On EBTs and Rangers FC – Part 1

A day or so ago, I gave an interview to BBC Radio Scotland.

For a while, at least, you can listen to that interview here (at about one hour and 36 minutes in). It’s not a particularly fluent interview – but it does have one merit. I express a clear view about the decision the Court of Session gave earlier this week in the Rangers case. I say that it was wrong. That’s my view at least and I’m a Queen’s Counsel specialising in the field of tax. Although that fact doesn’t make me right, it does make my view worth listening to.

After I gave that interview, I was asked whether I wanted to write about the Decision. My immediate reaction was that I didn’t. Analysing what cases mean – and whether they are rightly decided – is part of what I do for a living. What I do on this blog I do for other reasons.

But I hadn’t anticipated the level of interest in my views. And the need many Rangers fans have to understand what happened to their club. And the sense of loss that – or so from many hundreds of miles south it seems to me – many feel at having had part of their identity somehow taken away or diminished. And then I remembered that I had started writing this blog because I wanted to improve understanding of the field in which I work. And that the Rangers case was one where there was a huge demand for better understanding.

And so I changed my mind.

In a second I’ll tell you what I’ve decided to do. But before I say anything more, I need to tell you two things.

The first is that I don’t have any connection to Rangers or its equally proud rival, Celtic. I am not Scottish. I am not religious. And although I continue to follow Sunderland AFC – that being the team local to the pit village where my grandfather, Dennis, grew up – I can’t even decently pretend to be a serious football fan.

The second is that, as I point out here, I do work in many of the areas I cover in my blog. And I do work in the field of Employee Benefits Trusts. I think that the only difference this makes is that it gives me a good understanding of the area. I know I’m not the sort of person who would feed you a line because it was convenient to my clients for me to do so. I know that, as I’ve explained here, my record demonstrates that that’s not what I do. But none of that changes the fact that you’re entitled to know when you read what follows that I am doing some – not much but some – work in the field of Employee Benefit Trusts.


What I decided I would do is this.

I would write three pieces.

The first on why people use Employee Benefits Trusts; the second on why I think the Decision of the Court of Session is wrong and what happens next; and the third on what we can learn about the effects of tax avoidance from this sad tale.

And I would write them for those who most need them: the fans of Rangers. And because tax is difficult, I’d try and go slowly. I’d like the third piece to get more readers than the first – I think it will be the most interesting – and to do that I’d need not to lose readers along the way.

I haven’t followed the Rangers story especially closely – as I say, I don’t have any connection to the club – so please make allowances for that fact. I don’t think that will affect my ability to carry out the task I’ve set myself – but please bear it in mind if you think I’m getting something wrong.

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.


To understand Employee Benefits Trusts you need to start by understanding income tax.

To acquire a liability to pay income tax two things need to happen: the first is that you need to “get” a sum of money and the second is that that sum of money needs to be “income”.

If you do “get” “income” you’ll have to pay income tax on it. And that income tax will reduce the amount of money you have available in your hand to spend.


I’m not going to write a long essay on what “income” is here. It’s enough for me to point out that the money that you get from the work you do as an employee is your income.

The interesting bit – for my purposes here at least – is around the “getting”.

Dennis’ wife, my grandmother Joan, had eight grandchildren. As each of us was born, she opened a new savings account and every week she paid money in. Not much: she didn’t work and although Dennis had not followed his brothers down the pit he wasn’t earning a fortune working as an electrician. But something: and as we turned 18 she handed the savings book over to us.

Before I turned 18, the money wasn’t mine. Even though she absolutely knew that she was going to give it to me – and I knew she was too because she’d told me she was saving money for me – it was still hers. But when I turned 18 and she gave me the savings book with the entries all written in in hand (I remember this because the adding up on the final entry was wrong and the handwritten notes showed a new balance rather higher than the amount Joan had paid in and I spent many happy hours wondering whether the bank might hand over that extra. Reader, I was disappointed) and I could take the money out and spend it or give it away… Then it was mine: I’d got it.


Employee Benefits Trusts are a bit like that savings account. They are a way that employers earmark money to pay to their employees in the future.

A lawyer will tell you that once the employer has paid the money into the Employee Benefits Trust it doesn’t belong to the employer anymore. But it doesn’t belong to the employee either. It belongs to the trustees who hold on to it until they decide who – which of the beneficiaries of the trust – they are going to give it to.

Accountants take a different view. When they draw up the employer’s accounts they ask who really owns the money. If the employer can use that money to meet its future obligation to pay its employees then they treat it just like Joan’s bank accounts. It’s one of the employer’s assets.

But if control over the money has already been passed over to the employee – if Joan has given me the savings book – then it’s treated just like a payment by the employer of wages. The employer can deduct that money from its income in calculating its profit.

And that’s rather good news for the employer. Because by making that deduction the employer gets to reduce the amount he or she has to pay to the tax man.


So the employer wants to hand control of the money over to the employee to reduce the employer’s tax bill.

But what about the employee?

He’d like to – she’d like to – have control of that money too. To spend it. But ideally without having to pay income tax on it. Ideally getting in his or her hand all of the money in the trust.

And because the employer benefits from keeping the employee happy – because a footballer employee who had less in his hand than he wants might otherwise decide he’s going to go play for another club – the employer has a good reason to help the employee get control of that money without having to pay tax on it.


So the magic of Employee Benefits Trusts from an employer’s point of view is that they enable the employer to reduce the amount of tax it has to pay to the taxman. And they enable the employer to keep his employees happy.

But only if they work.


How many people has HMRC prosecuted for offshore evasion?

There’s a new report of the Public Accounts Committee out today. You can read it here.

Under its new Chair, Meg Hillier, it continues with many of the themes developed under her predecessor Margaret Hodge. It slams HMRC’s management of tax expenditures (a subject I tackled only a few days ago here and to which I expect to return in the coming days and weeks); it characterises as “unacceptable” HMRC’s customer service; and makes a number of detailed criticisms of how HMRC reports its progress on tackling tax avoidance and evasion.

What I want – briefly, for the point won’t take long – to focus on is some clarity the Report finally delivers on what HMRC has actually done to tackle offshore tax evasion by the wealthy. This has been a particular bug-bear of mine: I wrote a number of times on the issue in the early Spring culminating with this. And the new PAC report very much franks my analysis stating, starkly:

HMRC’s investigations do not lead to sufficient prosecutions to provide an effective deterrent, particularly for wealthy individuals who hide their assets offshore.

It then sets out this startling statistic:


That’s right, eleven in the last five years.

For scale, we know that the HSBC disclosures led to HMRC becoming aware of the names of 3,600 potential evaders – and in consequence HMRC “encouraged” 500 people to take advantage of the Liechtenstein Amnesty. Offshore tax evasion really has been, as Margaret Hodge put it,  “a risk worth taking” (see Question 102 here).

But worse even than that is what that number – eleven in five years – reveals about HMRC’s attitude to public reporting.

Back at the height of the furore around HMRC’s handling of the HSBC data – and in the run up to a General Election where it was a key political issue – HMRC released this document, entitled: ‘Statement by HMRC on tax evasion and the HSBC Suisse data leak.’

At the time, I was deeply sceptical of some of claims made in that document. I said:

What we know is that in a document designed to defend its record of achieving criminal convictions in tax evasion and the HSBC Suisse tax leaks – that being its title – HMRC is relying on convictions it has achieved in benefit fraud cases.

And that conclusion too is franked by this morning’s PAC report.

Here’s an extract from HMRC’s 2014 annual report on tackling offshore evasion: ‘No Safe Havens.’ And at page 11 it contains this table:


revealing 2,962 actual and prospective charging decisions.

Did only 11 of those lead to convictions? No. We can now conclude that by including that table – which includes charging decisions for such matters as wrongfully claiming tax credits – HMRC set out to mislead you as to its success in tackling offshore tax evasion. Not lying – because the document does not explicitly state that those are charging decisions in relation to offshore evasion – but an attempt to mislead.

That’s a serious charge – so don’t take my word for it. Have a look at that table and the context in which it appears. Look at the document and at the page. It appears in a document about offshore tax evasion. As the screen-grab above shows, it appears at the end of a paragraph talking about offshore tax evasion. Nowhere I can see in that document is it made clear that that table has nothing to do with offshore evasion.


There is some evidence that the Government is at long last taking tax evasion seriously. You can see here a series of consultation papers on new civil and criminal matters. Let’s hope those measures are delivered. Let’s hope they are utilised by HMRC. Let’s hope they work. Because the Coalition Government and HMRC’s response to offshore tax evasion by the wealthy was a disgrace.

A short elegy to mark the passing of a prospective improvement to our democracy

He was always rather under-appreciated, Ed Balls, and it looks now as though – at least within TIGMOO – his star has further to fall.

But it shouldn’t. One rather clever insight of his during the last Parliament was to wonder whether the Office for Budget Responsibility might counteract what he then anticipated would be the critical issue for Labour in 2015: whether it could be trusted with the economy. If an independent OBR were to ‘cost’ Manifestos, and Labour’s ‘stood up’ he might gain ammunition to tackle what he anticipated would be a hostile press. And so he secured a Commons Debate on the proposal.

I wrote about the debate here. But let me give you a short extract:

“The Conservatives’ position – not unsupported by Robert Chote’s letter – was that any change in the OBR’s remit was temporally too proximate to the general election to be implemented.  As the then Financial Secretary to the Treasury, Nicky Morgan (who opened the debate for the Coalition) (Column 392) put it:

we are not suggesting that the issues that the shadow Chancellor’s proposals present are insurmountable, but we do believe very firmly that the independence and operation of the OBR is critical. We need to make sure that independence and impartiality is preserved, and as such, Parliament would need time to scrutinise the proposals properly and the OBR still needs time to establish itself fully as an independent fiscal watchdog before being drawn into the political heart of a general election.

So not now, but next time.

Nevertheless, we had the cautious beginnings of a political consensus. And by goodness, the electorate needs it. When the FT, not often Pravda for this sort of agitprop, writes

The deficit policies of both main parties blur into one. Forgetfulness or deceit, it does not matter. When the new government opens the books after the election and the truth comes out, voters will think their new rulers are a bunch of liars who were willing to say anything to get elected. They would be right,

then the hour is surely nigh.

If we are to do more than talk about addressing public cynicism about politics, if politicians are to be incentivised to be straight with the electorate, if we are to fight back against the destructive tribalism that passes for public engagement with Government finances, then it is with measures like this that we must start. Technocratic, apolitical but incredibly important.”

Labour lost the debate.

And – because Balls’ identification of the key battleground appears to have been right – the election. And Ed Balls. And all impetus to continue the push on extending the remit of the OBR.

A pity for Labour and a pity for democracy – the functioning of which could only be enhanced by the electorate having a more acute understanding of what it was being asked to vote for.

Anyway. I mention all of this now because earlier this year George Osborne asked Sir David Ramsden, Chief Economic Adviser to HM Treasury, to conduct a review into the OBR. He looked at a number of issues but, on the costing of manifestos, recommended against an extension.

Perhaps this paragraph of the Report best expressed the core of his reasoning:


But what about the gains for the functioning of democracy? Why so readily dismiss these? The older reader, at this point, turns wearily to the Appendices and the terms of reference. What is it that Sir David was asked to consider?


Ah. Nothing on the prospective gains for the functioning of our democracy.

So. A short elegy.

Note: Sir David’s Report was published in September. That publication passed me by; I learned of it from this blog post, by Simon Wren-Lewis.

Balancing the Books – with One Eye Shut

It’s a curious paradox that the delivery of the Conservatives’ desire for a smaller state, a desire born of a belief in the inefficiency of that state, throws up inefficiencies all of its own.

How we laughed at the logic that led us to consider underwriting private sector investment in the nuclear power industry at a cost exceeding that which would be incurred were we to borrow and invest ourselves.

And cried, at the Chancellor’s attempts to wrest from the tax system – one that already exempts the lower earning half of the adult population from liability to income tax – some meaningful amelioration of the swingeing cuts to tax credits that hit hardest that same half.

My own particular cranny of expertise is, of course, neither off-balance sheet financing nor how best to balance the moral imperative to tackle poverty against the desire to run a balanced budget and properly incentivise work. What I know about is the uses that our politicians make of our tax system.

But here too we find inefficiencies – borne of the same desire. And which will have profound consequences for the outcome of the Comprehensive Spending Review.


Decisions around the rates at which we pay tax – cutting corporation tax to 18% or the top rate of income tax to 45% – are closely scrutinised. So, too, are decisions around thresholds: raising personal allowances to £12.500, or the point at which you pay higher rate tax to £50,000, or the threshold before a couple must pay Inheritance Tax to £1m. For changes of this type, it is relatively straightforward to identify the cost, the beneficiaries, and the advantages.

But alongside these headline decisions sits a host of further choices made by Government to favour certain types of business activity, or individual, or activity.

This favouriting usually takes the form of a reduction in liability to tax – and sometimes payments made to the chosen subject by HMRC. But from our perspective of course – the ‘our’ here being you and me: society at large – the form makes no difference. Either we incur expenditure by handing over cash or we forego cash by choosing not to collect that which would otherwise be our due.

The technical term for these encouragements is “tax expenditures” – reflecting that through them Government is foregoing or ‘expending’ tax that might otherwise be collected. But unlike the headline decisions around rates and thresholds, the scrutiny of tax expenditures is unsatisfactory – and the evidence of their efficiency weak.

But before I get into how they’re unsatisfactory and weak let me tell you why this matters.

We’re talking staggering sums of money here. An Office for Tax Simplification report identified the existence of over 1,000 reliefs. The 50 tax expenditure reliefs which find their way onto the (somewhat misnamed) “principal” tax expenditure spreadsheet – these 50 alone – cost us collectively £111bn in 2014/15.  That’s about 20% of all the tax of all types we collected that year.

Now that I’ve piqued your interest let me explain how it’s weak and unsatisfactory.

First, what the electorate is told about the purpose of these tax expenditures is often a stranger to the reality of what they actually accomplish. Last week, for example, I wrote about the so-called Shares for Rights scheme. It was heralded by Government as a mechanic to create partnerships between workers and owners of businesses. But the reality was it was little more than a £1bn bung to wealthy private equity buyers. And it appears to have been designed as such.

Second, how the benefits are shared is poorly understood. Richard Murphy has given the example here of how entrepreneur’s relief (which cost a total of £2.77bn in 2013/14) delivered a tax saving of a staggering £600,000 (on average) to each of 3,000 people. True it is that Richard was able to effect that calculation from publicly available information – but the same is not true of most tax expenditures.

Third, their costs – in tax revenues foregone – lack transparency. HMRC publishes three spreadsheets showing the costs attached to tax expenditures. The first – here – sets out what are described (somewhat misleadingly) as the costs of the “principal” tax expenditures. The third – here – describes the costs of “minor” tax expenditure reliefs (i.e. below £50m). But (and this is why I describe the title to the first as misleading) there is also a second – here – with the  title of “cost not known”. And that second includes some punchy items – like the £1bn+ cost of Shares for Rights – which should quite clearly come within the first, “principal” tax expenditures, spreadsheet.

And it’s not easy to avoid the conclusion that that lack of transparency is sometimes deliberate. Let me give some examples:

  • The Shares for Rights scheme appears on the “cost not known” spreadsheet – despite the fact that Treasury promised at the time to monitor it. Moreover, as I pointed out in my post last week, the OBR was perfectly well able to estimate the £1bn+ cost. So you might be forgiven for some scepticism about the assertion that Treasury and HMRC are unable to.
  • The second item on the “cost not known” spreadsheet is ‘10% wear and tear allowance.’ But how can that cost not have been known when, in July’s Summer Budget, the Government abolished the allowance, a measure that Treasury was able to estimate carried a forecast yield of £205m in 2017/18 (with more to follow in succeeding years)?
  • The National Audit Office has made similar (and related) points in relation to Lettings Relief:


But a number of the items on the first spreadsheet – misleadingly marked “principal” tax expenditures – are marked as “particularly tentative and subject to a wide margin of error.” What’s the rationale for including them but excluding lettings relief?

It is temping indeed to conclude that the “costs not known” spreadsheet might better be entitled “costs we’re not going to tell you.”

And even where the costs of tax expenditures are published there are profound doubts about the reliability of those numbers. As the NAO pointed out:


(and that’s four of only ten reliefs the NAO examined).

And, critically too, fourth, there is no ongoing assessment of whether those reliefs deliver value for money. Even if you make the generous assumption in favour of the Government of the Day that the reliefs do deliver its assessment of value for money at the time they’re introduced, the structure of that relief, its cost and what it delivers, is not routinely reviewed to take account of changes in the economic climate.

Take Agricultural Property Relief from Inheritance Tax, for example. It is expected to cost us £420m in 2014/15 but what value does it now deliver? When I looked at that question here I concluded that whatever had been its original intention, it now acted as a barrier rather than a spur to the productive use of agricultural property.

Or Entrepreneurs’ Relief (which I have already referred to). The National Audit Office has calculated that the actual cost is fully three times what was forecast.


but there is no suggestion that this heightened level of expenditure is necessary to deliver the purpose of “encouraging enterprise”. Or even that Government has seen fit, in light of this much higher level of expenditure than anticipated, even to ask itself the question whether we get value for money from that 300% increase in the originally anticipated cost.

To take another example, a detailed literature review of the effectiveness of tax expenditures on research and development (at a cost in 2014/15 of £1.7bn) presented a very mixed picture. Certainly those reliefs became less effective over time. And we also did not know how effective they were to start with:


I could go on. But you have the point. For further reading I recommend this Report from the National Audit Office and this one from the Public Accounts Committee.

Given the scale of tax expenditure – over £110bn on 50 tax expenditures alone (HMRC estimate there are may be 150 in total) – these problems of disinformation, poor knowledge of costs and distributional effects, limited understanding of value for money and a lack of monitoring are profoundly troubling.

So Corbyn has been right to highlight it, albeit that his particular focus on corporate reliefs is difficult to understand.


But these issues rise above the party political: they ought to be absolutely centre-stage for all of us who care about efficient and well-run Government.

We have been told to expect £20bn of savings in the Government Spending Review, the results of which will be announced with the Autumn Statement on 25 November.


And, as has been well flagged, delivery of this £20bn number whilst meeting the pledge to ‘protect’ substantial parts of public spending, will involve swingeing cuts to some unprotected departments. Departments have been asked to identify prospective cuts of 25% and 40% – here’s one possible scenario the IFS has modeled:


And these cuts follow, of course, from substantial cuts achieved during the last Parliament.

No one would argue that the Conservatives – initially with the Liberal Democrats and now alone – have failed to look long and hard at how to cut expenditure. But where is the similar detailed focus on revenues foregone?

Because, of course, there is another way to achieve your goal of balancing the budget: you can increase your income. Or do a little of both.

It seems bizarre that you might look to balance the books solely through the mechanic of cutting £20bn of expenditure whilst turning a blind eye to the value for money delivered by your choices to forego income. Especially when there is a tidal wave of evidence that our understanding of that value for money is poor and the sums – in excess of £110bn for fifty tax expenditures alone – are so enormous.

Why would you choose to balance the books with one eye shut?

In another context Government rejected this analogy between revenues foregone and expenditure incurred.


And this rejection stands, apparently, despite the fact that these tax expenditures can and do take the form of cash payments made by HMRC to beneficiaries.

But whatever the merits of this reasoning – and I personally struggle to identify any – it is surely a truism to say that one can balance the books as easily by increasing your income as cutting your expenditure.

And you would only close your eyes to this truth if you were bent on shrinking the size of the state.