Enough already

It often comes as a surprise to people when they discover that tax specialists pay scant attention to the tax related articles which appear in the national media.  But, after all the years of studying, exam taking, learning the job and, especially in recent years, coping with the near constant demands on advisers to revise and update their knowledge, the very last thing you feel inclined to do is spend yet more time in reading the diluted and inaccurate rubbish that finds it way into the papers.

Notwithstanding, for those of us who advise clients on their planning for business transactions, succession and wealth management etc., it is incumbent on us to have a feel for the political mood in order that we can anticipate changes in legislation and practice which may have a bearing on our clients, and the work we do for them. For this, we have to suck it up, and read the press.

Even then, no matter how diligent one is, there will still be the occasional left hook that no one sees coming. In recent times, no one foresaw the changes to the remittance basis of taxation (still commonly referred to, albeit wholly inaccurately, as the domicile rule). Whether the old rules were correct, fair or justifiable and, indeed, whether the new rules fall to be viewed any differently, is not the issue here. It is simply a case, when taking the starting point of the law we already had in place, of relying on the not unreasonable consensus amongst experts that no government in its right mind would risk changing those laws, or at least risk doing so without giving at least, say, five years advance notice. Oh well, you live and learn. At least on the plus side, the writer’s London apartment block is now blessedly free of foreign investment bankers.

Recent weeks have seen the Guardian’s tax gap series, an inaccurate spewing forth of subjective drivel, largely written by anonymous contributors, and accusing many law abiding taxpayers of being tax evaders who are responsible for third world infant mortality.  I pay my taxes - I don't kill babies.  Get your bumper sticker, free with this weekend’s colour supplement.

All good stirring stuff for the sandal wearing, chattering classes sitting comfortably in their [capital gains tax free] Islington townhouses, but it is blather and all it can achieve is to worsen the very problems complained of, causing the government to react in its knee jerk fashion and, in keeping with its now proven approach to tax policy, succeed only in making a hugely complex, uncertain and unreliable system even more so.

What compounds the irresponsible nature of such hack reporting is that the whole shebang is, in the writer’s view, nothing more than the throwing up of a smokescreen as the Grauniad seeks to save face after having been deservedly clattered by Tesco last year and, into the bargain, exposed for its own parent company’s less than upstanding, but still entirely lawful, tax management policies.

Which brings us to the key issues. Unfortunately, none make for the sexy copy of the low hanging fruits of multilateral information treaties, tax havens or dodgy bankers.

It is human nature that people do not like being told what to do, and that certainly includes the payment of taxes. It is all very well advancing the inarguable truths that taxes are needed to pay for centralised spending on infrastructure, healthcare, defence and education etc., but these have no significance at the coalface. On a local level, there will always be individuals and companies who will seek to rationalise the exclusion of their own contribution to the public coffers whilst still expecting the majority to comply. The issue is not that this happens, because it always will happen. The issue is by how many, and by how much.

The sad fact, and especially in the current economic climate, is that this rationalisation becomes all the easier to find when the taxpayer does not see his contributions going to pay for hospitals and schools but, rather, towards lining the politicians’ own pockets, paying for junkets and jollies, incompetent bankers and fat cat PFI merchants. Polly Toynbee might, one day, see the folly of chastising the plebs for not acting like model citizens when, at the same time, being willfully blind to the actions of her mates in government who foster the very spirit of non compliance against which she rails.

Where laws are required in order to prescribe a certain type of behaviour, the prescription itself is only declaratory. What makes the law work is enforcement and the deterrent effect of the sanctions for those who do not comply.

In the UK, we have a motorway speed limit of 70 miles per hour, but yet many modern executive and sports cars will be capable of near double that limit. Yet, for the best part, the drivers of those cars restrict their speed to the prescribed limit of 70 mph, or thereabouts. The reason is not because they understand or agree with the basis of the law in question but because they know, and fear, the consequence of breaching the law; often, a ban from driving. A conclusion which is easily supported by seeing the same drivers elsewhere in Europe when, in the absence of the prescribed speed limit, they will drive not at their usual 70 mph but, rather, at 130 mph.

Which brings us to tax, and its evasion, which we will describe simply as being unlawful non-payment. To the extent there is evasion, as opposed to the lawful avoidance or mitigation of tax, ranting against the banks etc., will achieve nothing but to advertise an evasion culture to a wider audience, some of whom may well feel encouraged to follow suit. After all, if Barclays can evade the payment of £1 billion tax, who is going to care about the average Joe evading the payment of a much smaller sum ?

No, what is needed is both better enforcement and better sanctions. In no particular order, we suggest the following are needed:

Leave the extant law alone. As a body of law, it might well be far from satisfactory but that is not going to be changed by the very politicians who have made it such. The exception to this must surely be the long awaited changes to the foreign company taxation regime, over which considerable resentment now exists at the uncertainty caused by the government’s procrastination.

Appoint an independent body to review systematically the whole of the tax code with a view to establishing how, and when, it can be best be repaired. Experts, and not trough-feeding politicos, are needed for the purpose and unless, or until, someone has any better ideas, the Tory proposals here are worthy of more consideration.

Regulate, by statute, those who provide tax advice. This is loverdue and, whilst some of us are subject to professional regulation, disciplinary procedures, compulsory insurance etc, there has been, in recent years, the emergence of a sector of dubious providers purporting to offer expertise but yet merely selling expensive and ineffective tat in the way of schemes, plans and solutions (whatever they might be). The more reputable advisers know this, because we get called upon to pick up the pieces when, more often than not, the mug punter finds out the hard way that they were sold a pup by an outfit which has long since disappeared from the scene. If it were not for the government hamstringing its own tax agencies with the ill advised 2005 merger, the extent of this mis-selling and the consequences of the absence of proper regulation would, we feel, have now surfaced and prove to be another matter worthy of public outrage.

Allow the Revenue to do its job, and to enforce the laws for which they are made responsible. At the upper echelons of the Revenue, there are some very capable, well educated and sincere people who need to be better resourced and given more freedom to enforce the law. Until this happens, the Revenue will continue to have a long tail of lowly skilled employees who are inflicted on the wider public to little positive effect whilst the talent in the Revenue’s ranks spends its time in filling out forms and attending policy meetings instead of using their considerable expertise to secure major tax settlements in investigating and, when appropriate, litigating against the banks and similar sized organisations.

Make the sanctions an effective deterrent. Here, there seems little merit in the argument advanced by some commentators that there should be more criminal prosecutions. Such prosecutions are expensive, are rarely justifiable in the public interest and the criminal justice system hardly has an effective track record of dealing with tax evaders. The preferred alternative must be for the financial penalties to be improved upon. These have long since been too low to act as a deterrent to many. It remains to be seen how the new penalty system, effective for returns in the post April 2008 period, works in practice but the expectation is that the penalty weightings will prove to be higher than has historically been the case. There remains, however, the long awaited second go at an amnesty. Whilst the first ODF was a steal for the limited few who took advantage, the very announcement of a second facility will, itself, call into question the credibility of the government (when amnesties and similar initiatives are like buses, people can always miss one and wait for the next). If the new disclosure facility is to be effective in encouraging sufficient numbers to come forward, the government will have to make it known that the future penalty weightings will be much higher for those who do not then come forward voluntarily but whom are subsequently caught (the law itself does, after all, allow for a 100% penalty albeit that this has historically probably only very rarely, if ever, actually been levied). In taking a bullish approach, the scope for setting the ODF 2 penalty weighting at a much higher level than the 10% of ODF 1 will exist but still provide an incentive to those recalcitrant taxpayers who might be considering whether to come forward.

Lastly, impose joint or secondary personal liability on company directors for evasion by the companies for which they are responsible.  Whilst, in some albeit extreme circumstances, this is now going to be possible under the new penalty regime, the law is aimed at those directors of privately owned companies who undertake phoenixing with a view to avoiding payment of the company's tax laibilities.   It will be of no relevance to the directors of the larger public companies, where tax is an expense which falls to be managed for the benefit of shareholders.  Here, in the absence of the directors having any material investment in the companies which they manage, there is a moral hazard whereby the directors can be encouraged to take a more than optimistic view over  the agressive nature of company tax planning, often with the assurance of external advisers and the tacit indulgence by shareholders.  In areas elsewhere, such as health & safety and, from next month, the national minimum wage, such directors can find themselves personally exposed to potentially unlimited fines where the companies  they manage breach the applicable laws.  It is, perhaps, time for this principle ito be extended to tax evasion.