Pulling down the shutters at HMRC

How should the ‘elites’ address mistrust? And the Government Departments thought soft on them? Pull down the shutters – or let the light shine in?

Nowhere are these question raised nowhere more sharply than in the sphere of tax dodging – avoidance and evasion – by wealthy individuals and powerful corporates.  We are worried – and we are right to be worried. The best that can be said about our tax system is that it does not function as it should. But the worst is that HMRC fails to apply the law in an even handed fashion: it is, to borrow Ed Miliband’s compelling phrase, strong with the weak but weak with the strong.

Many of us can understand that responsibility for the misfiring international tax system does not lie entirely with our own Government. But the idea HMRC pushes hard against small businesses struggling to turn a profit whilst failing to collect tax from the likes of Google and Facebook is deeply corrosive. And only yesterday the National Audit Office reported that, over the last five years, HMRC had closed 72 fraud investigations into high net worth individuals with only two prosecutions and one conviction.

It’s a brave Government that ignores the question ‘why should I pay more taxes when he doesn’t pay his?’ Brave or – given that we check less than 2% of personal self-assessment returns – stupid. And greater transparency is an important – and perhaps the only – way to answer it; greater transparency alongside meaningful scrutiny.

Last month the Supreme Court handed down a decision in the Ingenious case. The case concerned a briefing given in 2012 by the then Head of HMRC, Dave Hartnett, to Alexi Mostrous, a journalist at the Times. During the course of it, Mr Hartnett made some corruscating remarks about Patrick McKenna, a then high profile promoter of tax avoidance schemes. And those observations drew upon confidential material held by HMRC.

You can read the remarks at paragraph 10 and 11 of the decision. They disclose nothing about the tax affairs of Mr McKenna. Or, indeed, of anyone else. They merely signalled that HMRC disapproved of the arrangements promoted by Mr McKenna; that very, very substantial sums of money were at stake; and that HMRC anticipated that it would establish that those arrangements did not work.

The Supreme Court found that, in making those remarks, HMRC had breached its duty of confidence owed to Mr McKenna. Even though, only weeks earlier, the specialist Tax Tribunal had found that Mr McKenna had promoted tax avoidance arrangements; that very, very substantial sums of money were at stake; and that the arrangements did not work.

In practice, such arrangements can be difficult even for highly skilled professionals to differentiate from ‘good’ tax mitigation. Individuals without professional expertise have little choice but to rely on the advice given to them by their advisers. And their advisers are usually or often financially incentivised to encourage their clients to invest.

The consequences can be disastrous. We know from numerous media reports (see, for example, this) that a number of hugely successful footballers face bankruptcy as a result of participating in Ingenious schemes.

Even in the tax field, some stuff is beyond sensible argument.

HMRC must be able in the public interest to communicate with those it serves.

It must be able to warn taxpayers off avoidance schemes that it considers dangerous, as it sought to do with Ingenious and film schemes more generally.

It must be able to address public concern about possible sweetheart deals – for example, this story that Bernie Ecclestone was able to settle a £2bn tax bill for £10m. It must be both free to engage with and forced to confront legitimate Parliament scrutiny of sweetheart deals.

It must be able to address misrepresentations by powerful individuals or corporates. Tax conduct is reputational and wealthy taxpayers and corporates do publicly misrepresent their tax behaviour. Where these representations damage public trust in HMRC, HMRC must be free to counteract them.

I intend no criticism of the Supreme Court – it addressed a narrower question – when I say it is a mistake to conceive of taxpayer confidentiality as an absolute value to which the public interest must genuflect. Like all values it must be balanced, here with the importance of maintaining public confidence in HMRC. Should this remark be thought controversial I would invite putative critics to grapple with the rule that compels the full public disclosure of the relevant personal financial affairs of individuals of anyone seeking to appeal against a decision  of HMRC.

To strike that balance, it is now clear that Parliament must legislate. It must explicitly authorise disclosures of confidential information to protect HMRC’s assessment of the public interest. Parliament can, should it wishes, make that assessment justiciable before the courts by listing a range of factors to which HMRC is to have regard in reaching that assessment. Those factors could include the obligation to have regard to the objectives listed above – and also the desire, where consistent with their achievement, to preserve taxpayer confidentiality.

But the status quo, after the Supreme Court’s decision in Ingenious, is unsustainable. It will damage HMRC’s ability to raise tax, it will foster public distrust in the institutions of Government, and it will inhibit Parliament’s already poor scrutiny of a field of proper public concern.

5 thoughts on “Pulling down the shutters at HMRC

  1. Read the judgement. The Supreme Court was crystal clear that this was a clear breach of HMRC’s duty of confidentiality regarding a taxpayer’s affairs.
    To argue that the comments “disclose nothing about the tax affairs of Mr McKenna” is not correct. The remarks put on public record that Mr McKenna was involved in a tax enquiry (breach No. 1) and that HMRC would like to recover “lots of tax relief he has generated for himself” (breach No. 2).
    You are falling into the same trap as HMRC. When it loses a decision, rather than accept defeat gracefully and taking its medicine – it bleats about changing the law!
    Rather than “pulling down the shutters” this is very much an example of “pulling up the blinds”.

  2. I’d like to say that we should congratulate HMRC in getting more tax from the richer taxpayers. In relation to your comment that HMRC go after small business rather than prosecute the rich is probably, as you know, down to HMRC sense that they might win.

    Small businessmen who enter into tax schemes generally will use poorer advisers (if at all) whereas if the rich enter schemes they are more likely to use good standard advisers like yourself to implement legitimate tax avoidance schemes.

    In addition, as the NAO acknowledges, the rich have more choices as to how and where they earn money, and this (quite rightly) affects the tax outcome. Nothing wrong with that so there’s no need to spin the report to your own ends.

  3. The Supreme Court identified the following comments as being attributable to Mr Hartnett:

    “Patrick McKenna … and … [X] … are the two main providers of film investments schemes in the UK.

    To the Revenue the two men represent a threat. HM Revenue and Customs believes that film schemes have enabled investors to avoid at least £5 billion in tax. Much of that sum, the Revenue says, is attached to schemes created by [X] or Mr McKenna.

    Mr McKenna, 56, founder of Ingenious Media, is also involved in a long-running Revenue inquiry into three of his partnerships.

    ‘He’s never left my radar,’ a senior Revenue official said of Mr McKenna. ‘He’s an urbane man, …, he’s a clever guy, he’s made a fortune, he’s a banker, but actually he’s a big risk for us so we would like to recover lots of the tax relief he’s generated for himself and other people. Are we winning? I would say, beginning to. I think we’ll clean up on film schemes over the next few years.’”

    I do not see how 1 and 2 are anything other than statements of fact that were in the public domain. They certainly do not refer to Mr McKenna’s tax affairs. Point 4 is debatable but given there was much press comment on HMRC enquiries into Ingenious in 2010, some two years before the interview, at least arguable.

    see below:


    3 however is, I would agree, a breach of confidentiality. The Supreme Court werent asked whether all of these were; just did they breach the duty either combined or individually. Hartnett could have got his message across just as effectively without making point 3.

  4. I’d like to see HMRC have the ability to rebut comments made by taxpayers about their tax affairs. So, for example, if a company spokesman says: “We pay all the taxes we owe, every single dollar. We not only comply with the laws, but we comply with the spirit of the laws” then HMRC should be able to comment on that.

  5. This is a hugely complex field which is part of the problem. The other part is that it is never left alone. Every year, the Chancellor undertakes widespread tinkering to a point where nobody, least of all HMRC know what is going on any more. Hopefully, once we are out ofthe EU, the Googles of this world will end up paying tax on their UK earnings without being able to offset profits against intellectual licensing costs etc.

    Nonetheless, if the whole thing was simplified, it would be come clearer to everybody and dodging would be harder. Fewer mistakes would be made and fewer people hurt in the process.

    Finally, avoidance is fine. I liken it to shopping in the sales or benefitting from offers in the shops. To suggest that depriving a shopkeeper from his full mark up and profit on an item is immoral is patently absurd. So is paying more tax than necessary.

    Even if HMRC recovered a chunk of tax without prosecutions, there are plenty of ways it can make life unpleasant starting by investigating every return for the next 10 years. This will tie up even the very rich for ages and be a serious nuisance for them. HMRC will find something if it looks hard enough and so the cycle repeats itself. Endless inaccuracies, Mr X simply cannot be trusted and will under the microscope for a very long time indeed. No need for lawyers. Just seriously mess them about.

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