What Use the Tax Gap?

Every year HMRC publishes its estimate of the so-called Tax Gap.

What is it?


So the Tax Gap is predicated on Parliament’s intention in making the law. It measures (what HMRC considers to be) the difference between the tax Parliament intends should be collected and the tax HMRC actually collects. It doesn’t measure the tax that Parliament hasn’t asked HMRC to collect. So if Parliament doesn’t intend to levy, for example, a window tax the fact that there are no receipts from a window tax won’t make the Tax Gap bigger. If you wanted to measure the tax that might be collected if we had a window tax you’d first calculate the size of the Tax Gap – and then you’d add whatever yield a window tax might generate.

Another important thing to note about the Tax Gap is that it’s reasonably stable in both absolute and relative terms.


The latest estimate of the Tax Gap can be seen here. I’ve said it before and I’ll say it again: although it is inconvenient to Labour  – I am a Labour Party member and it is inconvenient to me – the Coalition did a reasonable job of shrinking the Tax Gap.

And HMRC are generally thought to be doing a pretty good job in measuring it. Here’s the NAO late last month:


Of course, it’s theoretically possible that HMRC and the National Audit Office and the IMF are all wrong and the Tax Gap is massively understated. Possible, but unlikely.

I apologise for labouring these points. But they’re important because, along with £93bn of so-called Corporate Welfare – which I’ve addressed at some length here – closing the Tax Gap forms a central plank of so-called Corbynomics.

Here’s what Corbyn says about it:


So is there really £2,000 for every man, woman and child in the country in closing the Tax Gap?

No. Unambiguously no.

Here’s how you get to that conclusion in three easy steps.

(1) There’s no worldwide conspiracy involving HMRC, the NAO and the IMF to hoodwink us as to the size of the Tax Gap. The Coalition Government wasn’t party to such a conspiracy – and neither was the last Labour government before it. HMRC does a decent job in calculating the size of the Tax Gap.

(2) The reason the Tax Gap is where it is is because it’s extremely difficult to close. Every Government ever has come into office saying it will tackle avoidance and evasion – but still we have a Tax Gap which is reasonably stable in amount. There are only two explanations for this. Either every Government ever has deliberately chosen to leave the Tax Gap where it is. Or try though you might a certain amount of leakage is inevitable and all you can hope to do is narrow the gap a bit. Those are your choices – and only one of them is plausible.

(3) Some other number might measure some other thing. It might measure what Parliament could levy if it changed the law. And that other number might even measure that thing plausibly. But raising £2,000 for every man, woman and child involves identifying what that change in the law is – a new window tax for example – and identifying how much it will raise. The extract from Corbyn’s manifesto given above – purportedly supporting the £120bn yield – doesn’t identify any new tax. And Corbyn’s record on calculating yield is poor: I give an example here.

So what use, then, is the Tax Gap? Well, HMRC tell us:


The mundane truth, I’m afraid, is that it’s a sophisticated performance metric for HMRC. It measures how well they’re doing and where they should target their resources.

The Tax Gap is not a serious tool for making broader economic policy. It is no magical pot of gold that will obviate the need for close engagement with the choices inherent in being in government. And it’s not a basis upon which you can pitch to a sentient electorate. It just isn’t.

Follow me @jolyonmaugham.

The truth about the truth about corporate welfare

Students of the relationship between business and society will, of late, have encountered a new discourse, that around “corporate welfare”.


That headline comes from here but you could as easily look at “The £93bn handshake: businesses pocket huge subsidies and tax breaks“; “Britain’s corporate welfare is out of control: increasing it makes no sense” and “Direct aid, subsidies, tax breaks – the hidden welfare budget we don’t debate.”

So what is “corporate welfare”?

The 43 page paper that put the idea on the map in the UK – ‘The British Corporate Welfare State: Public Provision for Private Businesses‘ – doesn’t define it. So I asked the Sheffield Political Economy Research Institute (SPERI) which published the paper. They directed me to this definition on the ‘Corporate Welfare Watch‘ site:

…efforts made by the state to directly or indirectly subsidize, support, or rescue corporations, or otherwise socialise the cost and risk of investment and production of private profits and capital accumulation

(my emphasis). So corporate welfare is where the state acts such that the risks attached to generating private profit are shared by us all.  But dig a little deeper: let’s try to understand the concept by its composition.

Corporate welfare, the report tells us, costs “between £93bn and £180bn a year”: £93bn represents the “most direct category of corporate welfare”; £180bn includes the education and public health care that delivers indirect benefits to business through an educated workforce not stricken with illness.

This is how the £180bn is made up.


I don’t want to set out a full analysis of those categories. So let me just make a few points about some of the bigger items.

The biggest, at £44bn, is “Corporate tax benefits” and, of these, the biggest is capital allowances (at £20bn pa). But capital allowances are the statutory equivalent of depreciation. They do no more than recognise that, in order to make profits (on which they pay tax), many businesses have to buy equipment (or “capital”) which then wears out and needs replacement. The report, quite wrongly, says that capital allowances “socialise the risks associated with private business investment.” It misses that capital allowances operate to reduce the tax paid on profits – the profits the business owner has to buy the capital assets to make – and if the business doesn’t make profits the cost of buying those assets stays with the business owner. Nor do they “subsidise the production of private profits” (to borrow from the definition). Rather they recognise that in earning those profits the business owner incurs costs.

Of “direct” corporate welfare, numbers two and three by size are “subsidies and grants” and “procurement”.

Subsidies and grants are support given by Government to business to influence levels of production, prices and suchlike. They include subsidies to bus and train operators to run services at particular levels of frequency and at particular price points. They include payments made under the Common Agricultural policy (the objectives of which can be seen at Article 39 here). They include regional aid to encourage business to invest in economically neglected regions. SPERI describes these payments as “unrequited” transfers but if, by this word, the implication is that Government is not delivering its perception of the public interest through them, it is wrong.

There is, of course, scope for arguing that its perception of the public interest is flawed. But that argument is not advanced by badging these payments as “corporate welfare” or “unrequited”. To make that argument requires engagement with the different policy agendas advanced – and the extent to which the money buys value enhancements to those agendas.

The procurement figure of £15bn is arrived at by applying to aggregate Government spending on private sector procurement – including social care, defence, construction and so on – a rate of “average profits of 6.5% per annum in the period leading up to 2012” for the big four procurement companies. But does paying a price for government procurement that enables the provider to make a profit involve socialising the risks of private profit? Delivering goods or services to the public sector requires an investment of risk capital which is only made in the expectation of a return. The fact that this capital is risked can be seen from the share price performance of two procurement companies explicitly mentioned in the report. Over five years Capita’s share price has almost doubled but Serco’s has fallen by more than 75%. If the risks of investment are being socialised, they’re not being socialised very well. Remove that return and capital doesn’t get invested and the goods and services aren’t delivered.

The report also asserts that “such transactions take place outside of the regular market, meaning that government often gets a worse deal.” Where poor value for money is obtained from procurement that point is well worth making. But the point is not well made through bland assertion – and confidence in the rigour of the treatment is diminished by the fact that the report ignores the legal requirement for government procurement contracts above a de minimis limit to be subject to open competition.

Moving from the direct (£93bn) to the indirect (£180bn) measure of corporate welfare brings in measures such as working and child tax credits (because they enable workers to work for corporates), education and training (because they deliver to corporates a workforce) and the NHS (because good heath care contributes to high productivity). But are these costs to the public purse ones which “socialise the cost and risk of investment”?

They are big numbers – respectively 13% of 25% of all public expenditure. But still they are said to be “conservative”.

They exclude other forms of support identified in the welfare continuum – including legal and regulatory instruments, the system of money, the right to hire and fire and the right to trade – because the business benefits are simply too difficult to separate out.

One could easily add law and order – which allows business to operate – and defence which protects it from confiscation by unfriendly powers. Indeed, it is tempting to ask whether there is any element of Government expenditure that does not deliver benefit to corporates; is the entire of state spending indirect corporate welfare?

Without a clear distinction between that which is, and that which is not, corporate welfare are we left with any more than the idea that corporates cannot function without the state? Indeed, is it “corporate” the paper means or “business”? And why characterise a relationship where corporates are used to achieve Government policy as “welfare”?

Don’t ponder that last question too long. By equating Government policy which benefits corporates to welfare payments made to individuals; by contending that “conservatively” 25% of all public expenditure delivers “unrequited” benefits to corporates; by suggesting that public policy purposes are advanced modestly if at all through that expenditure, the report seeks to steady and advance the narrative of corporate capture of the public sphere.

Does any of this really matter?

It does. As bank shareholders agitate at the consequences – in particular, its impact on banking profitability – of implementing the lessons learned from the credit crunch, and as Government’s inclination to resist diminishes, what will society at large be left with? Little more, perhaps, than higher public indebtedness with its sequelae of austerity and a heightened public interest in the nature of the relationship between business and government.

How that relationship should function poses questions for all governments, including on the centre-right.  But for many on the left it has become the defining political issue of our day.

No one could argue against proper scrutiny of individual policy decisions that deliver from public funds direct or indirect benefits to business. Nor would many contend that Government’s modes of engagement with business are perfectly delivered. But lump together tendentious assertions of value, couch the sum in the language of unrequited welfare, ascribe the result to corporate capture and you do no more than fuel a prejudice searching for a justification.

My particular concern is this: that prejudice is hugely damaging to a centre-left embarked on an existential struggle to restore public confidence in its ability to deliver an environment in which responsible capitalism can flourish. It drags the left to a fairytale land of Government in crippled obeisance to mendacious business.

Fairytale, and unelectable. Both Corbyn and Kendall – the former explicitly; the latter through the language of “£100 billion of reliefs” – have sought to mine this promising vein to pay, respectively, for greater spending and the austerian’s equivalent: closing the deficit. Unlock these riches and we need not engage with difficult decisions.

Goethe tells of how Faust arrives in a Kingdom plagued by debt and is provided by Mephistopheles with a solution:

there is gold in the earth, coined and uncoined,
Hoards hidden under walls, rocks precious-veined:
This treasure’s for the wise man to collect,
By Nature’s power and human intellect.

But like that other alluring promise, the £120bn Tax Gap, the corporate welfare gold can only plausibly be spent on policy objectives if the means of extracting it can plausibly be identified. What particular tax reliefs will be cut – and what will the savings be? What precisely is Government getting wrong in its procurement decisions?

Turn your eyes from these questions and you might blind yourself – but you won’t fool a sceptical electorate.

Follow me @jolyonmaugham.

Why it makes financial sense to evade your taxes. Really.

Under the LDF tax amnesty which has been running since 2009 – the bizarre workings of which I have discussed here – you can choose to disclose your tax evasion to HMRC and pay back taxes and interest on those taxes. You’ll also face a penalty of 10% of your unpaid taxes but you won’t face a criminal prosecution. Nope, and you might well still be better off than if you had paid your taxes. It will be the rest of us eating porridge, as the following example shows.

This state of affairs occurs, broadly, when you are able to make a return on the tax you have evaded which is higher than the rate of interest HMRC charges you on unpaid tax. Sufficiently higher to overcome the effects of the 10% penalty. It isn’t legal – but it’s risk free. I prove it, in the following example.

Happy Easter, from those wonderful folks who gave you the Liechtenstein Disclosure Facility.


To simplify, I’ll assume that tax rates and interest rates on unpaid tax in 2009 were what they are today. Today rates on capital gains tax are 28% and, on savings income, 45% (if you’re wealthy). Interest rates on unpaid tax are 3%. I’ll also assume that taxes follow the calendar year and are payable on 31 December rather than 31 January. None of these simplifications makes a material difference to my example.

Assume Mr X makes a capital gain on 1 January 2009: on an investment of £500,000 he makes a gain of £1,000,000. He then invests the proceeds earning a return of 10% per annum until 31 December 2015.

If Mr X has evaded his taxes he will have (in cash) at the end of 2009 £1,650,000, at the end of 2010 £1,815,000, at the end of 2011 £1,996,500, at the end of 2012 £2,196,150, at the end of 2013 £2,415,765, at the end of 2014 £2,657,341 and at the end of 2015 £2,923,076.

His tax liability for 2009 will be £280,000 with an interest bill (from 31.12.20-31.12.2015) of £50,400.
His tax liability for 2010 will be £74,250 with an interest bill (from 31.12.2010-31.12.2015) of £11,137.
His tax liability for 2011 will be £81,675 with an interest bill (from 31.12.2011-31.12.2015) of £9,801.
His tax liability for 2012 will be £89,842 with an interest bill (from 31.12.2012-31.12.2015) of £8,086.
His tax liability for 2013 will be £98,827 with an interest bill (from 31.12.2013-31.12.2015) of £5,930.
His tax liability for 2014 will be £108,708 with an interest bill (from 31.12.2014-31.12.2015) of £3,261.
His tax liability for 2015 will be £119,580.

So his total tax bill will be £852,882, interest payable will be £88,615 his penalty will be £73,330 (he won’t pay a penalty on his tax bill for 2015) and of his £2,923,076 he will have left £1,908,249.

If, on the other hand, Mr X complies with the law and pays his taxes he will have:

At the end of 2009 £1,650,000
At the end of 2010 (£1,650,000 x 110% – (28% of £1,000,000) – (45% of £150,000)) £1,467,500
At the end of 2011 (£1,467,500 x 110% – (45% of £165,000)) £1,540,000
At the end of 2012 (£1,540,000 X 110% – (45% of £146,750)) £1,627,963
At the end of 2013 (£1,627,963 x 110% – (45% of £154,000)) £1,721,459
At the end of 2014 (£1,721,459 x 110% – (45% of £162,796)) £1,820,347
At the end of 2015 (£1,820,347 x 110% – (45% of £172,146) £1,924,916
Plus he will have a tax bill for his interest in 2015 of (45% of £182,038) of £81,917 leaving him with cash of £1,842,945 (more than £65,000 worse off).

The critical point to note is that, in every year Mr X earns a return of higher than the rate at which HMRC charges interest on unpaid taxes, he is eating into the effect of the 10% penalty. And the longer the period over which he beats that 3% the easier it is to overcome the effects of the penalty. Putting the matter another way, the 10% penalty regime benefits successful long term and punishes unsuccessful short term evaders.

Follow me @jolyonmaugham

HSBC and HMRC: what can we learn from Ireland

Last week, the Chairman of the Irish tax authority wrote to its Public Accounts Committee. You can read the letter here.

For students of HMRC’s handling of the Falciani HSBC disclosures, the letter makes for illuminating reading. The similarities between Ireland’s tax system and our own invite comparisons between how the Irish tax authority handled the disclosures – and how we did.

There seem to me to be five potentially interesting points of comparison.

1. Yield. I have written elsewhere about the comparisons to be drawn between us and our continental neighbours on tax yield from HSBC accounts. UK received information on about 6,000 individuals and businesses and recovered tax and penalties of £135m. France and Spain – both with fewer billionaires than the UK – have recovered £188m from 3,000 and £220m from 3,000 respectively.

It is fair to point out that there is no direct read-across from the yield figures for France and Spain as neither has a non-dom rule. It is probably fair to say, as a generality, that money held by UK residents abroad is less likely to give rise to a UK tax liability than money held by Spanish residents a Spanish one. Ireland has a non-dom rule – but sadly the letter does not give a comparable yield figure.

2. Criminal prosecutions. There were 88 individuals with Irish addresses. 20 were considered for criminal prosecution (23%), four were selected for prosecution, three were convicted (3.4%) and 1 remains under investigation. In the UK, there were 3,600 individuals of whom 3,200 were traced, 150 were considered for criminal prosecution (4.2% or 4.7%) and 1 conviction (so far) has been obtained (0.03%).

So the Irish have been spectacularly more successful than us in achieving criminal prosecutions.

3. Does the French Defence stand up? The absence of criminal prosecutions has been blamed by HMRC and the Treasury Minister on constraints imposed by the French on the use to which we could put the Falciani disclosures. Initially both were rather tight-lipped on what those constraints were. However, we know now that the information was disclosed under the terms of the UK France Double Tax Convention Article 27 of which limits its use to tax matters (including tax evasion offences). However, the information was also disclosed to the Irish under the terms of their Double Tax Convention with France (and the EC Mutual Assistance Directive) which contain the very same limitations. It hasn’t stopped the Irish obtaining convictions.

So this evidence suggests we were not justified in blaming the French.

4. What effect did the Falciani disclosures have on the use of amnesties? The point of an amnesty is to encourage people you might not otherwise find out about to come forward voluntarily and put their tax affairs in order. Why would you offer an amnesty to those you already knew about?

I have written here about our misuse of amnesties. But, in fact, the situation is even worse than I then appreciated.

Lin Homer said this to the Public Accounts Committee:

I think that, on previous occasions, we have told you that we thought that there were possibly about 15 or so that we hoped to get through to criminal prosecution. As I have told you on a previous occasion, a number of those moved into the disclosure facility and took themselves out of prosecution that way. A number were discussed with the CPS, and, in the end, of the three that we and they felt most likely to be able to prosecute, they felt that only one had reached the test. That is the top tier.

Quite why those actively being investigated with a view to criminal prosecution should have been permitted to ‘take themselves out of prosecution’ through use of the amnesty I do not know. Certainly this was appreciated by the Chair of the Irish tax authority who said:

The commencement of a Revenue investigation means that the taxpayer is precluded from availing of a qualifying voluntary disclosure.

5. Different approaches to transparency. But to me the most striking thing of all about the letter to the Irish Public Accounts Committee is its tone. The letter demonstrates that the Chairman of the Irish tax authority understands that transparency is important. Our own HMRC, I am afraid, does not. In its dealings with the Press, Parliamentarians, and the public at large it routinely seeks to deflect scrutiny and to discourage accountability.

There is not a day when we, the public, do not read stories of legal avoidance and criminal evasion by powerful corporates and wealthy individuals. Those who have suffered in consequence of the squeeze in public finances are entitled to ask of HMRC, are you policing the line? HMRC’s disinclination fairly to answer that question is highly corrosive of public faith not just in HMRC itself but in democracy and society at large.

Follow me @jolyonmaugham

Why are HMRC not challenging non-dom status?

There’s a surprising dearth of data on non-doms in the UK. In one sense this isn’t a surprise. The overwhelming majority of the perhaps 4.9 million non-doms in the country won’t have substantial assets or income abroad. Their domicile status won’t be of interest to them – and it won’t be of interest to HMRC.

But even in relation to those for whom the status is financially meaningful, data is not routinely published. About 114,000 were registered non-doms 2005-06 (before the introduction of the ‘remittance basis charge’). And about 118,000 were registered in 2009-10 (after its introduction): the latest year for which I have been able to find data. Of those 118,000, the charge was paid by 5,100 people (4.3%). Many of the remainder are likely to be ‘newer’ non-doms: the charge is only payable if you have been resident in the UK for seven out of the preceding nine years. (Putting the matter another way, you can be a resident non-dom for six years and claim the remittance basis without incurring liability to the charge.)

So the figures we have are out of date. But the more important data deficit – for those attempting to understand the tax consequences of our decision to maintain non-dom status – is our ignorance of the amount of tax we forego. As Ed Balls explained back in 2007, information is not held on overseas income and gains that do not give rise to a tax liability in the UK.

The numbers will be substantial, though. Iain Tait, who heads the Private Investment Office of London & Capital, described the £50,000 remittance charge as “largely symbolic.” However you carve it, there will be many billions at stake.

One of the odd things about non-dom status – and there are many (see this piece I wrote last Friday) – is that your possession of it at any given time is a matter of your then present intention as to your future status. I was brought up in New Zealand: do I now intend to return there at some stage in the future? That might not be such an easy thing for HMRC to assess. But judges are well used to such questions. State of mind is a critical element of pretty much every criminal offence. It’s also worth remembering that the burden of proving possession of non-dom status rests on s/he who claims it.

Against that background – vast amounts of tax at stake and so every reason for both sides to fight, a Revenue authority which may not be best placed to assess status, and judges trained to do exactly that – you might expect to find a slew of cases in which HMRC have sought to test entitlement to domicile in the courts. I know I did. But I was wrong.

In the last ten years (which is as far back as I checked), there’s only been one concluded challenge to domicile, nine years ago. There’s also a single indication of a challenge to come.

Many of us in the profession are surprised at HMRC’s seemingly ready acceptance of assertions of UK non-dom status. This morning’s Guardian account of Stuart Gulliver is a good example: it reports he went to University in Oxford, lives in the UK and is married to an Australian. The FT adds that he grew up in Plymouth, and chooses to be based in London. The Independent says he was born in Derby. But he is nevertheless, apparently, accepted to be domiciled in Hong Kong. Now, I’m not saying that conclusion is wrong – but it does raise questions.

What does all of this evidence? A reluctance on the part of HMRC to take on the richest and best-lawyered? A policy decision not to alienate the most mobile? Or merely that us tax professionals are wrong to be surprised. Whatever the answer, it’s a pretty striking state of affairs.

Follow me @jolyonmaugham

Osborne’s Buy to Let Bonanza

If you’re short of time skip to the end where I summarise the arguments. If you’re still interested, come back to the start.

Here’s how the FT characterised George Osborne’s changes to Stamp Duty Land Tax:


And here’s the Daily Mail:


But as we fiscal footsoldiers well know, there’s little political capital to be won in improving the technical functioning of the tax system. Especially not at an annual cost to the fisc of around £800m. Here’s the Green Book forecast costs of the changes over the next six years:


An effective 12% cut in the gross yield from stamp duty land tax on residential property and the most expensive measure in the Autumn Statement, more expensive even than the rise in the Personal Allowance. Even I, when I lie awake at night contemplating the fiscal utopia that would follow as night after day from a world in which I was enthroned as Chancellor, even I recognise that north of £800m per annum is a pretty heavy price to pay for avoiding some fairly modest distortions in the residential property market.

The Great Man knows this. Here’s what he said

“In recent years the burden of stamp duty has increased on low- and middle-income families trying to buy a new home, as prices have risen. This makes it even more difficult to get together the cash deposits buyers need. It’s time we fundamentally changed this badly designed tax on aspiration.”

Before we examine this statement can we just admire the tactical acuity that enabled a hugely expensive tax break purportedly for house buyers to be sold to the media as reform of a tax universally acknowledged to be badly designed.

Have you paused? Good.

Now let’s turn to the effects.

Council of Mortgage Lenders figures show about 50,000 purchases for home owner house purchasers a month of which around 20,000 are to first time buyers; there are also around 8,000 loans a month to buy to let purchasers. So of buyers in the market, first time buyers account for 34%, other occupier buyers 52%, and buy to leters 14%.

To work out who benefits from the changes, one must also factor in that different types of purchasers buy at different prices. According to ONS figures, the average price paid by a first time buyer is £210,000 and the average price paid by a “former owner-occupier” is £315,000. The saving made by a first time buyer at that average price is (£2,100-£1,700) £400. And the average saving made by a “former owner occupier” is (£9,450-£5,750) £3,700. (For comparison, a purchaser at the average house price in London (£514,000) would save (£20,560-£15,700) £4,860).

I’m not going to pretend to be an economist (it’s challenging enough pretending to be a lawyer) and I don’t have access to the data and assumptions underpinning the forecasts. So let’s make the (simplistic) assumption that all buyers of particular types buy at the same price.

I am not aware of data showing the average price paid by a buy-to-leter. But if one assumes that she buys at the average price paid by a former owner-occupier, the putative sharing of the benefit of the stamp duty land tax cut as between these different types of purchaser is first time buyer (34×400=13,600/257,800) 5.3%, other occupier buyer (52×3700=192,400/257,800) 74.6%, buy to leter (14×3700=51,800/257,800) 20.1%.

Putting the matter another way, if one wanted to deliver the benefit of this cut in stamp duty land tax to your hypothetical person “trying to get together the cash deposit buyers need” it would cost £42m rather than £800m. Indeed, you could give them the (even more financially meaningful) assistance of a complete exemption from stamp duty land tax  at a cost of (34×2,100/315,600 = 22.6% x 315,600/257,800 of £800m = 979m) £221m.

But, structured as they presently are, ‘buy-to-leters’ get four times the benefit from the stamp duty land tax cut as George Osborne’s ‘person saving for their deposit’. However, as I will go on to show, this figure substantially understates the buy-to-leter’s share of the take.

It is, of course, only superficially true to attribute (as I have done above – and as did George Osborne) the benefits of cuts in stamp duty land tax to house price buyers. The papers are full of stories of vendors pulling out of the deals because they realise that they will now be able to get more for their property; and of the house price boom expected to result. The cut in tax for buyers is immediately swamped by an increase in price and the benefit goes to those holding property wealth.

Given that the deficit will, as George Osborne has made plain, be closed through cuts in public spending, one might perfectly reasonably say that the real transfer of wealth implicit in the cuts to stamp duty land tax is from those reliant on public services to those who own property – and (with one important proviso) the more property someone owns the greater the transfer of wealth to them.

The important proviso is that those who own houses worth more than £937,500 will see a diminution in housing wealth as they suffer the devaluation consequence that a purchaser of their property will face a higher stamp duty charge. Those on the left will attribute this feature of the changes to a desire to spike Labour’s Mansion Tax; those on the right will say it demonstrates that the Tories recognise that those who can afford to pay more should do.

Whatever the spin, once one recognises this factor, one can see that the real benefits of the cut in stamp duty land tax flow to those who have substantial amounts of housing wealth in houses worth less than £937,500. The more housing wealth you hold in houses worth less than £937,500 the more you benefit. So, as I have indicated, the percentages given above are likely to understate the extent to which buy to let owners will benefit from a tax cut funded by cuts to public services.

There is, of course, a further political dimension to be noted. To badge this as a ‘reform’ of stamp duty land tax may well be to disguise its true intent. As Danny Dorling, professor of Geography at Oxford University put it:

“This is the politics at the heart of the stamp duty cut. It is designed to trigger a housing boom before the election. The Tories know that they cannot not win seats outside of London unless the value of homes is rising. This is critical to their election prospects next year.”

None of this should be surprising. And it was why, listening to Ed Balls on the Today Programme the morning after the Autumn Statement, after an impressive performance by the Shadow Chancellor on (for him) the most difficult day in the political calendar, I tweeted:

As the data demonstrates, the Labour Party is credited much too little for how carefully it has sought to address the perception it cannot be trusted with public finances. Against that background, and as a Labour Party member, I regret that it appears to have been bounced rather too quickly into supporting a tax cut that undermines the goals and ambitions of the Party.

This is a long and rambling post. Let me try and pull the threads together:

(1) this is a hugely expensive measure;

(2) contrary to what Osborne says, materially none of the benefits go to those struggling to get on the housing ladder;

(3) one certainly can’t describe it as designed to help those people;

(4) it looks like a transfer of state wealth, to be funded by cuts to public services, to those holding residential properties worth <£937,500;

(5) the more of those properties you hold, the more you’ll benefit – so the big winners will be those with substantial buy to let portfolios;

(6) one might well regard it as designed to generate a good old fashioned pre election house price boom;

(7) I’d be interested to see Labour’s case for supporting these cuts – it’s not immediately apparent to me.

Follow me on Twitter @jolyonmaugham

Badging tax risk


I have alluded elsewhere on this blog to the challenges that taxpayers face in assessing tax risk. BigXCo may feel comfortable – assuming its audit committee trusts its professional advisers – that it can make a fully informed decision as to the level of tax risk it wishes to take. But MediumYCo or IndividualZ will generally not possess that capacity. And, lacking it, they can unwittingly become participants in – and sometimes victims of – tax arrangements with a higher risk profile than they might choose.

I am not alone in being interested in the consequences of this state of affairs. The consensus view is that, if taxpayers knew what they were getting into, they wouldn’t get into it. And, collectively, we would suffer less the consequences of tax avoidance. But even if that consensus were wrong, a higher degree of certainty on the part of HMRC that taxpayers knew what they were doing would open up other avenues for addressing avoidance. For example, those who chose to participate in high risk transactions could be penalised if they went wrong.

With these policy wins in mind, a number of proposals have been advanced to help taxpayers assess tax risk: kite-marked tax advisors, higher quality explanatory notes, Revenue pre-clearance procedures, and the badging of certain promoters as “monitored”.

This is not the place for me to analyse the strengths and weaknesses of those proposals. Each presents challenges, each has limitations and each has strengths. What, instead, I would like to do is propose a further, and I hope realistic, proposal. A set of diagnostic criteria against which a taxpayer might self-assess the risk of the transaction proposed to him.

The objective of these criteria – or badges as one might call them – is a modest but important one. It is to enable the interested taxpayer to position the contemplated transaction on a risk spectrum that might start with pension contributions and finish near to evasion. He should, with the benefit of that positioning, be able to decide whether or not to transact.

What follows is my first pass at something that might be publicised to taxpayers. I’ve thought about how these criteria might apply to various transactions I have litigated. But please do likewise – and suggest, criticise and redraft.

Badges of tax risk

External criteria. There are a number of externally verifiable signals of tax risk. You should ask the following questions of the person putting the proposal to you (your “Adviser”).

1. Is there a DOTAS number that I will have to put on my tax return? DOTAS stands for Disclosure of Tax Avoidance Schemes and if there is a number that is a strong indicator of high tax risk.

2. Is there a promoter reference number for your transaction? Transactions with promoter reference numbers will have been devised by those identified by HMRC as more likely to be engaged in high risk behaviour.

3. Is there a page on HMRC’s website that deals with this transaction? HMRC publishes on its website very detailed Manuals for its Inspectors which set out the tax treatment of most transactions.If the Adviser cannot direct you to where the transaction is addressed in the Manuals it may indicate the transaction is higher tax risk.

4. What fee are you being asked to pay? If you are asked to pay a fee calculated by reference to tax saved, that is a strong indicator of high tax risk. If your fee is calculated by reference to your adviser’s reasonable hourly rate, that is an indicator of low tax risk.

5. Are you asked to keep the details of the transaction confidential, or sign a Non-Disclosure Agreement? The confidentiality in your tax affairs is generally yours to keep – or waive – and not your Advisor’s. If your Advisor asks you to keep details of the transaction confidential that may well indicate that the transaction is being sold to others and is a strong indicator of high tax risk.

The transaction itself. Why are you transacting – and why are you transacting in this way?

6. Does your transaction advance a non-tax (i.e. either a commercial or a personal) objective? If your only purpose in transacting is to achieve a tax benefit, this is a strong indicator of high tax risk.

7. Is the attractiveness of the transaction a consequence of the tax benefits it delivers? If you would transact without the tax benefits, that is a strong indicator of low tax risk.

8. If your transaction has a non-tax objective, is the manner in which you are transacting a natural way to achieve that objective? Most transactions structured in a normal way will attract the tax treatment Parliament intends. It is a common feature of higher tax risk transactions that they deliver your objective by an artificial route.

9. Does the shape of the transaction give you a better tax result than another economically equivalent transaction? What are the tax consequences of achieving your objective through a different route? A transaction that is not tax maximising has some tax risk but a transaction that is tax maximising has none.

10. Does the shape of the transaction advance your pre-tax objectives? If both the transaction and its shape are dictated by your non-tax objectives that is a strong signal of low tax risk.

The tax effects of transacting. In tax, as with other things, there is rarely such a thing as a free lunch. The difference between tax efficient transactions and tax avoidance transactions is very often whether Parliament intended the tax result your transaction delivers. So, you should ask yourself:

11. Is it likely that Parliament intended this tax result? It is useful to ask this question alongside 3. above: if Parliament did intend it, it is very likely HMRC’s website will say so.

12. Are you being taxed on the economic or ‘real’ transaction that you entered into – or do the tax consequences attach to some other transaction? If you are being taxed on a transaction that differs from the ‘real’ transaction that is a strong signal of high tax risk.

Follow me on twitter at @jolyonmaugham

Our Big Tax Gamble

This is an extract from Ladbroke’s Annual Report and Accounts 2013. Not that it matters, but it’s the bit for telephone betting and high rollers.


It makes a rather obvious point: if you’re a bookmaker, there’s a difference between the amounts your punters stake and your profit. Sometimes they win, and when they win you have to pay out.

The bit of the accounts for the UK that deals with marketed, artificial avoidance schemes shows that HM Treasury has about £14bn of exposure to the outcome of such cases. That’s the difference between the amount HM Treasury stands to collect (or avoid having to repay) if HMRC defeats all those schemes and the amount HM Treasury will lose the ability to collect (or have to repay) if HMRC loses.

This number reflects a huge backlog of unresolved cases involving about 65,000 taxpayers. Yep, that many.

That’s the background against which in the Finance Act 2014 the Government introduced its Accelerated Payment Notices provisions. HMRC has just started issuing Notices and so they’ve been much in the news. I’ve written about them here but what they do is require the taxpayer the subject of the Notice to cough up the disputed tax now pending the outcome of his fight. They accelerate the moment at which the taxpayer has to pay the amount he will have to pay if he loses. But if he goes on to win, he’ll get the money back, plus interest.

HM Treasury estimates that it will issue some £7.1bn of Accelerated Payment Notices in the next couple of years. And the 2014 Budget Policy Costings Document (page 36 for eager beavers) shows that Accelerated Payments Notices will bring in an extra £4.645bn of income over the next five years. (For the £4.645bn figure you need to read it alongside page 22 of this).

The reconciliation between the £7bn and the £4.645bn figure takes into account a number of factors: for example, not everyone who is issued with an Accelerated Payment Notice will pay or will pay immediately. Moreover, some people would have paid within that five year term anyway and so you can’t describe their payments as extra money resulting from the Accelerated Payment Notices provision.

But it’s instructive to think about what that £4.645bn figure actually represents. It’s clear that it’s not new money: Accelerated Payment Notices don’t create any new income for HM Treasury, they just advance the point in time at which a losing taxpayer would have to cough the money up. Now that’s a bit unsatisfactory because we spend it as if it’s extra income. I made that point some time ago here. But I’m a bit slow these days and I didn’t spot the real story.

When the Exchequer collects tax it accounts for that tax as revenue. Generally speaking, that’s fine. People typically don’t pay tax unless they owe it. Having received it, the Exchequer doesn’t generally have to return it. It’s not a bookmaker after all. It’s “Net Revenue” (to go back to the Ladbrokes analogy) that the Exchequer can spend.

But that general rule is not true of the £7.1bn the subject of Accelerated Payment Notices. If HMRC loses the fight, the Exchequer will have to give the money back.

Most of that £7.1bn (indeed, most of that £14bn) exposure rests on two issues: what is a “trade” and what does the phrase “incurred on” mean? The two leading cases on these issues are plodding their way through the appellate system. So far HMRC has won. But so far the cases have only come before the lower tribunals. And it’s far from certain HMRC will win on appeal. The risk of a reversal in the higher courts is no mere theoretical possibility. There was, for example, a case called Conde Nast where the taxpayer lost in every tribunal except the House of Lords (where, coincidentally, I was instructed for the first time). The Exchequer’s exposure to that case ran into many billions.

If taxpayer X wins even one of those two issues then so will taxpayers Y, Z and A. I estimate HMRC’s exposure to each of those issues will be in the mid to high single digit £bns. For scale, the amount of money expected to be raised from Labour’s mansion tax is £1.2bn.

That’s bad news in relation to the £14bn: money we might have hoped to get we won’t get. But it’s extra bad news in relation to the money paid under Accelerated Payment Notices (of between £4.645bn and £7.1bn) because HM Treasury will have already accounted for that money as revenue – and spent it – whilst all but ignoring the possibility that HMRC will lose. I say “all but ignoring” because HM Treasury does make a modest adjustment for the possibility – we don’t what because they don’t tell us – but we do know it’s modest because HMRC tell us that the main uncertainties in calculating the income from Accelerated Payment Notices don’t include the possibility that HMRC will lose on one of those two issues.

Go back to Ladbrokes. If you were a shareholder, you’d want to be pretty sure the “Amounts staked” line wasn’t being represented as “Net Revenue”, wouldn’t you? You’d want to know that serious consideration had been given by expert minds to the size of any provision that should be taken. And you’d want to know the size of that provision. Before you spent the Amounts staked?


1. The Exchequer accounts for tax receipts as income and spends it on public services.

2. However, unlike normal tax receipts, receipts raised under Accelerated Payment Notices (expected to be some £7.1bn) carry a contingent liability to repay those receipts if the tax case the subject of the Notice goes against HMRC. Nevertheless those receipts are being spent just like normal tax receipts.

3. HM Treasury’s provision for that contingent liability is opaque and may well be many £billions too small.


Follow me on @jolyonmaugham

A better way of doing politics

What fun to be a new Government. In you bound, full of non-partisan cheer and an unshakeable conviction that you can make the world a better place.

As did the Coalition. Within ten days of taking power, George Osborne had delivered a landmark speech – “not about party interests [but] about the national interest” – in which he announced the creation of a new, independent Office for Budget Responsibility. Such stood to deliver many benefits:

  • It would “[w]ith help from a secretariat of civil servants…  be in charge of making independent forecasts for the economy and the public finances.”
  • It would “remove the temptation to fiddle the figures by giving up control over the economic and fiscal forecast”
  • We would become “one of the few advanced economies with an independent fiscal agency that produces official fiscal and economic forecasts.”

And there would be “nowhere to hide the debts, no way to fiddle the figures, and no way of avoiding the difficult choices.”

A marvellous thing.

In opposition, Labour came to wonder whether the OBR might be a route to counteract public scepticism that it could be trusted with the economy. If the political parties were to submit their manifestos to the OBR to be costed, the public might take a less jaundiced view of deliverability. As Robert Chote, Chairman of the OBR, wrote to Andrew Tyrie, Chairman of the Treasury Select Committee:

I believe that independent scrutiny of pre-election policy proposals could contribute to better policy making [and] to a more informed policy debate.

That letter (which is well worth reading) goes on to set out a number of (achievable) pre-conditions to that objective being achieved.

Labour eventually procured a debate on the issue. The motion was:

That this House believes the role of the Office for Budget Responsibility should be enhanced to allow it to independently audit the spending and tax commitments in the general election manifestos of the main political parties, and calls for legislative proposals to enable this to be brought forward at the earliest opportunity.

And it was defeated.

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

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

So not now, but next time.

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

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

then the hour is surely nigh.

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

I shall be inviting the Liberal Democrat incumbent, Simon Hughes, and the Labour challenger, Neil Coyle, in my constituency, Bermondsey and Old Southwark, to indicate their support for these measures. I hope you might ask the same of your candidates.

Follow me on twitter @jolyonmaugham

Some more Waiting

I started writing my Waiting for Godot blog with the objective of enhancing public understanding of, and improving the quality of public and political debate around, tax. Hence, the Blog’s title. I try to write thoughtful pieces, typically touching upon some tax issue in the public eye.

Despite being a small project it has enjoyed some successes. The FT has featured the blog several times and it is widely read by other journalists for the nationals. The Financial Secretary to the Treasury, David Gauke, has commented on a number of posts and has indicated to me that he means to continue to support the blog and its object. I am sure, too, that his talented shadow, Shabana Mahmood MP, is equally committed to the development of effective tax policy and public engagement in the field. As I have written elsewhere on this blog, a closer engagement with taxation is a particularly pressing need for the Labour Party, of which I am a member.

The tax community as a whole has been very supportive. With its assistance, this blog is frequently able to break stories across the tax technical and legal press. I am particularly grateful for the support of Richard Murphy, whose public position in the field is without parallel, and who has frequently directed his considerable following to blog posts featured here. Richard knows – for his support comes despite the fact that much of the analysis here he would disagree with – the value of the project and of high quality debate.

I have written about the need for and benefits of a more meaningful engagement with the public by HM Revenue & Customs. What that engagement does not look like is the occasional Treasury Select Committee, or other parliamentary committee, appearance. What it does is real engagement with the media.  It has been intimated to me, in high level discussions with HMRC, that there is growing internal recognition of the need for the department to become more outward facing. This, if it eventuates in a meaningful way, could be a transformational development not merely for the department but for public engagement in the field.

It’s always been clear to me that the project is too big for one person. Whilst I care enormously about it, I struggle to balance it with the demands of my practice. And I am also keenly aware of my own limitations: there are many important aspects of the field that I lack the technical capacity to address, at least in the educated and reflective style that I strive for.

To that end, I have in recent days asked a number of the leading figures in the tax world – and commentators in associated fields who I admire – to contribute thought pieces to this blog. These requests have been almost universally accepted. Pieces will appear in the coming days and weeks. And I will be very proud to host them.

One writer, of whom I am a particular fan and who has been especially supportive, has had to decline. It can be difficult for large professional services firms to write about tax policy. Their broad set of commercial interests, and duties, need to be carefully considered before taking a public position outside the range of a narrow tax technical analysis. But I hope that refusal does not signal a broader unwillingness to engage. It is those firms who harbour many or most of the leading technicians. And it is those firms alone that can deliver the value that comes from a breadth of perspective.

I hope those in the field who I have not – or not yet – approached might come to regard Waiting for Godot (www.waitingfortax.com) as a natural outlet for a particular kind of piece.  An educated, reflective, non-partisan writing about tax. What might our system look like? How might we get there? Why are we where we are? What are the impediments to improvement? Not as an alternative to writing for the established technical journals in the field – who exist to examine tax purely from a technical perspective. And not for pieces that advance commercial or political interests. But for those that could advance the public interest.

You can contact me on Twitter at @jolyonmaugham