Jim Harra, HMRC’s Director General of Business Tax, speaking last night before what one couldn’t politely call a lynch mob, at the joint CIOT/IFS event ‘HMRC Powers – Going too Far?’ observed:

Where we think it’s proper and effective that taxpayer information be disclosed we seek powers to do so.

The language of “proper” and “effective” is, of course, the studied language of a career civil servant. But that fact doesn’t – and nor do I imagine it was intended to – obscure Jim’s recognition of the need for HMRC to engage in a meaningful way with the public it serves.

Organisationally, HMRC get this. Kind of. That Jim Harra was prepared to appear last night to defend the (bafflingly unpopular) Direct Recovery of Debt provisions demonstrates some recognition that Public Engagement is a Thing That Must Be Done. Like Health & Safety. But as to whether it understands what real public engagement looks like on the ground? Of that I am less sure.

We will all remember Dave Hartnett’s disastrous appearances before the Public Accounts Committee and the damaging allegations that he “stonewalled” in such a way as to thwart the PAC’s legitimate interest in whether HMRC was doing ‘sweetheart’ deals with Goldman Sachs. However, perhaps a clearer illustration of its lack of clarity of thought can be found in the Panorama “taxposé” (a word borrowed with thanks from Tim Montgomerie) of Bernie Ecclestone (still available on iPlayer if anyone wants to watch it).

Panorama’s thesis was that Bernie had a $2 billion tax liability – but HMRC had accepted only £10m in settlement of it. And the notion that Bernie had a $2bn liability was a serious one: it was supported by his own evidence, under oath, suggesting he had been told by his advisers that he had such a liability.

So Panorama had serious grounds for suggesting a loss of tax to the public purse of $1.98bn. That’s a big sum: about a quarter of all monies lost to avoidance last year, according to HMRC calculations; more than twice the amount of tax the subject of the Liberty scheme, which has occupied multiple pages of The Times over successive days; more than ten times the projected yield from the direct recovery of debt provisions (the subject of yesterday’s debate); and more than a hundred times the value of the interest wrongly waived by Hartnett in Goldman Sach’s favour. In other words, a sum of a size to be a matter of enormous public interest. And such was reflected in the story being wallpapered across newstands throughout the UK – and the rest of the world.

What did HMRC do in the face of this public interest? Did they act to assuage public fears of an enormous tax loss? They did not. They issued a short press release which stated:

We do not discuss the confidential tax affairs of identifiable individuals or businesses.

The settlement of all disputes is governed by HMRC’s published litigation and settlement strategy, which ensures that we only settle for the tax that is owed and which would otherwise be achieved through litigation.

The way in which HMRC settles and assures tax disputes has been completely overhauled in recent years, making the process more transparent. The effectiveness and propriety of such settlements is overseen by a Tax Assurance Commissioner, who publishes an annual report covering all large settlement cases.

Move on folks, there’s nothing to see here. You can trust us. Even if we have every reason to tell you that.

That HMRC should have done more is beyond serious argument. But could they? Or is there some statutory gag smothering their ability to engage in public debate?

These questions were the subject of a recent Judicial Review action brought by Ingenious Media Holdings and Patrick McKenna against HMRC in respect of an interview given by Mr Hartnett to the journalist who’s been making all the running on tax avoidance matters since, well, forever: Alexi Mostrous of The Times. In that action, the claimants sought to challenge as unlawful disclosures made in an ‘off-the-record’ briefing Mr Hartnett had given to Mr Mostrous in which the former had suggested Mr McKenna was involved in putting together “scams for scumbags”.

The statutory gag in question – one which the claimants were contending Mr Hartnett had unlawfully spat out – is to be found in the Commissioners for Revenue and Customs Act 2005 at section 18 which provides:

(1) Revenue and Customs officials may not disclose information which is held by the Revenue and Customs in connection with a function of the Revenue and Customs.

(2) But subsection (1) does not apply to a disclosure –

(a) which –

(i) is made for the purposes of a function of the Revenue and Customs, and

(ii) does not contravene any restriction imposed by the Commissioners …”

This is not the place for a detailed analysis of what that provision means. All I need do is note the words of Mr Justice Philip Sales. He observed:

In general, it is legitimate for HMRC to seek to maintain good and co-operative relations with the press. The efficient and effective collection of tax which is due is a matter of obvious public interest and concern. Coverage in the press about such matters is vital as a way of informing public debate about them, which is strongly in the public interest in a well-functioning democracy. HMRC have limited resources to devote to the many aspects of their tax collection work, and it is legitimate and appropriate for them to seek to maintain relations with the press and through them with the public to inform public debate about the tax regime and the use of HMRC’s resources. It is also relevant to the exercise of HMRC’s functions to provide proper and accurate information to correct mis-apprehensions or captious criticism regarding the exercise of their functions (such as any misplaced suggestion that they had engaged in unduly lenient “cosy deals” with certain taxpayers), in order to maintain public confidence in the tax system. If such confidence were undermined, the efficient collection of taxes could be jeopardised, as disaffected taxpayers might withhold co-operation from the tax authorities. These considerations provided good objective grounds for Mr Hartnett’s decision to participate in the briefing and to seek to foster the spirit of co-operation with the journalists to which I have referred.

Could this reasoning apply to Bernie’s case? Might HMRC have responded to the suggestion made by Bernie on the day of the Panorama interview that he had not, after all, settled his tax bill? Could HMRC have prayed in aid the damage that would otherwise be done to public confidence in the administration of the tax system and given some assurance that they would look again at any deal done with Bernie?

The answers to these questions, I think, are yes. A court would not have criticised HMRC for engaging in a “proper” and “effective” way with a story run by the nation’s public service broadcaster that raised a serious suspicion of a massive loss of tax.

The rise of tax to the top of the political agenda; the public demand in times of hardship for everyone to pay their share; and the suspicion of two tax systems – one for the wealthy with access to the best technical minds and one for the rest who must with their bills make up the tax underpaid by the wealthy: these things demand a closer and more responsive public engagement from HMRC.

[The following was my contribution to the ICAEW’s Wyman Debate on the Direct Recovery of Debts]

We mostly remember Anthony Burgess for The Clockwork Orange. But his best work of fiction – if you exclude his autobiography – is Earthly Powers. It begins:

“It was the afternoon of my eighty-first birthday, and I was in bed with my catamite when Ali announced that the archbishop had come to see me.”

Several paragraphs later he says:

“I retired twelve years ago from the profession of novelist. Nevertheless you will be constrained to consider… that I have lost none of my old cunning in the contrivance of what is known as an arresting opening.”

I begin with that not because I want to show off my knowledge of English literature (or not just because of that) but because I too have an arresting opening.

It’s this. Most of the arguments against DRD boil down on analysis to: it’s a good policy and it should be easier to collect underpaid tax but HMRC are so hopeless that they can’t be trusted with it.

I propose to begin by looking at the ‘so hopeless’ issue, then at whether it’s a policy worth pursuing, then whether the safeguards are adequate and finally whether there’s some important constitutional issue engaged.

Are HMRC so hopeless that they can’t be trusted with DRD?

Let’s look at the data.

In 2012/13 some 75% of agents (up from 65% three years previously) were overall satisfied with HMRC. For SMEs the equivalent figure is 85% (and has been for the last five years). For individuals and personal tax it’s 75% (and again it’s broadly static).

Given the business HMRC is in – that business is not handing out sweeties to children, it is forcibly extracting money from you (a kind of ‘fiscal dentistry’) – these are pretty respectable numbers.

You might also be interested in what the Ombudsman has to say. I was. She received 1,200 odd complaints about HMRC in 2012. But she only investigated 13 (and upheld 57% of those). Not quite sure what you can read into those figures other than that the Ombudsman doesn’t investigate many complaints.

Even leaving aside the numbers and approaching the matter as one of principle, we don’t say – because social workers sometimes fail to pick up cases of neglect we shouldn’t have social workers. What we do say is – social workers exist for a good reason, they do an awful lot of good, and they sometimes get stuff wrong. So we should put in place safeguards to ensure they get stuff wrong as infrequently as possible.

So I say the starting point is, could these measures do real good? If they can, then the debate should be about the safeguards.

Could these measures do real good?

I begin by pointing out that these measures only concern tax which is due, which is payable and which the taxpayer hasn’t paid. Tax we need to provide public services. Oh, and service our enormous national debt.

Some £48bn a year has to be pursued from can’t pay/won’t pay taxpayers. That’s a huge number: about 10% of all the tax that’s collected.

According to the latest Tax Gap calculations some £4.4bn is lost each year through non-payment. That’s more than the figure for avoidance – which is the only thing we ever talk about. Obviously a lot of that £4.4 is lost through insolvency – but if HMRC were as aggressive as commercial creditors you would expect that £4.4bn figure to reduce significantly.

Of those who don’t pay over 20% have in excess of £50k in their bank accounts. They are likely just taking advantage of the fact that HMRC can (in effect) be played as a cheap and accommodative overdraft facility. They shouldn’t.

The yield from DRD is expected to be £90m a year. And the costs of it are £160k a year – materially, nothing. So it’s an incredibly efficient policy.

It’s also a much more efficient way for taxpayers to pay (compared with the alternative – distraint). Once a taxpayer’s £500 Plasma is seized, transported, valued and auctioned for its second hand price, he’s unlikely to realise much from it. Assuming you’d get £50 for it, after costs you’d need to distraint 1.8m Plasmas a year to generate a yield of £90m). For any economists out there, that’s assuming completely inelastic demand for second hand Plasmas.

Those are the reasons I think it’s a good policy. Now let’s look at the safeguards.
Are the safeguards adequate?

As proposed, you’ve got two sets of safeguards – ‘before the money is taken’ safeguards and ‘after the money is taken’ safeguards.

The main ‘before’ safeguards are these:

• A taxpayer will have been contacted a minimum of four times about his tax debt (HMRC say nine times on average).
• The measures will only be available where in excess of £1,000 of tax is due and unpaid.
• The measures will never be utilised in such a way as to leave a taxpayer will less than £5,000 in his bank accounts.
• Regard will always be had to his regular pattern of expenditure over the previous 12 month period in considering whether taking the money would cause hardship.

The main ‘after’ safeguards are:

• for a period of 14 calendar days from the date of application of the measures, HMRC will not actually be given access to the monies. Instead, during that period, the monies will, in effect, be blocked and the taxpayer (or the other joint account holder) will be able to make representations to the effect that either a transfer of the money to HMRC would cause hardship or the tax debt is not due. If those representations are not accepted, the monies will be transferred to HMRC.
• If the taxpayer still contends that the monies ought not to have been transferred (his representations having been rejected by HMRC) he can judicially review HMRC’s actions; he can appeal to the independent Adjudicator; and, with the support of his MP, he has a further right of ‘appeal’ against the decision of the Adjudicator to the Parliamentary Ombudsman.

They are not perfect but they’re not bad.

Finally, is it a step change?

If, tomorrow, HMRC issue a closure notice amending my tax return I have 30 days within which to pay any excess tax due or to appeal. If I appeal and satisfy HMRC or the Tribunal that I have reasonable grounds for my appeal, I don’t have to pay the tax pending the outcome at first instance. If I don’t appeal, or I don’t satisfy the Tribunal then I have a tax debt to which these measures can apply.

What happens at the moment if I don’t cough up? The Collector can, without court supervision, demand the tax and, if I don’t pay it, can exercise distraint. He can take my Plasma. So I’m afraid I just don’t understand the argument that there is some major constitutional issue at stake.

Jolyon Maugham
2 July 2014

Devereux Chambers

Even the most lazily complacent amongst us; even he who has happily waved through the GAAR and Direct Recovery of Tax Debts and Accelerated Payment Notices; even, well, me, has baulked at Follower Notices. I’ve never understood the intellectual case for them; I’ve always regarded them as unfairly loading the dice in favour of HMRC, and in a way likely to breach the Human Rights Act right to a fair trial.

Albeit belatedly, so, it would seem, does Government. In proposed changes to the Follower Notice provisions announced today, the Government has announced one sensible clarification of the Follower Notices regime and one equally sensible, but rather more fundamental, change to it.

The sensible clarification is this. As I have written elsewhere, the Follower Notices regime contains provision for an appeal to be made against a penalty under a Follower Notice albeit that, rather unsatisfactorily, that appeal will likely be decided at a point in time too late to provide the taxpayer with the clarity he needs. It was (in particular) that feature of the regime that I have focused on as a very real substantive defect. However, there was also a technical defect. Clause 207 Finance Bill 2014-15 (which specifies the appeals jurisdiction) did not state what jurisdiction the Tribunal hearing the appeal against the imposition of a penalty exercised. Did it exercise a supervisory regime? An appellate regime? Did it, in effect, make the decision to issue the Follower Notice anew?

That question has now been answered by new sub-clause 207(2A)(b). The test for the Tribunal is whether “the judicial ruling which is specified in the notice is… one which is relevant to the chosen arrangements.” This looks to me like an appellate regime: the Tribunal will have to ask and answer the question discussed in this blog post. That is a helpful, welcome and unsurprisingly clarification.

The fundamental change comes in new sub-clause 207(2A)(d). You may appeal against a decision that a penalty is payable under a Follower Notice on the grounds that “it was reasonable in all the circumstances” for you, when confronted with a Follower Notice, to decide to fight on. If it was reasonable the Tribunal must cancel the penalty. 

The main constituent elements of the reasonableness test are, it seems to me, two in number. First, do you have reasonable grounds for thinking that if you continue with your substantive appeal you could win? Second, do you have reasonable grounds for thinking that either (a) there is no relevant Judicial ruling or (b) if there is such a ruling, that it will not be decisive of your substantive appeal?

None but the most sophisticated of taxpayers is likely to be able to assess these factors for herself. Indeed, even the most sophisticated taxpayer is likely to want to be able to rely (a polite way of saying ‘transfer responsibility’) on the assessment of her professional advisers. However, where that assessment is carried out, and the conclusion is that it is reasonable to continue with the substantive appeal, the taxpayer should have good ground for resisting a penalty even if she then goes on to lose the substantive appeal.

There is a narrow sense in which this is a positive development. It provides a powerful safeguard against HMRC’s otherwise untrammelled power to put pressure on taxpayers to settle. I do not think it is an exaggeration to say that it restricts the likely ambit of Follower Notices to all but a narrow class of cases. As I put the matter in my blog post of several days ago:

That (narrow) class of case is, in my opinion, that class of tax avoidance scheme where one taxpayer has fought and lost. In those circumstances, others entering into that scheme, if they fail to fold, face the likelihood of FNs, and of courts upholding them.

However, approached from a technocratic perspective, this is bad legislation. It drives taxpayers into the arms of their professional advisers (good for me, less so for them) whilst still leaving them with a degree of doubt about whether they face a penalty. It would, in my view at least, have been better for Government simply to have tightened up and clarified the unsatisfactorily vague definition of “relevant” Judicial rulings.

The title of this blog post is ‘Follower Notices – and a Government that Listens.’ These changes will be welcomed by those facing the prospect of Follower Notices. But is it them to whom Government has listened? No, and nor the technocrats (like me) who will see this as poor legislation. Those to whom Government has listened are its legal advisers. They will have expressed to Government a genuine concern that this regime might not survive judicial review challenge. This change reads to me like an attempt to shore up the defences in anticipation of such a challenge. But shore them up enough? Now there’s a question.

I have written about Accelerated Payment Notices (“APNs”) elsewhere. Here, I propose to examine a feature common to both APNs and Follower Notices (“FNs”) – that of relevant Judicial rulings (“RJRs”) – but with a particular emphasis on the latter. However, I need to begin by setting out how the (complex) Follower Notices regime operates.

The FN regime seeks to put pressure on prospective appellants in tax cases to ditch their appeals by exposing them to the threat of a 50% tax geared penalty (i.e. on top of the tax that is due) should they (a) choose to pursue their appeal in circumstances where (b) there is a final RJR. If you receive a FN, you have 90 days to object and if you don’t object (or you do, and your objections are dismissed) you become liable to that penalty. That penalty disappears if you win your appeal but if you lose your liability may be increased by up to 50%.

Now, it has been said that you have no right of appeal against a FN. This is wrong, you do (see clause 207 of the Finance Bill). But that right of appeal looks deliberately constructed so as not to interfere with the critical pressure that FNs are designed to  place upon the litigant: the pressure to throw the towel in even in cases where you consider yourself to have decent prospects of succeeding.

Let’s assume HMRC issue you with a FN. Your advisers tell you that you have decent prospects. But you’re obviously concerned at the thought you might have to pay 150% of your present bill should the courts or tribunals disagree. And assume, also, that you disagree that a FN should have been issued perhaps because you consider there is no RJR.

To make the right decision in these circumstances you need to know whether the FN was correctly issued. If it was, you can then form an assessment of whether your prospects of winning are so good that you’ll take the chance of suffering a penalty of an extra 50% should you lose. If it wasn’t, you are in the familiar regime of merely suffering (at least if they are yours to bear) the professional costs of pursuing the appeal. But the statutory appeal provided by clause 207 against the issuance of the penalty is extremely unlikely to take place until after you have fought and won (or lost) the appeal in respect of which the penalty is due. So the certainty you need – as to whether you are at risk of a 50% penalty – comes too late to be useful.

Broadly I want to make two observations. First, it seems to me (for reasons set out following) that the circumstances in which courts or tribunals are likely to uphold the issuance by HMRC of FNs are likely to be very narrow indeed. Second (a point that will have to be explored elsewhere), it may well be the case that the sensible judicial review challenge is not a tanks-on-the-lawn challenge to the FN regime as a whole, but is a rather quieter one.

When will courts or tribunals find there is an RJR?

The concept of an RJR was hitherto unknown to English law. It is defined in clause 198(2) and (3) of the Bill as follows:

(2) “Judicial ruling” means a ruling of a court or tribunal on one or more issues.

(3) A “judicial ruling” is relevant to the chosen arrangements if… (b) the principles laid down or reasoning given, in the ruling would, if applied to the chosen arrangements deny [the tax advantage].

What follows is two short points about the concept of an RJR, one observation about how courts and tribunals are likely to approach RJRs and three golden rules the breach of any of which by HMRC would, in my view at least, leave them exposed to judicial challenge.

My two points about the concept of an RJR. First, a RJR is not the same thing as a binding ruling (or, as lawyers would put it, a ratio decidendi). Any judicial observation – even if merely passing and/or unnecessary – if found in a “final ruling” (a relatively straightforward concept which can be found in clause 198(4)) is capable of constituting an RJR. There is no explicit qualitative test. Second, a judicial ruling is only relevant – is only an RJR – if it would “if applied to the chosen arrangements… deny” the tax advantage. So, although the judicial ruling does not need to be of high quality it does need to be bang on point.

My observation about how courts and tribunals are likely to approach them. Follower Notices clearly raise Human Rights Act questions about the interference with the right to a fair trial . In such circumstances, to state the obvious, courts and tribunals are obliged to read legislation in such a way as to ensure it complies with Convention Rights. This is, in my view, likely to have practical consequences.

My three golden rules.

The best reasoning rule. There is nothing in the definition of RJR explicitly obliging HMRC to choose the better of competing “principles” or pieces of “reasoning”. I consider there is scope for the courts to read one in.

The qualitative control. Notwithstanding that a tribunal – whose decisions do not bind anyone else – is as a matter of law capable of delivering a final RJR (see clause 198(4)(b)) I consider that a court or tribunal will apply a qualitative control. In other words, the less compelling the judicial reasoning sought to be relied upon by HMRC, the greater the likelihood a court or tribunal will hold there is no RJR. Again, I consider there is scope for the courts to do this.

The scrutiny principle. The reality of litigating tax avoidance transactions is that there is very rarely a piece of reasoning or a principle which is decisive of the outcome. I consider courts and tribunals are likely closely to scrutinise the contention to the contrary.

It follows from the above that, in my view, the circumstances in which a court or tribunal will uphold a decision by HMRC to issue and not withdraw a FN are likely to be confined, in practice, and with only rare exceptions, to one class of case.

That (narrow) class of case is, in my opinion, that class of tax avoidance scheme where one taxpayer has fought and lost. In those circumstances, others entering into that scheme, if they fail to fold, face the likelihood of FNs, and of courts upholding them.

It is instructive to stand back and remind ourselves of how HMRC originally badged the provisions now known as the Follower Notice provisions. They were originally described as “Penalties for Other Users of Failed Schemes.” That original description accords with the likely legislative effect of the provisions as interpreted by the courts and tribunals at least as I understanding it. It is a point worth remembering.

Let’s begin by eating our greens.

Shortly after the launch of the Fair Tax Mark earlier this year, Mike Truman, Editor of Taxation, published an article [£] assessing the Mark’s award criteria. The pass mark was 65% with up to 20% awarded by reference to the relationship between an applicant’s average tax rate (“ATR”) and the then headline rate of corporation tax. The ATR was calculated by reference to the tax rate paid over the previous four years. In his article, Mike Truman expressed a preference for a weighted average (such that the rate paid in years where profits were higher counted more heavily than the rate paid in years where profits were lower) rather than the unweighted ATR adopted by the Mark. Mike Truman also reported the view of the Technical Director of the Fair Tax Mark, Richard Murphy, that in 95% of cases it would make no difference. It was not suggested that there was any bias inherent in the adoption of an unweighted rather than a weighted ATR.

If you were toying with your broccoli, now to the beef. The criticism was merely this: a technically less purist measure, making (it was claimed) no difference in 95% of cases, had been used in relation to but 20% of the weighting for the Mark.

Yet from such an unpromising beachhead, and without other serious technical criticism, was launched attack after attack on the technical soundness of the Mark. And, in a manner equally unattractive, its defenders accused the attackers of base motive. That, in other words, they were actuated purely by a desire to preserve their turf; to enrich themselves, and their wealthy clients, and to preserve their monopoly over public debate on this most critical public policy arena.

That was, on any view, a profoundly one-dimensional anecdote. You will expect me, in due course, to seek to justify its telling. But first a diversion.

There are those – let me call them the Moralists – who seek to bring about broad social change and who recognise the tax system as an important tool to achieve that change. Their champions, in the UK at least, are such figures as Alex Andreou, Polly Toynbee, the Chair of the Public Accounts Committee Margaret Hodge, and the grandfather of them all, the aforementioned Richard Murphy.

The Moralists have, of course, political detractors who disagree either with the Moralists’ objectives or with their assessment of how to use tax policy to achieve them. These political detractors are, in a sense, Moralists too. UKIP, until very recently, advocated a flat rate of tax as a means to “make all taxpayers better off.” However, this rather energetic logic has never featured heavily on their policy platform and so they are, disappointingly, less visible members of the Moralist class.

The Moralists have a further group of detractors. They are tax academics, practitioners, and even the odd member of the Bar. They occupy a smaller stage, those merry few. They are guardians of the craft of taxation and invisible to a public with but the barest interest in such matters.The thrillingly uninhibited Christie Malry – a witty pseudonym referencing the eponymous subject of BS Johnson’s novel – who tweets as @fcablog is perhaps as good an exemplar as any. I shall call them the Technocrats.

Such justification as I can offer – I didn’t say I would, only that I would try – of the anecdote set out above is as synecdoche. It aptly illustrates the unproductive nature of debate between the Moralists and the Technocrats. Neither recognises the role played by the other. Too often the Moralists boldly go where no well informed advocate for social change would. Too often the Technocrats look at questions of social reform through the wrong end of the telescope.

But each needs the other. Tax is a legitimate tool to achieve social change and the Technocrat must recognise that lest he be shorn of moral purpose. The Moralist, too, must recognise that, as I have put it (in an otherwise nugatory article) elsewhere, by moral fury alone she will not get the job done.

This is my plea to give peace a chance.

Thanks to @alexcobham who got me started on this.

It’s difficult to think of a measure that has attracted such universal hostility as the proposals announced in the Queen’s Speech for so-called Accelerated Payments. Badged by the Telegraph as treating taxpayers as “guilty until proven innocent” and by Pinsent Masons as “unconstitutional” and “having the effect of making HMRC judge and jury” they have nevertheless found their way into the Con/Lib Government’s final Queen’s Speech.

These are heavy charges. But are they justified? Do the Accelerated Payments provisions effect some step change to the present system for collecting tax? And if they did, would they be wrong to do so? The answer, in both cases, is an all but unqualified no.

Let’s remind ourselves what the provisions do. Where your tax behaviour looks like ‘bad’ behaviour – defined in ways I shall come on to – HMRC can compel you to hand over the fruits of avoidance pending a final judicial determination. And, err, that’s it. Standing back, the policy rationale is, where your behaviour looks like it’s bad, you hand over the cash now. But should the courts later define your behaviour to be, in effect, ‘good’, you’ll get the money back plus interest.

So the provisions are only about the question ‘who should hold the cash?’ in the meantime.

To, then, the first of the two questions I posed. Do they effect some step change?

Answer, clearly not.

The provisions bite only where you are holding on to the tax fruits of your avoidance behaviour in the meantime. But the question whether you are – or whether HMRC already have the cash – is not a function of some broad constitutional principle that you should enjoy the money until a court compels you to hand it over. It’s a function, instead, largely of fortuity: whether you’re employed or self-employed.

The effect of successful personal income tax planning is typically to remove an obligation to pay income tax on otherwise taxable income. This intended effect is achieved either through the taxpayer generating ‘losses’ which she can set against her other taxable income thus reducing her net taxable income. Or by triggering her entitlement to a tax credit which, again, she can set against her liability to pay income tax.

Now, where you are self-employed, or have other income not subject to deduction of tax at source, you claim the benefit of these losses or this tax credit by saying on your tax return, in effect, I have a liability to pay you 100 but I have losses of 80 so I will only pay you nine (45% of the remaining 20), and then handing over that nine. However, where your income is subject to deduction of tax at source (because, for example, your employer deducts it under PAYE) you claim the benefit by saying, in your tax return, you HMRC have deducted tax on 100 but you should only have deducted tax on 20, so please repay the 36 (45% of 80). Sometimes HMRC do, even where they think your claim to 80 of losses may not be secure, but increasingly they don’t. So if you’re self-employed, typically you’l have the cash. But if you’re employed, generally HMRC will already hold it.

The effect of all of this is that the question ‘who should hold the cash?’ is one which, even under the legislation as it stands, is apt to produce different answers for different types of taxpayer. Or, in a nutshell, no step change to see here, move along.*

My second question was, even if the provisions effected a step change, would they be wrong to do so?

Plainly this is a question in relation to which different people can reasonably hold different views. My starting point is that HMRC is a department of Government, obliged as a matter of proper public administration to act reasonably in collecting tax, and that, where it says tax is due, it is generally likely (I put it no higher than that) to be right. The data in tax avoidance cases supports this proposition: HMRC claims to win over 80% of disputes. Now, one might reasonably ask, in those circumstances, why should HMRC not have the cash pending a determination.

And there are additional safeguards. In order for the accelerated payments provisions to apply, there must be more than a mere statistical probability that  HMRC will likely end up with the cash anyway, to justify them getting it now. For HMRC to issue an accelerated payment notice, they must be able to pass through one of three gates. The first gate is that an independent advisory panel has indicated that the transaction is likely to be “abusive”. The second gate is that the transaction has already been disclosed under the Disclosure of Tax Avoidance Scheme regulations. The third gate is that HMRC must be of the view there is a judicial ruling which, if applied to the case, would deny the asserted advantage.

Now, none of these gates is perfect.** They are all proxies for the (technically challenging) question the subject of the taxpayer’s appeal, what is ‘good’ and what is ‘bad’ tax avoidance. But they are, on any view real safeguards. And they have broadly the effect that only measures which are likely to be ‘bad’ avoidance cases should trigger the provision of an accelerated payment notice. Again, nothing to see here.

Summarising, the accelerated payments provisions are – or so it seems to me – well targeted provisions which seek to reduce tax avoidance behaviour by targeting one of the cash-flow benefits of that behaviour. In that objective, and generally in their execution, they are to be applauded.

Continue reading →

In his evidence to the Public Accounts Committee, Tim Levy, Director of Future Capital Partners, one of the two largest film investment companies that had grown up to enable investors to access statutory film relief, estimated that by 2002 the size of the market had grown to over £2bn per annum of expenditure. A written answer by the then Paymaster General Dawn Primarolo (and recorded in a Parliamentary briefing paper) showed that the tax cost of supporting the British film industry through statutory tax reliefs rose from £10m in 1997-98 to £560m in 2005-06. Because of the different things they are discussing, these two sets of figures are broadly consistent.

Clearly this was too much, and the legislative rowing back began in the 2002 Budget. That Budget introduced measures to “protect the tax base and root out tax avoidance.” That assertion proved a touch optimistic. The tax cost of statutory film reliefs virtually trebled in the following three years. But further legislative steps were taken and eventually, belatedly, the reliefs returned to the fiscal obscurity from which they had sprung.

A full account of the history of the legislative measures introduced by Parliament to “root out” tax avoidance and the responses by the various film investment companies to those measures is for the purist. It would reveal a shift on the part of those companies from accessing statutory film relief to statutory loss relief to statutory interest relief along with statutory capital allowances. It would also show ‘soft’ finance, assets being purchased at inflated values, all too generous commissions to IFAs, and other features tending to signal ‘bad’ tax avoidance.

There is much of interest in this account. If you want to draw the all-important line between ‘bad’ and ‘good’ tax avoidance – an ambitious exercise attempted by many but with little conspicuous success – you’ll find it in that account.

But that’s not an exercise for me. I have acted in (indeed, am acting in) most if not all of the film relief cases to come before the courts in recent times. Professionally, whilst they are on-going I cannot discuss them or their facts. And anyway, the story I want to tell is that of why it was that people engaged in transactions which are today badged as ‘bad’ tax avoidance. I don’t need to draw the line to tell the story.

But it is in the detail of that account that the truth lies. If there’s nothing wrong with good tax avoidance and everything wrong with bad tax avoidance, and you want to throw stones at the bad, you can only take sight if you have the facility to distinguish it from the other. And you would have had that facility without the benefit of the hindsight you now enjoy.

The features that are, now, typically identified by tribunals as ‘offensive’ were certainly not thought to be such at the time. In a previous post, I identified a number of common features of these arrangements which are today cited by tribunals, courts and commentators as signalling egregiously bad tax avoidance: the presence of borrowing to ‘ramp up’ the amount of tax relief available to the investor; the presence of guaranteed income streams to repay that borrowing; the fact that the structure of the arrangements together with the availability of the tax relief renders the commercial performance of the underlying film all but commercially irrelevant.

However, as I observed in that post, all of those features were said by Government at the time to be perfectly acceptable. All of those features are present in two cases in which I acted (Halcyon and Micro Fusion) in which the Court of Appeal said the arrangements succeeded. And none of those features was signalled or clearly signalled by the draftsman in his journey back from a more generous statutory relief regime to be especially offensive.

So, I return to my starting point. How is it that people found themselves engaged in transactions badged today as bad tax avoidance? Is their participation in those transactions a reliable indicator of poor moral fibre?

To conclude that it was, you would have to assume that an individual possessed the sophistication to draw the line between good and bad tax avoidance. You would have to assume that he was able to make the judgement despite the fact that each of Parliament, the courts and the Government were signalling to him at the time as acceptable features he now knows to be unacceptable. And you would have to assume he was able to make that judgment in the face of what his advisor was telling him.

Of course, you might just stand back and say, that’s all very well, but perhaps he should just have steered clear of the whole thing unless he was sure he was on the right side of the line. And perhaps that’s a fair judgment. Remember it next time you drive through an orange light.

Follow me on Twitter @JolyonMaugham

“Tax avoidance rocketed in the late 1990s,” according to an unnamed senior HMRC expert. And the question ‘Why?’ engaged a number of technical commentators this morning. 

There is a very strong candidate explanation as to why. And, of course, if you’re engaged in making tax policy, you’re keenly interested in what it was that happened at that particular moment in time. Knowing the answer to that question might help you damp the fuse of any future rocket. But I’m not interested in the explanation so much as what an account of the increase in tax avoidance might tell us about why people seek to avoid tax – and the morality of doing so. But the two tales are intertwined.

First, I need to start with a key distinction. Not all tax avoidance is ‘bad’. If I choose to pay money from my earnings into my pension scheme, I will not be taxed on those earnings: the tax code encourages me to make payments into my pension scheme by enabling me to do so out of untaxed income. So I will have arranged my affairs so that I pay less tax and I will have avoided tax – but few would regard this as objectionable. If the tax code offers me a reward for behaving in a certain way – because it serves some broader societal purpose such as encouraging people to save for their old age – and I behave in that way, why should I not enjoy the reward?

However, if, for example, I could contribute money into my pension scheme, get the tax relief, and then borrow it back from my pension fund at a zero-rate of interest, that would be anti-purposive. I would be getting to the other side without having to pay the ferryman. The money would not be there for me to spend in my old age. 

So, pro-purposive good. Anti-purposive bad.

This is all, now, pretty much agreed across the spectrum of commentators. People might disagree about whether Government should offer a particular relief but if Government does then there’s nothing immoral in you availing yourself of it in the way in which Parliament intended. The Fair Tax Mark is seeking investment and offering a relief (Enterprise Investment Scheme relief) which its Technical Director thinks should not exist. But it would say, if the relief exists there’s nothing wrong with people accessing it.

Working out whether the use of a relief is pro-purposive or anti-purposive? Less easy. But more on that later.

In 1992, Government decided it wanted to encourage investment in British films. So it introduced a new relief: if you used 100 to purchase a film, you could, in effect, set 33 off against your other income in each of tax year one, year two and year three. If you were a 40% taxpayer, you would (in effect) get a tax credit worth 13.3 in each of those years. This might not be enough to tempt you to invest in films – they are inherently very risky. So Government also said that the film company could sell you the film for 100 and then rent it back from you for a guaranteed stream of income worth, say, 92. That way, the film company would get 8 to put towards the cost of making the film. And you would get three tax credits of 13.3, plus income worth 92 for your 100. 

Now that’s not quite as good a deal as it looks, because that 92 of income is taxable so its net value in your hands is 92 – (40%) = 55. So you’re still down 5 (100-55+13.3+13.3+13.3) plus you only get the second and third 13.3s in the second and third years.

So in 1997, (under a Labour administration by the way) the Government announced you could get all of those 13.3s in your first year. And this was enough to tip the balance. You could borrow, say, 80 and put up 20 of your own money. You’d get a tax credit of 40 in your first year so you’d be 20 up in that year alone. You’d get taxed on 92 as it came back to you (so it would be worth 55) but you’d invest the 20 you were up and make up the extra 5 and then some. You wouldn’t need to worry about repaying the borrowing – this would be done from the rental stream of 92 which the film-maker would pay a bank to guarantee.

Now, so far so good. In published documents – I have them and I am perfectly happy to post them on line if anyone wants them – Government through HMRC encouraged this investment. In exactly the form I have described (the numbers are slightly different but the principle absolutely as stated). And the British Film Commission went out and encouraged foreign film makers to make their films in the UK on the back of the fact that they could make a 100 film here for only 92.

Just pause there. This was pro-purposive investment in films. Encouraged by the Government. And the result was that this sort of arrangement became respectable. Analytically, in tax terms, it was no different from putting money into your pension.

The result was that an enormous tidal wave of money came into British films. Because of the way in which the reliefs were structured, investors were, in effect, financially indifferent to the quality of films that were made. They made money from the arrangements irrespective of whether the films flew or bombed at the box office. 

Now several billions of pounds later, Government worked out that the reliefs weren’t really operating as they had intended. They were badly designed and too expensive. And the wholly unsurprising consequence of indifference to quality was the production of turkeys: remember Sex Lives of The Potato Men? I thought not – and that was, relatively speaking, one of the better ones: it at least got made and got a cinema release. So over a period of about a decade, Government slowly rowed back from what it had started in 1997. 

But it was difficult. You had a whole class of Film Investment companies which had grown up to put these deals together (the big ones generally founded around the late 1990s). You had IFAs who had made a lot of money introducing their clients to these deals. And you had a class of perfectly respectable, moral, law abiding individuals who had grown accustomed to arrangements of this nature.

Arrangement of this nature. Geared investments? encouraged by Government. Guaranteed income streams? encouraged by Government. Indifferent to the performance of the film because protected by the tax relief? encouraged by the structure of the tax relief. All of these features perfectly respectable – both legally and morally – at the time.

Like the launch of the reliefs in the first place, the process of rowing back from them was equally flawed. It left many of those moral and law abiding citizens genuinely in the dark about whether they were participating in pro- or anti- purposive arrangements. But subtle nuances – even important ones – don’t play well with an audience in the mood for blood. 

But the story of the trip back is for another day.

Follow me on Twitter @JolyonMaugham

Sadiq Khan’s call for action to tackle the under-representation in our judiciary of, well, everyone except privately educated white male Oxbridge graduates is to be welcomed. Tragically, the picture is far, far bleaker than even the abysmal statistics presented by the Judiciary Office suggest.

Those statistics show five BME High Court Judges – there are no BME judges at a senior appellate level – out of 108. But of those five, one is Asian or Asian British; one is “Mixed” and the other three are “any other background” – likely British Jews.

Staggeringly, a word rarely merited but it is here, of 1,450 full time salaried judges, only four report as “black or black British”. Four.

The historic under-representation of women in the judiciary continues. It hovers, if one aggregates the figures for all judicial posts, at just under a quarter. But the higher up the ladder you rise, the greater the under-representation gets. And if you exclude fee paid posts, the figure slips to a fifth.

No data is collected for sexual orientation or disability. None.

Are we getting better? Can we derive some comfort from a meaningful rate of positive change? Compared with five years ago these figures are materially unchanged.

Meanwhile, whilst many of my colleagues on the Bar Council’s Equality and Diversity Committee work tirelessly for improvement, valuable initiatives are blocked or thwarted by an institutional disinclination to adopt the bottom up measures that will over time make a difference. Meaningful support for part time workers and care givers, serious analysis of why fee paid judicial roles have not proven an effective staging post to salaried roles for under-represented groups, vastly improved data collection and much higher quality statistical analysis of that data, better and earlier targeted mentoring schemes, analysis of differences between the statistics at Tribunal and Judicial levels, and so on.

These measures, and many others, look like what a properly resourced and prioritised commitment to improvement would look like. Like taking judicial diversity seriously would look like.

Yesterday I wrote about how the main tax raising measure in Budget 2014 was a swizz. That it was an exercising in fiddling with the profile of tax receipts to enable Treasury to spend tomorrow’s receipts today. Yesterday’s swizz was a £4bn swizz. Today’s is a little less. But only a little.

You were probably bored by the pension annuity debate before it even started. It obediently casts a patronising left against a laissez faire right. But on its resolution hangs a yield to Treasury of a further £3bn (over the five year term for which they publicly forecast).

If you retire today with a 25 year life expectancy and a pension pot of 100 which you spend on an annuity the Treasury will have to wait a quarter of a century to take all its income tax rake from your 100.

If, on the other hand, you withdraw that 100 today, you accelerate the rake (moving it from years one-twenty five to year one) and you concentrate it in a single year meaning more of it will be taxed at your higher (marginal) rate of tax.

So the Tories want you to buy a Lamborghini. Because when you do, you generate an extra £3bn of revenue for the Treasury.

Of course, if you take your pot in year one, there won’t be any tax receipts in years two to twenty five. And we’ll already have spent the proceeds on beer and bingo. But why should we worry about that?