UKIP has today floated the idea of increasing VAT on luxury goods to 25%.

But in an amusing – if unsurprising – irony, UKIP doesn’t appear to have bothered to read Council Directive (2006/79/EC) which provides (see Articles 96 and 98) that Member States may only levy a standard rate of VAT and (in certain prescribed circumstances) lower rates. It’s simply not open to UKIP to impose a higher rate of VAT. Hungary has tried this in the past – but failed. “Investigating the feasibility” seems to mean, in UKIP speak, something less than a quick google search.

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Last night I issued a heartfelt plea for the Labour Party to bring more tax expertise into the party. Today I can demonstrate why.

In his conference speech yesterday Ed Miliband promised extra spending on the NHS which would be funded in part from an extra £1bn yield from tax avoidance. Today some detail of where that £1bn would come from was given. £650m of that sum is to come, according to briefings and a Press Release, from “prevent[ing] so-called ‘Umbrella Companies’ being used to avoid tax and National Insurance by exploiting expenses rules.”

The way in which so-called umbrella companies “exploit” expenses rules is by seeking dispensations under section 65 of the Income Tax (Earnings and Pensions) Act 2003 from subjecting payments on account of expenses to tax. But they only get dispensations where HMRC agree the expenses are not subject to tax. In other words, where there is no exploitation of the expenses rules.

More likely, the £650m is the projected yield on a measure which has the effect of deeming many or most self employed workers in the construction industry to be employees. As I explain here, the effective rate of taxes on income for self-employed workers is materially lower than those for employed workers. So deeming some of those self-employed workers to be employees for tax purposes would produce a yield.

The measure referred to above was originally mooted by the last Labour Government in 2009. The cost to the exchequer in loss of tax and NICs from those workers (characterised as “falsely self-employed”) was estimated in 2010 to be £350m. But the measure fell away on the change in Government.

Then, in the Finance Act 2014, the present Government introduced measures to tackle false self employment in the construction industry. Those measures had a projected yield of some £520m in 2014/15.

So from a pool of expected cost to the fisc in 2010 of £350m pa the Conservatives propose drawing a projected yield of £520m pa (a figure I said at the time I did not believe would be achieved) and now Labour proposes drawing from that same pool a FURTHER £650m pa: a total of £1.17bn pa. Of course, that pool might have grown – but then again one never yields all of the ‘pool’.

You do the math.

Postscript. The Financial Secretary to the Treasury, commenting on this blog, has pointed out, correctly, here that the Conservatives were dipping into a pool bigger than the construction industry. In line with my policy of correcting my errors, I should state that I had forgotten that fact. But it is worth considering the consequences.

The Summary of Impacts for the Finance Act 2014 measures states that the impact is “expected to be focused on the construction sector” and then goes on to give a figure of 200,000 of 250,000 workers expected to be caught. One might, assuming equal distribution of impacts in the construction and non-construction sectors, reduce the Conservative ‘dip’ from the £350m pool by 20% to £416m. That would mean Labour was assuming an aggregate dip from a £350m pool of £1.066b rather than £1.17b. In other words, the adjustment makes Labour’s projected dip slightly less unrealistic.

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Whilst my own writings on this blog are – at least so far as I can make them – politically neutral, I make no secret of the fact that I am a Labour Party supporter. In light of Ed Miliband’s pledge to raise £1bn from tax avoidance, I thought I would republish (following) an article I wrote for Progress Magazine in May of this year. I haven’t touched it, but it might be worth me adding a couple of further thoughts.

On personal tax avoidance, in my opinion, the heavy lifting is done. Like it or not, this is credit in good part to the technical capacity brought to the role by an excellent Financial Secretary to the Treasury, David Gauke. I do not see scope for significant further receipts. On corporate tax avoidance, the ability of any Government to act is a function in large part of matters outside its control. We must await development and implementation of the OECD’s BEPS project. The battleground, now, is moving to evasion. On this front, I think the Conservatives’ record is less compelling. Tackling evasion is inevitably manpower heavy and I cannot see how HMRC’s capacity to close the tax gap in that field can have survived the significant cuts in HMRC staffing levels.

Labour needs to get technical on tax

You are the finance director of a large enterprise. Revenues are in the tens of billions, so obviously you pay attention to your costs. But you are also keenly interested in maximising your revenues. Right? I ask because we in Labour are not – hardly at all – interested in our revenues. As a party we debate endlessly how to spend, understandably, because spending is the end, tax the mere means. But you would still expect us to have some interest in maximising the means the better to achieve our ends.

Where we do talk about tax, the discussion concerns matters of ideological interest only. Should we raise the top rate of income tax? Your finance director cares not. She knows it will not make any material difference to her bottom line. Do it or don’t do it. It makes no difference to her. On the mechanics of how to tax, and on the detail of how to improve collection, we are almost completely silent.

The other parties talk about tax; they are interested in their revenues, the Tories especially. Ideologically, of course, they levy less, but they are skilled at maximising the rake from what they do levy. The general anti-avoidance rule, accelerated payment notices, strict criminal liability for undisclosed monies held offshore, recovery of unpaid taxes direct from bank accounts – all of these are genuinely radical measures introduced by the government and ones that Labour could have introduced, but did not.

There are a number of competing accounts of why this is so. The Tories are elected to government in times of austerity. And it is in times of austerity – when the state needs money most – that the political focus is on tax. In times of boom all anyone is interested in is how to spend the money. Another explanation – ‘stealth taxes’ being the latest of many examples – is that Labour focuses on increasing the tax base rather than reducing avoidance. Because, ideologically, we are the party that believes in levying tax we can let the collection take care of itself.

Although there is, no doubt, truth in these accounts, we cannot ignore a third. Culturally, we are not the party of money. We did not grow up with family wealth to shepherd. Outwitting the taxman is not conversation at our breakfast tables. Moreover, our parliamentarians, by and large, did not work as tax advisers before becoming members of parliament. A talented party member recently said to me that it is difficult to think of an occupation less suited than his to seeking nomination as an MP. He is a partner in the tax department of a City law firm.

The Tory selectorate is less squeamish. Tax advisers and accountants routinely become Treasury ministers. They bring with them a detailed knowledge of the craft of taxation, and Conservative tax policy is immeasurably the stronger for it.

We, on the other hand, make play with moral outrage. We give ourselves over to the cheerleaders at the public accounts committee – full of sound and fury but signifying nothing – without actually getting anything done. Our policy teams are overly reliant on briefings from the trade unions who, like everyone else, have axes to grind. But, more importantly, they do not have access to the right minds, to the leading technicians. It is Cary Grant they asked to catch a thief, not the constabulary.

To improve our effectiveness in government we must focus on tax as a means to an end rather than an end unto itself: quantifying the yield from raising the top rate of income tax should be the question on everyone’s lips, not the rhetorical flourish of whether the rich should pay their share. The fiscal carpet-bombing of increasing the base must be jettisoned for the economically efficient precision strikes of taxes which are closely drawn and effectively policed. We need unembarrassedly to welcome tax technocrats into our midst. With moral fury alone we cannot get the job done.

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It is a truth much delivered to clients – by me and by others at the tax bar – that their prospects of succeeding in tax litigation are influenced by what are politely styled “environmental factors”. One of these, if you happen to be litigating an avoidance transaction, is that tax avoidance is much in the public eye. (And not in a way that is helpful to those badged ‘avoiders’.) Another is that pressures on the public finances are everywhere to be seen such that shoulders are to be put to wheels.

It sometimes comes as a shock to the public that judges are human and their legal assessment of a case is not wholly divorced from their feel for it. That’s neither wholly a good thing nor wholly bad. How strongly you feel it’s a good thing that judges overlay a sense of ‘justice’ onto their analysis of the ‘law’ probably depends on the confidence you have in the judges’ sense of justice. It’s for this reason that our appalling – there’s no putting lipstick on this pig – judicial diversity statistics ought to be a matter of much greater public concern. My own view – that the majority of judges are intellectually honest, decent and driven by entirely appropriate notions of liberality and fairness – is bound to reflect that they see through similar eyes to mine. In tax avoidance cases, on the other hand, many might consider that judges should not be slow to plug their thumb into a dyke.

But it’s also true that the overlay of fairness should not jeopardise legal certainty. The validity of the law is a function of its predictably. And the practical applications of this aphorism can be seen even in a tax context: it is a truth widely held that unpredictable tax consequences in the UK jeopardise the inclination of foreign and UK investors to invest.

It was these factors that led me to welcome the introduction of the General Anti Abuse Rule. It gave judges hearing avoidance cases – who I had seen as occasionally articulating their instinct to fairness against the grain of the legislation – a legal framework within which to articulate it. And in so doing it made the operation of the law more certain: how the GAAR will operate is more predictable than the question what will be an unknown judge’s instinctive response to a set of facts.

[Lengthy preamble ends.]

Yesterday morning, I read yet another (to me) surprising decision of the Upper Tribunal in HMRC’s favour. And on a whim I spent some time counting decisions of the Upper Tribunal in substantive (i.e. not case management) statutory appeals from the Tax Chamber of the First-tier Tribunal.

Depending on which ones you count (and I tried to be consistent), there have, in 2014 so far, been 38 such cases. HMRC have won 31 (a win rate of 82%) and the taxpayer has won 7 (a win rate of 18%). On the face of it, that’s rather odd. It’s worth remembering that appeals to the Upper Tribunal have all passed a ‘permission’ threshold to strip out hopeless cases.

I then examined an obvious candidate explanation. The Appellant typically has the more difficult job: perhaps it is that the taxpayer is more often the Appellant? But if you look at the win ratio of Appellants, the taxpayer fought 23 and won 2 (i.e. a win rate of 9%). HMRC fought 15 and won 9 (i.e. a win rate of 60%). So my candidate explanation is helpful but not sufficient.

Another candidate is that HMRC is just much better at picking which cases to appeal. Certainly HMRC have a published strategy indicating that they should generally only pursue litigation where they consider it has a better than 50/50 prospect of succeeding. All things being equal, the taxpayer, on the other hand, will typically ask the question whether the costs of pursuing the litigation are higher or lower than its expected gain. If it costs 1 to pursue a 10% chance of gaining 100, the (deep-pocketed) taxpayer will generally litigate. On the other hand, it’s worth bearing in mind that ‘environmental factors’ are presently so compelling that sometimes even taxpayers whose behaviour is perfectly proper and who have strong prospects of success choose not to challenge poor HMRC assessments of liability because of the commercial risk that their behaviour will be spun as tax-bad to sell newspapers.

For what it’s worth, my instinct is that this candidate takes us closer to – but not all the way – home.

Of course, my data set must be approached with caution: it is small, and is chosen at random (2014 until today). And there are bound to be some counting discrepancies. But to my mind, the numbers are so stark that this is an area meriting further examination. Will the numbers look different once GAAR cases start coming before the Upper Tribunal? What would a longitudinal study of this data setreveal about the final decision post any further appeals? And are there any other explanations I have missed?

He’s not especially active on twitter, Geoffrey Cox QC, but with pleasing irony his latest tweet champions the new Theatre Tax Credit.

Clicking on the link reveals that:

The new scheme provides support for theatres across the country, bringing productions to new audiences as well as promoting economic growth and widening opportunities for people to participate in the arts.

And what’s not to like about that?

I ask because Gordon Brown, in his 1997 Budget speech, championed a very similar sort of scheme – only for films rather than theatre. He said this:

Britain is increasingly leading the world in those industries which most obviously
depend on the skills and talents of their workers – communications, design,
architecture, fashion, music and film. Our national endowment fund for science
technology and the arts will offer talented young artists and scientists, the finance to
turn British ideas into successful business ventures. But despite the British film
industry’s outstanding record of creative and critical success, too many British films
that could be made in Britain are being made abroad, or not at all. The talents of British film makers can and should, wherever possible, be employed to the benefit of the British economy.

That announcement was the spur for the creation of Ingenious Media (founded in 1998); which put together Phoenix Film Partners LLP; in which one Geoffrey Cox QC, MP invested. According to today’s Mirror.

But let me return to my question.

Measures – including tax measures – that help us reap the cultural and economic benefits of a vibrant arts sector, these sound like good things. But what of those who are encouraged by the availability of tax reliefs to provide the capital for the arts sector to flourish? Those who would not invest without the tax incentive the relief provides: good or bad?

The answer is, of course, that it all depends. The story of how the 1997 film tax reliefs spawned a huge range of arrangements – some absolutely what Gordon Brown had intended, some quite clearly not, and a large number in between – I have told elsewhere on this blog. But what cannot sensibly be argued – I almost said ‘cannot be argued’ but it is being argued and every day – is that the mere fact that someone has been induced by a tax relief to provide funding for the arts renders them amenable of criticism.

So, what of Geoffrey Cox QC MP?

What we learned from today’s Mirror piece is this: that he has invested in Phoenix; that Phoenix is being enquired into by HMRC; and that Accelerated Payment Notices may be issued to Phoenix members.

Investment in the arts was what the reliefs sought to achieve and every single arrangement accessing the reliefs will have been the subject of HMRC enquiry. Accelerated Payment Notices, I have talked about here. Colloquially they signal that arrangements might be abusive but they certainly don’t decide that they are.

Now. I don’t know what arrangements Phoenix entered into. I don’t know where on the spectrum between entirely pro-purposive and clearly abusive they fall. And nor, it would seem, does the Mirror. Tax avoidance is clearly a social ill and I have written widely in support of measures to tackle it. But by going too big too early we’re in clear danger of rushing to ill-judgement.

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Boldly they strode, the British Bankers’ Association, into the hotly contested debate about proposals to enable HMRC to recover undisputed tax debts directly from non-payers’ bank accounts.

And boldly they spoke too:

It is clear that HMRC’s performance cannot yet be considered as sufficiently competent to wield an unchecked power this strong.

And:

The lack of checks and balances could create problems for citizens.

And:

We are not persuaded that the rights… of the vulnerable… are sufficiently protected.

Admirable stuff, you may think. And, should anyone be unkind enough to suggest a touch of ‘pot’ and ‘kettle’ about Banks criticising HMRC’s competence, well, that would merely highlight the BBA’s bravery in taking this principled stance in the public interest.

But pause for a moment. Why might the BBA speak out publicly on such a matter: its ‘News’ page is not heavy with statements made in the public interest?

Does the BBA’s letter tell us? It does not.

But HM Treasury’s Consultation Document might. Buried away on page 19, in the “Assessment of Impacts” one finds this statement:

Deposit-takers will be required to provide information to HMRC and deduct and transfer sums from customers’ accounts to HMRC, which may carry an associated cost.

In other words, the cost of operating the proposals will fall, in good part, upon the banks.

Now, the proposals face remarkably widespread and heterodox opposition: Liberty, most of the Professional Institutes, the Treasury Select Committee, and almost all of the tax profession have come out against. And now the banks too. The proposals are – one or two Canutian souls excepted – universally disliked. So no real complaint can be made about the substance of the banks’ criticism which is carefully modulated and reflects concerns expressed by others.

But for the banks to speak out, purportedly in the public interest, but keeping quiet about their own?

It doesn’t leave a great taste.

Since getting married I say this less and less, but I know I’ll regret this in the morning. Nevertheless, here’s my exchange with a PhD student who wrote to me on the Direct Recovery of Debts. I’ve called him Adrian.

—–Original Message—–
From: [Adrian]
Sent: 11 July 2014 08:51
To: Jolyon Maugham
Subject: Some questions about Wednesday evening

Dear Jolyon,

I attended your discussion at the RSA on Wednesday evening. I am interested in the position you put forward as I am currently working on a PhD in Tax Policy and Jurisprudence at [DELETED].

If I understood your point correctly, you had identified a problem, namely a cost to HMRC in the recovery of “undisputed” debts. I use quotation marks as there appears to be some dispute over whether, in fact those debts are indeed disputed. Your put to the audience several times that if not direct access to bank accounts then what alternative?

In addition, you were of the view that the real question was not whether the administration ought to be able to take direct action against individuals in respect to the seizing of assets without necessary recourse to the courts, but rather, are there sufficient safeguards. You also suggested that the condoc implied some sort of court procedure in granting consent for this process.

Dealing with each of these points in turn.

1. Very often in practice, it appears that there are many instances of HMRC acting in error. The court procedure would, if applied correctly, eliminate or at least mitigate errors of HMRC prior to any attempt to seize assets. Whilst there can be little doubt that this procedure is more expensive to HMRC, isn’t the point of the court procedure to protect individuals from HMRC error making?

If it turns out that HMRC are correct in their assessment, those costs are recoverable through the county court procedure and therefore the costs are recovered or mitigated. I don’t believe you answered Keith Gordon’s assertion that it is only when HMRC make errors that the costs consequences are incurred, but if HMRC incur costs in those instances, it is correct that the taxpayer is protected.

2. Safeguards within the administration of government can only really go so far. They are applied by the administration themselves and therefore subject to a degree of assessment which, by its very nature, is coloured by the relationship between the assessor and their paymasters. My specific research looks at the GAAR, and in the case of the Panel, there are some real questions over the degree of independence given the direct recruitment of those individuals by HMRC itself.

Isn’t it the case that our legal system, providing an independent forum for the resolution of disputes between individuals and government provides the best possible safeguard against error or bias judgement? I wondered why you believed that an individual or group of individuals whose livelihoods or recruitment depended on one side of the dispute could possibly provide the same sort of protection than a court?

3. My final point relates to the cost or efficiency of solving problems.
There can be little doubt that direct access to individuals bank accounts would invariable reduce the perceived “gap” between the amounts of money HMRC believe they are owed and the sums of money they are able to recover. It does seem, however, that there are many ways in which the “problem” can be resolved but all of them must operate to preserve basic rights and protect the system of law.

The real point of the evening was to assess whether HMRC were going too far, not whether there was a problem – which it seems to me was widely acknowledged. There are many problems in society that could be addressed by a more interventionist government taking more aggressive steps to eliminate its perceived ills for society. We could, for example execute criminals because prison numbers are too high, we could engage in euthanasia because the elderly are expensive and a drain on NHS resources. Isn’t the whole point of discussions such as Wednesday to debate the holding back gray men in suits from exercising too much power, using the apparatus of the state, threatening people with seizure of property or imprisonment?

I am seriously concerned that the powers currently being proposed for HMRC, in addition to the ones they already have will erode basic freedoms within our country. I don’t believe that, for example the GAAR, permits anything other than a discretion for the administration to ignore Parliament – albeit they would need to convince a court of such a course of action (probably the reason why there are no cases at the moment).

I wondered how much faith you really had in the arguments you were putting forward when considering all that stands between us and creeping totalitarianism is the rule of law and a legal system that has until now been intolerant to demands from increasing discretionary power?

Best,

[Adrian]

—–Original Message—–
From: Jolyon Maugham
Sent: 11 July 2014 09:41
To: [Adrian]
Subject: RE: Some questions about Wednesday evening

Hi [Adrian],

It’s absolutely my view that DRD is – with one or two modest adjustments to safeguards – a policy that we will look back on a decade hence with a degree of bafflement at the views many of us held about it on its proposal. I don’t accept much of your characterisation of DRD or how it operates but I guess there’s a prior difference between us. You seem to see the world in terms of absolutes and I, absolutely, see it in terms of policy choices.

I am not quite sure what you are suggesting about my views when you talk of executing prisoners to ease overcrowding or killing the elderly to ease pressure on the NHS. But to close your eyes to the effects on the NHS of narrowing the £4.4bn tax gap (of monies lost to the fisc through non-payment of tax debts) seems to me a rather odd way of looking at the world.

Jolyon