives are being met.”

(paragraph 17).

And here’s the Public Accounts Committee:

“HM Treasury and HM Revenue and Customs (HMRC) do not keep track of those tax reliefs intended to influence behaviour. They do not adequately report to Parliament or the public on whether reliefs are working as intended and what they cost and whether they represent good value for money.”



“HMRC rarely, if ever, assesses whether a tax relief is an economic, efficient and effective way of meeting its policy objectives.”

(Paragraph 4).


Let me try and bring this to life with one example – of the 1,156 reliefs the Office of Tax Simplification says exist.

Entrepreneur’s Relief reduces capital gains tax to 10% for entrepreneurs selling their business. It was forecast to cost £0.475bn in 2007-08 but in 2013-14 cost £2.77bn – an increase of more than 500%. But, says the National Audit Office, there was “No detailed analysis carried out to explain the increase” (Figure 6).

What has this £2.77bn of expenditure delivered? HMRC says that “the relief may have formed a genuine incentive for entrepreneurs based on the finding that the average age of beneficiaries had dropped from 59 to 53. The analysis did not explain or justify the link between age and entrepreneurship” (paragraph 2.15).

It’s not even clear what the purpose of the relief was in the first place.

Giving evidence to the House of Lords Select Committee on Economic Affairs the Oxford University Centre for Business Taxation pointed out that: “The economic rationale for Entrepreneur’s Relief is unclear… an entrepreneur that has already gained the benefit of the relief has a (comparatively) reduced incentive to undertake a new enterprise” (page 124).


Let’s return to the Spending Review.

George Osborne, in his Foreword to the HM Treasury paper (“A country that lives within its means: Spending Review 2015”) stresses the need to “eliminate the deficit by 2019-20” to deliver an economy that “offers security for the working people of Britain.”

Of course, you could eliminate the deficit by reducing your spending. But you could also eliminate it by raising your income through cutting back on tax giveaways. Indeed it’s not an either/or. Anyone whose interest genuinely lay in a balanced budget would take a long hard look at both.

You’d look at how much fat there was on the spending side, for sure. You’d recognise that £14bn had already been trimmed – and you’d ask yourself whether more could be done.

But you’d also look at the £100bn cost of those tax giveaways and what public benefit they delivered.

Osborne’s doing the former. But he’s closing his eyes to the latter. There’s compelling evidence of waste on the tax side of the Government’s P&L but Osborne, quite literally, does not want to know.

This is not where you get to if you’re trying to “eliminate the deficit”. It’s not the way to delivery “security for working people”. It’s not what you do if you have a genuine focus on “the best value for money for taxpayers”.

But an ideological exercise in shrinking the State? It looks like this.

So just how good is that Northern Rock transaction?

Here’s what Osborne tweeted out this morning.

It was probably something I ate, because I woke up in a rather sceptical mood: what’s the “gain” he’s referring to, I wondered?

So I looked at the HM Treasury Press Release. It doesn’t tell us much. But it does say that:

The Chancellor has today (13 November 2015) authorised a record-breaking £13 billion sale of mortgages acquired by the government during the financial crisis.

And the word “gain” seems to refer to the fact that the price achieved represented a £280m (or “almost £300m” as the Press Release goes on helpfully to observe. Political rounding, you might call it) surplus over book value.

That’s not especially illuminating because, if I have an asset worth 100, write it down in my books to 10, and then sell it for 30 I can say I’ve made a “gain” on book value of 20 even though actually I’ve lost 70. But because I didn’t know the actual cost to us of the mortgage book – known in the trade as the Granite Portfolio – I left the point alone.

But then I wondered: who purchased it?

Well, it’s something called Cerberus Capital Management LP – “one of the world’s leading private investment firms” – and it’s been on a buying spree of real estate debt from across Europe (as its website helpfully points out) including Germany, France, Britain and Scandinavia. And it seems to be buying this debt through what the Irish Times describes as “a network of Irish companies” Special Purpose Vehicles (SPVs if you’d like to pretend to know what you’re talking about), each of them owning hundreds of millions or billions of pounds of assets but having no Irish employees and paying no Irish corporation tax.

The Irish Times is pretty brassed off about this – well, wouldn’t you be if you were Irish? – but is there a UK angle?

Reader, there is.

The bulk of the loans in the Granite Portfolio pay interest at 4.79% – so says the Financial Times at least. Calculating 4.79% of £13,000,000,000 on an eight digit pocket calculator is a little tricky but I think we get to £623m per annum of interest income. If that income were subject to UK corporation tax (even at our special low low rate of 20%) it would generate UK corporation tax receipts of £125m per annum – less any expenses of course.

But by selling it to Ireland all those prospective tax receipts go to… hang on… the Irish don’t get them either. We don’t and it’s a racing certainty that no-one else will. Typically they disappear off to a Dutch or Luxembourg Company where they’re received as a dividend and are tax exempt.

Cerberus, by the way, is also the name of a “monstrous multi-headed dog who guards the gates of the underworld, preventing the dead from leaving.”

I don’t know that Cerberus have brought the Granite Portfolio through an Irish SPV. But the Irish Times tells us that Cerberus have used this structure to buy other UK property loans – so it’s a reasonable bet. And I’m sure HM Treasury will tell us, if anyone cares to ask them.

We could, of course, have insisted on a UK buyer. That way, we would have kept in the national coffers the contribution made by £623m of annual taxable income. But because a UK buyer would have had a tax liability on that income he wouldn’t have been prepared to pay such a high price. And George Osborne wouldn’t have been able to send out this morning’s tweet trumpeting his “gain”.

I should mention for the sake of completeness that a UK borrower is in principle required to deduct and pay to HMRC 20% tax when he or she pays interest to a foreign lender.  This can be reduced or eliminated if the UK has entered into a so-called ‘double tax treaty’ with the country in which the foreign lender is based.  It will not surprise you to learn that the UK has entered into a treaty with Ireland, and the rate of tax the UK is entitled to deduct under that treaty has been reduced to… zero.

11 November 2015:

Note (1) I now know that the Granite Portfolio was sold to a Dutch Company, Cerberus European Residential Holdings B.V. My understanding – I put it no higher than that – is that this leaves all of the points made above intact.

(2) Friday’s Press Release states the value of the loan book on 30 June 2015 as £12.04bn but information released at the time appears to give a higher value of £12.05bn.

On “shrouds of secrecy” and political will

Here’s an extract from a letter David Cameron sent to the British Overseas Territories – ‘our’ tax havens – in April 2014:


Well put. Sunlight is the best disinfectant. “Tax evasion and illicit finance” are scourges. They need to be addressed, and “urgently”. And transparency is “vital” to meeting to those challenges.

As a BIS paper produced under the Coalition put it (in respect of plans for our own registry):


And as Cameron reportedly said, speaking in Singapore this July:


Having made a world-leading commitment to tackle these issues you’d expect the Conservatives to remind us of it in the run up to the General Election. And, amid the febrile atmosphere surrounding the HSBC disclosures of thousands of wealthy tax evaders and one prosecution, they did. Cameron demanded that British Overseas Territories publish plans to create central register revealing companies’ ultimate owners by November. This month.

Of course, the General Election has now come and gone.

So how now press upon the Prime Minister the concerns that so troubled him then?

What’s happened?

In response to a written question from Margaret Hodge, James Duddridge, the Parliamentary Under-Secretary of State for Foreign and Commonwealth Affairs yesterday said this.


Or, in a word, nothing.

The UK does possess the power to force our tax havens to adopt this measure – at least that’s what an article in the highly respected New Law Journal concluded. It’s just a matter of political will. Which seems to be in rather shorter supply after the General Election than it was before it.

When, back in March, Cameron renewed his demands to the British Overseas Territories, the International Financial Centres Forum – a lobby group for British Overseas Territories – said the demands were “clearly politically driven given the timing.”

Sadly, events have shown it to be right.

Thanks to @davidtpegg for alerting me to the James Duddridge statement.




On EBTs and Rangers – Part 3

A lot of people are interested in the decision of the Court of Session in Advocate General of Scotland v Murray Group Holdings and others. A lot of people.

On the 8th of April, at the height of the 2015 General Election campaign, Ed Balls appeared on the Today programme on Radio 4 to launch Labour’s proposal to ‘abolish’ (as he put it) the non-dom rule. The real question was whether that measure would cost money or raise money. He cited a post on this blog in which I argued that such a measure might well raise £1bn. It was the only evidence he had. I spent the whole day in media studios talking about that £1bn figure.

As I write, that post on the key question around one of the highest profile policies announced in the General Election campaign, a post which has been ‘up’ for over seven months, has been read 6,911 times. And a post about a tax decision of the Court of Session ‘On EBT and Rangers FC – Pt 1‘ has been read 14,246 times. And it’s been up for six days.

Why is that?


Clearly, what is perceived to be at stake is the reputation of the club.

Did it “cheat”, as Alex Thompson and others have argued? Did the club’s directors, by trying to reduce its tax bill, imperil its claim to past titles? Did the club do anything ‘wrong’?

I could offer some answers to those questions.

But my views would be ill-informed: I have not followed the story. To offer them would be crass: I know nothing of Glasgow or its football culture. And my expertise is as a tax lawyer: I’m not a moral philosopher.

But what strikes me is this.

You won’t find the answers to those questions in the decision of the Court of the Session. You won’t find them in whether the liquidators decide to appeal that decision. Nor in a decision of the Supreme Court. Not one that overturns the decision of the Court of Session; and not one that upholds it.

You find the moral quality of an action only in its actors. At what they did at the time and why they did it. The man or woman who drafted the tax code knows nothing of morality. The administrator of BDO cares nothing for football titles. The judges in the Supreme Court seek only to apply the law.

And whatever the directors of Rangers FC lost for its fans, and for Scottish football, when they embarked on an attempt to avoid tax won’t be regained by a legal decision that they succeeded in that attempt. And nor will it be lost afresh by a decision that they failed.

Put shortly, the conduct of Rangers’ directors won’t be bad if the liquidators decide not to appeal. And good if the Supreme Court overturns the decision of the Court of Session. It is what is, either way.


I have campaigned against tax avoidance at some professional cost to myself: you can read about that here.

And I have taken steps to expose the dishonesty of a small number of my colleagues at the tax bar. You can read about that here.

But I have also recognised that a climate in which tax avoidance goes unchecked – and the use of EBTs was then commonplace – can encourage avoidance amongst those who would not otherwise contemplate it.

And that there are circumstances in which even the best informed can find it impossible to ascertain the likely attitude of HMRC to a transaction they are contemplating.

You’ll all have your views on which side of the moral line the conduct of the directors of Rangers falls. It’s not for me to try and change your minds.

Enough for me to identify the right question. Which has got nothing to do with tax law.

Note: I discussed, on Sportsound, last night many of the issues raised by this post. You can listen to the podcast, for a period of time, here.

Footballers and Film Schemes – today’s Sunday Times story

Today, over six pages, the Sunday Times has shown that a number of professional footballers face financial ruin because they participated in so-called film schemes.

If you were earning a lot of money during the late 90s and early 00s and had an IFA I can almost guarantee you would have been offered the opportunity to participate in a film scheme. They were sold – almost without exception – as opportunities for the wealthy to mitigate (less politely, cut) their tax bill.

It now looks as though film schemes will not deliver that result – although greater clarity will be brought to this question by a forthcoming Supreme Court appeal called Eclipse 35. (Transparency note: I am lead Counsel for Eclipse 35.)

I have a long standing, dual, interest in film schemes. First, I have been involved in litigating almost all – if not all – of them. Second, through a series of posts on this blog, I have written about the many interesting questions that they raise.

Writing here and here I sought to bring a more nuanced perspective to the question whether those who invest in film schemes are getting what they deserve. Writing here I examined the crowd-dynamic that lead so many to embark on tax avoidance schemes. I’ve also written on how you solve these problems here, here, here and elsewhere.

But the most important piece I have written is this one. In it I point the finger at a small group of real villains: some members of my own profession. I invite you to read it.

But the reason I write this morning is this.

I applaud the decision of the Sunday Times to give this story the prominence it deserves. The basic argument is that a number of footballers face financial ruin through no fault of their own. I have no doubt that that argument is right. And the story of working class kids who work hard and succeed as brilliant athlete or musicians but lose it all due to the actions of their advisers is familiar through the ages. But it continues to have a powerful resonance for me – and I suspect for many of you.

I have worked with the Sunday Times on this story, I am quoted in it, and I applaud it. But I do want to add an important postscript.

To focus on two financial advisers – named in the Sunday Times as David McKee and Kevin McMenamin – is to miss the broader story.

Tax barristers got rich through devising these schemes – and are not being held to account. I showed this here.

In that same post, I pointed out the promoters who devised these schemes may have made £100 million from a single idea. And although many of them may have been wound up, the individuals who ran them will have walked away with fortunes. It is very difficult to hold them to account as I pointed out here.

IFAs, too, have wound themselves up – and the individuals involved have walked away wealthy.

And Government too has achieved its policy objectives.


(that’s an extract from this Decision). The very films Government sought to encourage were made – but Government has (in some cases at least) refused to honour its side of the clear and explicit bargain it struck with investors. I have explored this theme in more detail here.

So it’s not just David McKee and Kevin McMenamin – about whom I know nothing beyond that which is reported in the Sunday Times – whose conduct is amenable of criticism. Everyone involved – those who created the environment for these schemes, those who devised them, advised on them, administered them, and sold them – bears a share of the blame.

And they also share responsibility for the plight of the victims at the bottom.

I’ve tried in leaden-footed legalese to express this sentiment.

But don’t waste your time. Listen instead to Dylan on Who Killed Davey Moore.

On EBTs and Rangers FC – Part 2

Writing here, I explained how Employee Benefits Trust work and why they were used for tax planning.

But I also promised to try and explain why the decision of the Court of Session in the Rangers case seems to me to be wrong. And to look at what happens next.

But first, let me repeat my warning from Part 1:

If you’re a tax specialist you’ll also need to make allowances for the fact that this piece isn’t written for you. I make no apologies for not capturing in these posts the full technical detail around Employee Benefits Trusts.


As I said in Part 1, to have a liability to pay income tax you need to have something that is “income” – but you also need to “get” that thing. If you work hard for three years and your employer pays you a bonus in year three because of all of that work do you have a liability to pay income tax in year one? There is income from that year, after all?

I give you this example because what I think the Court of Session has got wrong, in summary, is to focus too much on the income and too little on the getting.

But let me take it a bit more slowly.

You might think about the Rangers transaction as looking a little like this. (And sorry for my home-made diagram. You need to make allowances for us lawyers.)


What happens at 1 is that the employer gives money to the trust – think of it as a big pot – for all employees. At 2 the trust gives money to the sub-trust – a smaller pot – for a particular employee and his family. And at 3 the sub-trust lends the money to the employee.

So when does the employee “get” the income? When does he have a liability to pay income tax?

Of course he gets his hands on the cash at 3. But all the courts so far have held that what he has is a loan of the money – which he may need to repay.

And at 2 the money is passed to the sub-trust for the benefit of the employee and his family. But all the courts so far have held that the employee hasn’t got it – because the trust might decide to give it to someone else – for example his daughter – instead.

Now everyone involved kind of knew the money would just flow straight through from employer to trust to sub-trust to employee. And the loans don’t look the same as a loan you might take from a bank – no-one’s been demanding that the loans should be repaid. So you might feel that what the courts have held doesn’t have much reality to it. But as I said on Good Morning Scotland, the law isn’t always about common-sense.

And what’s more important now is that they’re not conclusions a judge can overturn on an appeal.

So what about at 1? Might there be a payment there? Because the new argument HMRC advanced before the Court of Session was that the employees got the income at 1.

But how, you might ask, could they have got it at 1 if they didn’t get it at 2? Isn’t it odd that at 1 it could have been given to any employee but at 2 it could only have been given to the employee or his family? How could it be the employee’s income at 1 if it wasn’t at 2?

Well, the answer the Court of Session gave was this.

You can satisfy the “getting” bit of the test for a liability for income tax in two ways. You can satisfy it if you get the money yourself. Or you can satisfy it if you agree that it should be paid to someone else.

There’s definitely something to this argument as a matter of principle.

Think about it this way. Most of you won’t receive your wages through some complex EBT structure. Most of you will receive them directly from your employer. And you couldn’t avoid income tax on them by agreeing that they should be paid into your daughter’s bank account rather than your own.

And what the Court of Session said had happened here was, in effect, that the employees had agreed that they should be paid into the EBT (at 1) rather than to them. And by agreeing, they had satisfied the requirement that they “get” the income.

But, although that might be right in principle I have some problems with the practice.

The first is that the Court of Session seems to me to see the “getting” requirement as a problem to be solved rather than a key part of the question. And I think this may have led it to the second and third problems.

The second is that the Court of Session is not terribly clear – or not terribly clear to me, at any rate – about where you can find the agreement that someone else should be paid the income.

But I should also make this point. There were two different types of arrangement before the Court of Session: one for footballers and one for managers. And this criticism I have advanced of the Decision may be stronger for managers than for footballers. Because footballers did enter into an agreement (called a side-letter) when they signed with Rangers in which they seem to have agreed that payments should be made to an EBT rather than to them. But Managers didn’t sign an agreement – although they too were found by the Court of Session to have agreed.

The third is that we are taxed on our actual pay – and not on what we might have been paid had we negotiated a different package with our employer. We are free (at least if we do it right) to agree with our employer a package that involves us getting less stuff that does give rise to a tax liability (for example, pay) and more stuff that doesn’t give rise to a tax liability (for example, child-care vouchers or pension contributions). And if we make that choice then we pay (the lower) tax on our actual pay package rather than (the higher) tax on what we might have negotiated. I’m not sure that the Court of Session fully appreciates this.


It’s not easy for an outsider – like me – to look at a case and say what the answer should be. The answer is often quite sensitive to the facts. The advocates arguing the case – and the judge or judges hearing it – know those facts better than the outsider does. And that’s a particular problem in this case. I’m not sure why – perhaps it’s because the Court of Session decided the case on an entirely new argument – but the facts relevant to this new argument are not terribly clear from the Decision.

So, although I stand by the problems I have set out above with the Decision, it is perfectly possible that my analysis is wrong. You know this, of course. But it’s important that I say it.


But actually my views are not nearly as important as what happens next.

If there is an appeal to the Supreme Court either I will be proved wrong or I will be proved right. And whatever my view is now will be irrelevant.

And if there isn’t an appeal to the Supreme Court then the fact I think the Decision is wrong will also be irrelevant – because it will remain the Decision. And no-one will care if someone somewhere (me, for example) thinks it’s wrong.

So will there be an appeal?

I don’t want to speculate about the financial position of whoever’s running the litigation. There are other people around who are better informed than me on that subject.

But if there is money to fund it I’m pretty sure there will be an appeal. It would be an odd decision to stop at your first loss, having won twice. That’s especially true where you’ve lost on a ‘new’ point. And it’s especially, especially true where that new point is controversial. I can put my hand on my heart and say that all of the tax professionals I have spoken to about the Decision find it difficult to see how it can be right. They might all be wrong – but that sort of sentiment towards the Decision is absolutely going to encourage rather than discourage an appeal.


Thanks for sticking with me this far. Even I know that tax is less fun than football.


I know it now, anyway. So I appreciate you sticking around. And I’ve enjoyed engaging with many of you on twitter.

Please come back for Part 3 where I’m going to talk about what I find particularly interesting about this case. Which is what I think it tells us about who the real winners and the real losers are from this kind of tax avoidance.