On Sunday, Labour pledged to tax as income the performance fees (known as the “carried interest”) paid to certain investment managers. This rather than the much lower capital gains tax rate enjoyed hitherto. The pledge followed Labour’s promise, earlier in the week, to remove the centuries old non-dom tax break and, last month, to restrict pension tax relief for high earners.

Taken individually, there is a compelling case for each of these measures. And they cohere as individual parts of a bigger programme to bring more earnings above £150,000 into the top rate of tax. Looked at as a matter of good design, we should applaud them. The removal of piecemeal tax reliefs and complexity is the intellectually unassailable argument of flat taxers. They should love this programme too.

They don’t though.

In 2012, Allister Heath, the Telegraph’s Deputy Editor, chaired a report calling for a flat tax of 30%. But on Thursday he led the charge against the non-dom changes in a heroic leader piece entitled “Labour’s Socialist Headbangers Will Clobber Us All.” It was a “near certainty”, he said “that a significant minority of non-doms, including the richest… would up-sticks.”

He did, though, concede that the eligibility conditions for non-dom status were “bizarre.” When I asked him why he had not called for their reform earlier he claimed he had. But he dropped the point when I pointed out his report had explicitly recommended no change. I had an almost identical conversation with another avowed flat-taxer, Stephen Herring, Director of Tax at the IOD.

The problem they face is this. If you won’t advocate sensible reform against your own interests you can’t expect to be listened to when you advocate sensible reform for them.

Now, none of this would much matter but for the fact that the right is already losing this argument. And not – entirely at least – in a good way.

There is a rate of tax that is too high. Although we sustained marginal rates of income tax as high as 99.5% in the post-war years through to the late 1970s the world, our place in it, and the tax rates of our competitors, were all very different then. Today we are – like it or (more likely) not – highly dependent on the highest earning 1% who pay around 27% of all our income tax receipts. And the evidence clearly shows there to be a point where increasing the rate of tax brings about only small increases in receipts – and beyond which increasing it further can lead to reductions. It is this relationship that the Laffer curve describes. Even around the 50% mark policy makers begin to “stroll,” as Robert Chote, Chairman of the Office for Budget Responsibility, memorably described it “across the summit of the Laffer curve.”

What is true for individuals is also true for business. Despite the Coalition’s promise to rebalance the economy, we remain heavily reliant on financial services. Yet, for understandable political reasons, banks have been hit time and again. And there are serious murmurings of discontent, even amongst the most socially responsible of bankers.

It is this debate that ought to be centre stage; it is this debate that matters. There is meaningful difference between the parties: Labour is promising to restore the top or “additional” rate of tax to 50%. The Conservatives have refused to confirm they will not cut it to 40%. What the extra yield might be today – because things have moved on from when Treasury last did the exercise – from a higher rate of tax is a point I mean to cover in a later blog post. But what I do know is that, if the right persists in inconsistent and alarmist ‘Chicken Licken’ry, it will further remove itself from a position of influence.

That would be a bad thing. We need an intellectual compelling counter-argument to the view, slowly taking hold and fostered by ongoing increases in the personal allowance, that taxes are things other people can be relied upon to pay.

There are those on the right who see taxes as a confiscation of personal wealth under compulsion of law by a spendthrift state. The left’s equivalent would soak high earners until the pips squeak for the sin of financial success.  They deserve each other, these ideologues.

But for the rest of us, the only question we should be asking is, how much tax is too much?

Jolyon Maugham QC advised the Labour Party on its reform to the non-dom rules.

Below is Labour’s Press Release on tackling tax avoidance and evasion. These things are not typically made available to the public – so I have taken the liberty of publishing it below.

Some brief thoughts on the announcement follow:

(1) Labour will tackle the beneficial taxation of private equity carried interests. Whilst this tax break is, perhaps, uglier even than the non-dom remittance basis, these individuals are highly mobile and the behavioural effects of removing this tax break cannot sensibly be considered in isolation from the increase in the top rate of tax, the mansion tax, and removal of the remittance basis of taxation for non-doms

(2) having pointed out that the Tories’ projected £5bn yield from tackling tax avoidance is meaningless if unspecified (actually I was a little blunter) I cannot fail to make that point in this context. That having been said, the carried interest changes are newly announced today. And there are a series of previously announced measures all supporting that £7.5bn target (including the non-doms measure which I continue to think will provide a substantial yield). Perhaps critically, unlike the Tories’ £5bn, Labour’s £7.5bn is not being committed in support of future spending plans: it is a mere target.

Do I think this target is achievable? See (4) below.

(3) measures to improve the accountability of HMRC are long overdue. Indeed, these proposals do not, I would say, go nearly far enough. It is to be hoped that Labour is merely signalling what ground it expects its previously announced enquiry into HMRC practices to cover

(4) the success of measures to tackle the informal economy will be central to Labour’s ability to meet this ambitious target. Both parties know this area to be of critical importance – both the former Financial Secretary to the Treasury David Gauke and the current Shadow Chancellor have tried to raise the profile of this issue. But as to what those measures should look like: neither side has yet advanced workable proposals

(5) It is neither fair – nor accurate – to describe the Tories as having presided over an increase in the tax gap.

​​Labour announces Ten Point Plan to Tackle Tax Avoidance and £7.5 billion target to reduce avoidance and evasion

Labour’s Shadow Chancellor is today setting a tough new target for the Treasury and HMRC to cut tax avoidance and evasion by at least £7.5 billion a year in the next Parliament and a ten point plan to help deliver it.

Ed Balls will give the Treasury and HMRC warning that on the first day of a Labour government there must be:

• A draft Finance Bill which is an Anti-Tax Avoidance Bill and delivers the legislation needed for the measures set out in Labour’s ten point plan to tackle tax avoidance and evasion;
• A report from HMRC on all current measures and processes for tackling tax avoidance and evasion, so that Labour’s review of culture and practices at HMRC can make an immediate start.

He will also ask the Bank of England to focus on risks from the informal economy, including avoidance, evasion and the tax gap, in delivering its financial stability objective.

Labour’s immediate review of culture and practices at HMRC will help deliver this reduction of at least £7.5 billion a year in tax avoidance and evasion in the next Parliament – with the ambitious goal of doing so by the middle of the next Parliament. This will reverse increases in the tax gap under the Tories and get it back on a downwards trajectory.

He will also challenge the Tories to back Labour’s plan, which includes Labour’s pledge to abolish the 200 year old non-dom rules and action to tackle tax avoidance by hedge funds.

Measures in Labour’s plan also include changing the so-called  ‘carried interest’ rules which allow private equity managers to pay lower rates of Capital Gains Tax – instead of income tax – even when they are not investing much of their own money.

Both the Chancellor and Chief Executive of HMRC will also have to present an annual report to Parliament, and give evidence to the Treasury Select Committee, on the government’s progress in tackling tax avoidance and evasion.

Labour’s ten point plan sets out a series of measures it will take in order to help raise billions of pounds a year and protect the nation’s finances.

In addition to abolishing the non-dom rules which Labour has said will be used to help get the deficit down, the concrete tax avoidance measures we have set out – including new measures today and Labour’s changes to pension tax relief for the very highest earners – will mean Labour can fully fund our NHS Time to Care Fund, abolish the bedroom tax and cut tuition fees to £6,000. Additional revenues raised over and above this will be used to help get the deficit down.

Ed Balls, Labour’s Shadow Chancellor, said:

“The Tories have spent the last week explaining why they won’t tackle tax avoidance and defending the non-dom loophole.

“They just don’t understand that when working people are paying more in tax it’s a scandal that some people can get away with not paying their fair share.

“The Tories can claim they’ll raise money from tackling tax avoidance, but the amount of uncollected tax has gone up under this government. And when push comes to shove they refuse to close the loopholes or take the tough action that will make a difference.

“It will take a Labour government to call time on this lax approach and launch an assault on tax avoidance.

“We will set tough targets for HMRC to reduce tax avoidance and evasion by at least £7.5bn a year. Our ten point plan will take the tough action needed to help us get there and we will start on day one of the next Labour government.

“We will close the loopholes the Tories won’t act on, increase transparency, toughen up penalties and abolish the non-dom rules. And our first Budget will make sure that, following an immediate review of HMRC, it has all the powers and resources it needs to come down hard on tax avoidance and evasion.

“Working people who are paying more in tax want everyone to pay their fair share. And there shouldn’t be one rule for a few and another rule for everybody else. The Tories should back Labour’s plan and stop defending the indefensible.”

Ends
 
Editor’s notes

Labour’s Ten Point Plan to Tackle Tax Avoidance:

1. Abolish the non-dom rules so that wealthy people are not able to use loopholes to avoid paying tax like the rest of us, while introducing a temporary residence rule for those genuinely in the UK for a short period of time, such as university students.
2. Re-write the rules which allow private equity managers to get away with paying less tax than ordinary working people even when they have not been investing their own money
3. Close loopholes used by hedge funds to avoid stamp duty
4. Force the UK’s Overseas Territories and Crown Dependencies to produce publicly available registries of beneficial ownership
5. Increase penalties for tax avoidance including new penalties for those who are caught by the General Anti-Abuse Rule
6. Close loopholes like the Eurobonds loophole which allow some large companies to move profits out of the UK and avoid Corporation Tax
7. Scrap the “Shares for Rights” scheme, which the OBR has warned could enable avoidance and cost £1bn
8. Tackle disguised self-employment by introducing strict deeming criteria
9. Tackle the use of dormant companies to avoid tax by requiring them to report more frequently
10. Make country-by-country reporting information publicly available

Labour’s £7.5bn target for cutting tax avoidance and evasion

Under the last Labour government the tax gap was falling by £1.5bn a year on average between 2005-06 and 2009-10. But under the Tories it has been increasing by an average of £1bn a year.

The next Labour government will set a target to not only get back to avoidance and evasion falling at £1.5bn a year, but reverse the increases under the Tories as well.

That will mean cutting tax avoidance and evasion by £7.5bn a year – with the ambitious goal of doing so by the middle of the next Parliament.

If you read the papers, you might have formed the view that Labour’s proposed replacement of the non-dom regime will lead to the sky falling in. Here are some of the good bits:

The Telegraph:

The Evening Standard:

Here’s a lawyer who acts for non-doms:

Here’s the Daily Mail:

Here’s a guy who acts for wealthy shipowners:

But is the sky really falling in? Or is the media inadvertently playing Chicken Little?

Back in 2008 Labour introduced the non-domy levy (subsequently increased, twice, during the course of this Parliament). Here’s what was said then about the effects of introducing the levy. (Warning: some of it may feel a little, well, familiar).

The Daily Mail:

The British Banking Association:

The fetchingly salmon Financial Times:

The Telegraph:

A large firm of accountants:

The Times:

I could go on. And on. But you have the point. They say this every time. And then they stay. They stay because the people who were motivated by tax never came to London in the first place – they want to “Switzerland, Monaco and a host of other countries.” They came to London because it’s a very nice place to live. If you’re wealthy. And that won’t change.

All of the broadcast and print media’s fact-checking teams had been very busy. Who could blame them for not asking the obvious question, whether we’ve heard any of this before? Certainly not me.

So. Don’t believe the hype.

Oh, and to save you the trouble, here’s Chuck D

In a series of blog posts pre-dating that FT editorial, I argued that the non-dom rule is an unsightly bribe to those with some foreign connection to come to or remain in the UK; that the structure of the remittance basis (which taxes income and capital gains brought into the UK but not those left outside) discourages the very thing (inward investment) that we should want to encourage; that establishing someone’s non-domicile status is incredibly difficult – a fact which may be responsible for the fact that in the last decade HMRC have only taken one domicile case to the Tribunal; and I also asked why, if the introduction of the remittance basis charge didn’t reduce the number of registered non-doms, it should be thought that abolition of the remittance basis should cause the sky to fall in.

I also advanced a policy suggestion:

But what I want to look at here is the prospective yield from certain changes to the non-dom rule proposed today by the Labour Party.

***

What proponents of the remittance basis of taxation for non-doms say is this: yes, we know it’s unfair that those with some happenstance foreign connection should pay less UK income tax and capital gains tax than those who are UK resident through and through. But unless we lower their tax bills, they’ll leave and take such tax as they pay with them.

You need to start with that statement because, embedded within it, is a rather startling argument: that it doesn’t matter if a tax result is unfair, so long as it increases yield. This is the logic of a fiscal dutch auction: that we should offer foreigners a lower and lower income tax bill until they agree to move (or stay) here. Whilst this approach will have enthusiastic supporters – not least as Charles Walker MP (Con) has pointed out, high end estate agents – it’s not a proposition many of us would find palatable. Not even Deloitte who noted, rather drily, and of the increase to the remittance basis charge in the 2014 Autumn Statement:

It’s important not to forget this. Proposals to reform non-dom status must, of course, have regard to yield – but not only to yield. Fairness too.

Everyone will place their own subjective value on fairness in the tax system – I’ll leave that to the politicians and the voters. But what I want to do is examine the available data on yield.

***

Calculating the yield to Treasury from changes to the tax regime is typically a two stage process. Stage one is to calculate the theoretical yield: if things remained the same, what would the extra measure raise (or cost)? Stage two is then to factor in the ‘behavioural effects’: i.e. how people will adjust their behaviour in light of the changed regime.

To take an example, if you reduced the duty on fuel by 30% you wouldn’t expect this to cost you 30% of your present rake. Fuel consumption would go up and so, although you’d now only get 70%, it would be 70% of a larger pot. The same is true of tax rises: it’s behavioural effects that enable Labour to say that cutting the top rate of income tax from 50% to 45% was a £3bn tax cut for the highest earners; and the Tories to say ‘but it only cost Treasury £100m’. People change their behaviour when circumstances change.

On the cut to the additional rate of tax, stage one was unproblematic. We knew how many people were liable to the “additional rate” of income tax and what they earned. What we were less clear on was stage two – how they would change their behaviour in light of increasing it to 50% – a question which formed the subject of this lengthy Treasury report.

But when you calculate the yield from changes to non-dom status you have a further difficulty. It’s not merely that you don’t know what the behavioural effects will be. It’s also that, as I observed here, we don’t collect data on the income and capital gains enjoyed by non-doms and not remitted to the UK. So you have a stage one difficulty as well. These difficulties led even the IFS to observe back in 2007 (about the effects of rival political proposals for the remittance basis charge) that no-one knows what the yield might be.

There are, however, a few propositions from which one might, cautiously, proceed.

(1) As to the size of the theoretical yield, the only data we have on the amount of unremitted gains shows average foreign earnings not remitted of £50,000. This average is drawn from a data set of 17,000 who voluntarily chose to disclose this information. However, this average is likely considerably to understate the theoretical yield. As it seems to me, the higher your unremitted gains the lower the prospect that you will voluntarily disclose them to HMRC – because disclosing high unremitted income or gains would invite close scrutiny of your entitlement to the remittance basis. Moreover, this figure looks to be just unremitted income – ignoring unremitted capital gains.

• If you assume 50,000 people claiming the remittance basis each with £50,000 of unremitted income – and conservatively no gains – the theoretical yield would be 50,000 x £50,000 x 47% (including 2% Class 4 NICS) = £1.175bn per annum.
• If, for the sake of argument, you assume 17,000 with an average of £50,000, 17,000 with an average of £100,000 and 16,000 with an average of £250,000 and again ignored capital gains the theoretical yield would be £3.1bn.
• If you take the figures at the second bullet point above and also assumed average capital gains of 50% of income taxed at 28% the theoretical yield would be £4bn per annum.

(2) As to behavioural effects, we’ve introduced a number of measures of late that have rendered the UK less tax-attractive for non-doms: not merely the remittance basis charge (and increases to it) but also the annual tax on enveloped dwellings, a series of measures widening the scope of what constitutes a remittance and the forfeiting of the personal allowance from income tax and annual exempt amount from capital gains tax. I’ve looked at some historical data here but as I read it, it shows a gently rising trend of non-doms in the UK. Whilst these measures might (on one view) have effected a short term interruption to the trend, the trend remains in place. Contrary to the warnings of many, and as Charles Walker rightly predicted, the changes have not caused the sky to fall in.

Looking forward, there is good reason to believe the trend might even strengthen. For example, as the Telegraph has reported, there has been a 69% increase in the number of applications for investor visas in the UK from Russians.

This – it seems to me – provides powerful support for the proposition that one should not over-estimate behavioural effects in calculating the likely yield.

(3) Further support for not overstating behavioural effects comes from looking at the yield calculations for earlier restrictions to the remittance basis charge.

The introduction of the remittance basis charge in 2008 generated a yield in the hundreds of millions of pounds (figures of £800m and £500m were given – see page 164 – but with only limited detail). The Budget 2011 increase in the size of the charge generated a median yield of £70m (see page 36 which went on to observe, inaccurately as it transpired: “There will be no other substantive changes to these rules for the remainder of this Parliament”). And the increase in the remittance basis charge in the Autumn Statement 2014 generated a steady state yield of £90m (made up of a £120m theoretical yield reduced by 25% for behavioural effects – see page 41).

If you have three data points, each demonstrating a positive yield from a restriction to the non-dom basis, it becomes quite difficult to contend that the behavioural consequences of a fourth such restriction will be such as to swamp the theoretical yield.

(4) If you proceed from that relatively modest evidential base and assume a 25% reduction due to behavioural effects (as Treasury did in 2014), then the annual yield numbers at (2) above become £880m per annum; £2.325bn per annum; and £3bn per annum. Other reductions for different behavioural effects can be relatively easily calculated.

***

Ultimately – and again leaving aside questions of basic tax fairness – a good change to the remittance basis is one which constrains the likelihood of huge behavioural effects. To analyse the likelihood of big behavioural effects from any particular measure what, it seems to me, you need to do is look at two groups of people: prospective immigrants to the UK and prospective emigrees from the UK.

As to prospective immigrants, what’s attractive about Labour’s proposal is that it gives people a decent period in the UK to enjoy the remittance basis. Long enough to put down roots by buying property, forming social networks, putting their children into local schools, and so on, such that they might be disinclined to leave when the incentive lapses.

And as to prospective emigrees, the data analysed above suggests that, whilst some will leave, one shouldn’t expect too many to do so. This cautionary tale – of the hugely deleterious effects on Guy Hands of his ceasing to be UK resident – might explain why.

***

If I proceed from the above and stick a finger in the air – an exercise that you’ll have to take it from me is not so dissimilar to that which Treasury does when it forecasts the effects of tax measures – where do I get to in terms of yield? I’m not an economist – and the data is poor. But my instinct is that the stage one theoretical yield figures will tend towards the top end – towards the £4bn end – of the spectrum. But I also think 25% is rather low as a behavioural effect: 50% or even more might well be more realistic, depending on the detail of Labour’s measures. But that would still leave a yield well north of £1bn.

Today the so-called Google Tax becomes law. It is, in cash terms, a bauble. In steady state, it will yield £350m a year; far less than half the cost of the reforms to stamp duty also introduced in last December’s Autumn Statement.

Yet its political importance is huge. Despite the Coalition’s radical programme to combat avoidance – which has changed the landscape beyond recognition – the Conservatives have remained vulnerable to the allegation that they are the friends of tax avoiders.

The Google Tax was their response.

Business was furious. The measure tore up the Coalition’s Corporate Tax Roadmap. The tax profession was no more enthusiastic. The ACCA, ICAEW, CIOT and others lined up to slam it: radical, introduced without proper consultation and pre-empting international measures to tackle avoidance. Nevertheless, and unopposed by Labour, it became law.

How did we get here? And where do we now go?

Business leaders recognise that the world has changed. Survey after survey places tax first amongst CSR concerns. Tax structured transactions are in near mortal decline. And litigating even vanilla transactions is perceived to carry prohibitive reputational risks. Yet a route to take matters forward remains elusive.

But here’s a prescription. Business needs to take the initiative. The defensive formulation – “we comply with all relevant tax laws” – will no longer do for a public dyspeptic on a diet of double Irish and Dutch sandwiches.

Boards need to take ownership of the tax issue. They should publish, with their annual reports, statements of tax policy. What strategy should the tax department pursue? What is the target rate of tax on corporate gains? Will the Group transact purely for tax advantages?

For meaningful buy in, statements should be developed internally. And, to remain relevant, there should be annual compliance audits. For laggards, a new Government will want to consider changes to the Companies Act.

Business has been on this journey before. The transparency and management of the supply chain is critical to such B2C businesses as Apple and Nike. Environmental concerns influence investment behaviour beyond pure ethical plays. Why should tax be any different?

It is, of course, a particularly significant cost. Perhaps it is this that has caused Boards to be slow to engage. But, although we have yet to experience a fiscal Deepwater Horizon, the EU State Aid probe should shake from complacency those businesses benefitting from sweetheart deals in Luxembourg, Ireland or the Netherlands.

Tax transparency, of course, brings risks and rewards. XCo, which chases post-tax gains, will be closely scrutinised by the revenue authorities. YCo, which adopts a principles based approach, may suffer a higher effective tax rate. But openness will draw the sting of the charge – beloved of campaigners and the media – of hypocrisy. And through the mechanic of statements of tax policy Boards will be able to set the strategic direction of this crucial, but ill-understood, function.

The alternative, of remaining on the side-lines, leaves a gap that politicians have no choice but to occupy. In the final analysis, it is the work of our own stayed hand we curse. To regain the moral authority to participate in the debate around what tax should look like, business must throw open the doors.

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

You might have wondered why this is.

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

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

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

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

But I digress.

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

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

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

Nope.

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

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

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

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

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

The Sunday Times today reported:

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

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

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

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

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

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

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

I’ve been pondering on this a lot recently.

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

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

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

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

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

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

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

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

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

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