I am just about getting used to tax being daily headline news, and therefore presumably the subject of everyday debate in the pub. It is really interesting to see how the debate is developing, and how the goalposts appear to be subtly shifting already in the game of acceptable tax mitigation versus unacceptable ad abusive tax avoidance.
Treasury Minister David Gauke has had a lot to say for himself recently, not all of which has made logical sense to me as a taxation practitioner. The highlights of his recent pronouncements have been as follows:
Proposals to counter aggressive avoidance schemes
The flagship of this particular policy is the General Anti-Abuse Rule (“GAAR”), which is due to be implemented in April 2013 and is currently the subject of consultation. This is targeted specifically at ‘abusive tax avoidance’, defined as activity with no commercial purpose other than saving tax, and thus by definition artificial tax avoidance. It is specifically not aimed at ‘the centre ground of tax planning’, whatever and wherever that may be (one can only assume planning that is neither abusive nor artificial).
I am a great supporter of the GAAR, but it has already become clear that the government is concerned about its scope, or alternatively concerned about what is going to happen in the interval before GAAR is introduced. Thus Mr Gauke has put forward further proposals to deal with those who promote and use aggressive avoidance schemes, which the Treasury estimates account for “14% of all unpaid tax income” (quote from the BBC News website). Heaven only knows what that means; I am assuming it is not a direct quote from the Treasury. Does it include tax evaded as well as avoided, and how do you estimate how much tax people are avoiding, or evading for that matter?
The proposed measures are as follows:
A requirement for promoters of tax avoidance schemes to disclose details of clients who take advantage of them. This is subtly different to the current Disclosure of Tax Avoidance Schemes (“DOTAS”) regime, which requires the taxpayer to disclose on his or her tax return details of schemes he or she has used.
A requirement for promoters to disclose how all of their avoidance schemes work, not just the ones for which they are being criticised. Again this should largely be covered by DOTAS requirements, so does not seem to add much to the armoury of HMRC in this respect.
Publication by HMRC of warnings about tax avoidance schemes that are being mis-sold, to make it easier for taxpayers to identify disreputable promoters. This is interesting; does it mean that HMRC will say “we do not think his scheme works” when the scheme has not been tested in the courts, or will it apply only to schemes that have already been struck down by the courts? I assume the latter will in fact be the case, although I can see a legitimate argument for either as long as the basis of the warning is clear.
Companies could be fined more than £1 million for flouting the new rules.
Use of service companies to reduce income tax
I can broadly live with Mr Gauke on the above issue, but this I have more problems with, as he describes this practice as ‘morally repugnant’. Having also described aggressive tax avoidance schemes as those which are contrived to defy the will of Parliament by depriving the Government of expected revenues, he would presumably regard himself as bound by that description in pronouncing on what is and is not acceptable tax planning. On that basis I think he has a problem in describing the use of service companies in these terms.
There is no doubt that the tax system contemplates the use of companies as a trading vehicle. Indeed, the recent trend in the tax system has been to reduce corporate tax rates as opposed to income tax rates, from which one might reasonably deduce that the will of Parliament is that people should be encouraged to trade through companies, and are not therefore defying the will of Parliament by so doing, but rather the opposite.
Furthermore, there is long-standing legislation to combat the use of service companies, in the form of what began life as IR35, which in appropriate cases allows HMRC to ‘look through the corporate veil’ and ignore a service company, effectively treating the relationship between engager and worker as an employment for tax purposes. However, by and large HMRC appears to choose not to use this legislation, either because it thinks it is ineffective, because it does not think it applies in the vast majority of cases, or because it does not have the resources to enforce it.
If the first reason is correct, some more effective legislation would be good, and that lies in the hands of Mr Gauke and his colleagues. If the second, I fail to see what Mr Gauke is complaining about, as such cases surely represent people using companies for the purpose intended by Parliament. If the third, it lies in the power of Mr Gauke and his colleagues to ensure that HMRC is properly resourced. None of these reasons appear to justify Mr Gauke’s whinge about the use of service companies.
In summary, a service company structure is either robust enough to satisfy HMRC that it is commercially justifiable and sustainable (typically this would involve no requirement for personal service from any specific individual) or it is not. In many of the cases recently publicised in the media and government itself, there is absolutely no doubt that personal service from a specific individual is of the essence of the contract, and thus existing legislation should be perfectly adequate to successfully challenge the apparent tax benefits of such structures.
I do not like this muddying of the waters by Government ministers who should know better, and should be able to provide clarity rather than obfuscation with regard to the issues at stake.
Paying tradesmen in cash
This is also morally wrong, says Mr Gauke. “Getting a discount with your plumber by paying cash in hand is something that is a big cost to the Revenue and means others have to pay more in tax. I think it is morally wrong. It is illegal for the plumber but it is pretty implicit in those circumstances that there is a reason why there is a discount for cash. That is a large part of the hidden economy.”
Again Mr Gauke runs the risk of confusing two issues here. If a tradesman chooses not to disclose a cash receipt on his tax return that is tax evasion pure and simple, a criminal offence which HMRC can choose (and usually do) to settle on the basis of a civil contract settlement offer, if of course it comes to light. Austin Mitchell, a Labour member of the Public Accounts Committee was therefore probably unwise to comment as he did:
“This is petty stuff. There would have to be large-scale surveillance to stop it. You can’t control people’s morals like this and it is best not to try.”
He runs the risk of being seen to condone criminal conduct, even if he was in fact talking about the other side of the coin, which is far from clear.
That other side of the coin is a trickier one to deal with, namely the position of the customer as opposed to the tradesman. My thoughts on this issue are as follows:
- Is it for the customer to act as his supplier’s moral conscience? Mr Gauke says he has never asked for a discount for paying cash to a tradesman. Nor have I, because I would not want to put temptation in someone’s way to behave in a manner that I consider reprehensible. The Daily Telegraph goes so far as to say “…………..it is fair to assume that Mr Gauke’s rather sanctimonious observation would apply to a majority of people in this country.” Quite how they reach that conclusion is beyond me, but it does seem likely that it is at least common practice.
- Even the very strict money laundering regulations applicable to accountants (among other professionals) draw a distinction between disclosure of evidence of tax evasion obtained in a professional capacity (to be disclosed) and a private capacity (no obligation to disclose). One would have to ask those who drew up the guidance why the distinction, which would I think be an interesting question and answer. Oddly enough it would mean that if my firm contracted with a supplier who offered a discount for cash I might be required to make a money laundering disclosure (but see below), but if I did so personally I would not. Is that morally right?
- Is it for the customer to guess his supplier’s motivation? I have had a number of clients who have got into difficulty with their bank, and in particular have found that if they pay money in to an overdrawn account they cannot access it again. In such a case it would be commercially extremely sensible, not to mention entirely legal and above board, for them to ask for payment in cash, and they might even offer a discount for the inconvenience suffered by the customer in accessing and obtaining a significant cash sum. Am I as the customer supposed to try and work out what my supplier’s motivation in asking for payment in cash is? I wish I lived in the morally black and white world that Mr Gauke appears to inhabit, where determining the motives of others is so straightforward. Or should I be worried that a senior Government minister has so little imagination, not to mention grip on reality?
- How far are we going to go with this? My wife and I engage (on a self-employed basis, and yes, she has on occasion sent a substitute) a cleaner for three hours a week. I have not the faintest idea to what extent if at all she discloses her cleaning income to HMRC, nor indeed any inclination or obligation to find out. I think the best of other people (unlike Mr Gauke) so I assume until proven otherwise that people are honest. That seems to me to be a reasonable basic tenet of Christianity, not to say humanity. Am I in future going to be required to ensure that our cleaner is complying with her tax obligations, and how will I be supposed to achieve that without breaching her rights to confidentiality as a taxpayer?
Difficult one, isn’t it, when you start to think about all the implications? Shame Mr Gauke didn’t bother to do so before opening mouth without engaging brain.
The extent of Mr Gauke’s rashness is demonstrated by a highly critical Daily Telegraph leader article, always a bad sign for a Conservative minister. The broad thrust of the leader is:
- People can make their own decisions as to how they pay for services. Paying cash is neither a crime nor in any way improper.
- Taxpayers are being expected to pay for the Government’s own tax legislative mistakes.
- Tax avoidance occurs because the tax system is too complex and tax rates are too high. As the Institute for Economic Affairs said yesterday “If the Government wants to reduce tax avoidance it should reduce and simplify taxes.”
I tend to agree with point 1. Point 2 is over simplistic, but there is an underlying point which runs into point 3. I certainly agree that the tax system is too complex, but not that tax rates are too high; someone has to pay for the financial mess we have got ourselves into, and taxpayers look the likeliest candidates to me.
The complexity of the tax system is quite frankly because it is imposed by amateurs with political axes to grind, who devote scandalously little time to careful examination of tax legislation before it hits the statute book. There is no underpinning philosophy to the UK system, which has simply developed piecemeal over hundreds of years with no discernible pattern or strategic view. In an ideal world we would rip it all up and start again with something much more logical and straightforward, but I don’t see a lot of political will to cleanse that particular Augean stables. And there is woefully little Parliamentary time devoted to line by line dissection of tax legislation, and a misguided and fundamental mistrust of the professional taxation community’s willingness to help with the drafting of tax legislation in a disinterested and public-spirited manner.
So my parting words to Mr Gauke would be to put his own, his party’s, his government’s and Parliament’s houses in order before he presumes to lecture the great British public on morality.