Archives For Jason Piper

By Jason Piper, ACCA’s Senior Manager, Tax and Business Law

Those of you with long memories (or chronic insomnia) may remember a blog I wrote in 2011 on the topic of HMRC’s approach to discovery assessments. To recap, the worry was that HMRC were using discovery as a backstop to try to cover up their own administrative failings, trying to claim that some technical deficiency in the taxpayer’s documentation entitled them to the longer time limits of what is meant to be a reserve power used only in rare cases.

Well, this week I read another case report, and they’re still at it. Like one of the earlier cases, the taxpayer had been using a reportable “DOTAS” arrangement, and the question was whether they had properly alerted HMRC to the structure so that HMRC could challenge it inside the usual 12 month window. What sets this latest case apart and makes it particularly relevant is that the debate only arose because of an issue in the taxpayer’s software package.

The details of the case turn on fine technical points of law, but the fundamental issue was whether the taxpayer had deliberately caused a loss of tax. For this to be the case, they needed to have consciously entered the relevant entries where they did in the return. In fact they had only put the entries where they did because a shortcoming in the software prevented the “correct” disclosure – all the right numbers were there to create the intended result, and there was clear notification in the “white space” of what had happened and why.

Neither the taxpayer nor his advisers appreciated that strictly the boxes they had used created a subtly different legal groundwork for the desired liability, with an immediate and inevitable loss of tax, rather than the creation of a freestanding credit which as a matter of choice had been set against the relevant income.

The practical upshot was that because the taxpayer had not deliberately created a loss of tax, HMRC could not apply the 20 year limit for claims that they would have needed to rely upon by the time they got around to trying to sort things out properly. Now, none of this goes to the rights and wrongs of the underlying scheme – but what it does illustrate is that the tax law and the software that purports to implement it are inextricably linked.

How *does* the law deal with situations where the software doesn’t quite align to the legal requirements? On the basis of this case, the answer to that would appear to be “slowly and painfully”. If it were only the users of esoteric avoidance schemes finding that the software can’t quite reflect the reality of their tax affairs in strict accordance with the minutiae of the 19,000 pages of UK tax law then it may not be such an issue.

But HMRC’s brave new world of Making Tax Digital beckons, and in this new legislative wonderland of interim reports, revised record keeping requirements and The Death Of The Tax Return, the Tribunals, taxpayers and HMRC alike will be finding out for the first time just how well the software developers have been able to predict what the final shape of the clauses passed in Finance Act 2017 will turn out to have been.

The new software packages haven’t been written yet – but then again neither have the rules that they’re supposed to implement. As Raymond Tooth and the Commissioners for Her Majesty’s Revenue and Customs, 2016 UKFTT 723 TC05452 illustrates, the ability (or otherwise) of the software to accurately reflect precisely the requirements of the Taxes Acts can be fundamental to whether a tax liability even exists – and that’s too important an issue to rush. There’s a line to be drawn between agile development and clairvoyance; developing the process and software for MTD before we know what the legal basis is for it runs the risk of falling the wrong side of that line.

 

Making tax digital

accapr —  1 September 2016 — Leave a comment

By Jason Piper, ACCA’s Senior Manager, Taxation and Business Law

If the only tool you have is a hammer then every problem looks like a nail. If you spend your whole time focused on just one topic, you can sometimes lose sight of the importance of other areas. Some topics though are too important to ever ignore completely, and when it comes to the relationship between business and society, one of those areas is tax. Every business should pay its correct share of taxes, in full and on time, both as a matter of law and as a point of principle.

But HMRC staff, who spend their whole lives engaged in just the one field, must remember that there is more to the world than tax returns.

One of the first things I was taught as a young tax trainee in practice was never to let the tax tail wag the commercial dog. It’s a sentiment HMRC subscribe to as well, especially when trying to ascribe motive in what may be an avoidance scheme. But what we’re at risk of seeing in MTD is the administrative tail not so much wagging the commercial and social dog as dragging it, unwilling, into a morass of unwanted and unfamiliar process changes.

HMRC’s own research indicates that 400,000 businesses would rather disengage totally from reporting their taxes than transmit their information over the internet to a government body. For those prepared to give it a try, the outlook is “challenging”.

The rollout programme currently envisaged by HMRC would see a huge spike in conversion to the new processes between April 2018 and April 2019, with taxpayers having to make the changeover at a rate of more than 1 every 9 seconds, day and night, week in, week out, with no break for Christmas, Easter or HMRC’s “software upgrades”.

Around 40% of them will need assistance with the new systems – or to put that in real numbers, about 1.5m. With a staff not much more than 50,000, that leaves every HMRC staff member an allocation of around 30 taxpayers to hand-hold through the process – or pass the burden onto friends, family, neighbours and Citizens Advice. Of course, helpful acquaintances may not know enough about the system (either the tax or the technology side) to really help out – while charities with experience in the sector have warned of the risk of exploitation of vulnerable taxpayers if they have to rely on third parties to handle this aspect of their financial affairs.

HMRC’s MTD proposals for big business would allow for a longer, later conversion period and provide a less pressured environment for the HMRC staff. It may be sensible to do the first tests with some volunteer big businesses, for even their (more complicated) systems are likely to suffer significant disruption. But some businesses would relish that opportunity. If they and HMRC could work together to understand how this might all be made feasible, then it’d pay dividends for everyone. In any event, some of the issues facing taxpayers (poor broadband, unfamiliarity with the internet) will heal themselves while a robust and workable system is developed for wider rollout.

The digitally disenfranchised are a poor target market for merging two of the things that many people find hardest to understand – tax and modern technology. The additional delays introduced by the Referendum vote, not to mention the related uncertainty about the future of VAT, give weight to our calls to rethink at least the timetable – and with it the chance to maybe revise the substance.

Tax systems exist for the benefit of society, not the other way around. At a time when there are concerns about the whole of the rest of what society gets up to, breaking the bit that pays for it all is the last thing we need.

Brian Cox has got it easy…

accapr —  19 September 2014 — Leave a comment

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By Jason Piper, manager for tax and business law, ACCA

The recent launch of the OECD’s proposals for the BEPS project resulted in a deluge of response, commentary and reaction.

Too much is ill, mis or uninformed, and often from people who ought to know better. There’s a rush to present simplified answers, to try to clear everything up with a couple of soundbites and a nod to popular opinion.

But it’s not simple.

People say “oh, it’s not rocket science”. As these things go, rocket science is actually a comparatively simple bunch of equations. Rocket engineering on the other hand, now that’s difficult. Any 6th form physics student can (or at least, should be able to) do the theoretical calculations on how much fuel you need to get a given payload to escape velocity. But actually designing the pumps, tanks & nozzles to get the stuff to burn, let alone actually building them (hands up anyone with the knowledge of metallurgy to understand precisely which alloys you should be using where?) is a different matter, and only the most gifted and dedicated of amateurs have even a hope of getting a rocket to actually work (and even then they’d be the first to admit their debt to the professionals who build the parts).

Tax is much the same. Should everyone pay a fair amount of tax? Well that’s so trite it barely even deserves to be a question.

What is a fair amount of tax? You might as well ask what’s the right shade of blue, or how tall should a politician be.

Laws are the next best proxy we have to fairness when it comes to tax. But then the laws are (to put it mildly) complicated. And Brian Cox can point to planetary movements, reel off the equations, and explain what’s happened. When someone asks why a baseball pitch doesn’t work the same way, that’s easy – baseballs are operating in an atmosphere, and under another heavy gravitational field. And there’s no real mileage in trying to establish the physics of what would happen to a baseball in space, or a planet in the earth’s atmosphere and gravity, because the two scenarios are implausible. And there’s no need to worry about how a watermelon would operate at high altitude, or a whale sized object on the edge of the atmosphere, because such things don’t exist. There is no gentle graded curve between the tiny everyday objects that we all handle and work with and the vast numbers and forces which operate in astronomical models. There’s a clear break between them; no need for complex transitional calculations.

But tax isn’t like that. There’s no legal difference between the structure your window cleaner can set up to run his business and the one that a multinational might use to handle its international treasury function. There’s no difference in principle between the calculations that a business handling nuclear waste reprocessing does to work out its tax liability and those that a corner shop might do. And the tax system isn’t just trying to run one set of equations at once; it’s got two or three sets to cope with (companies, partnerships, limited vs unlimited liability variants, sole traders – they’re all valid forms of business, and it’s open to business to mix and match the legal forms to get itself the best result.) So it’s a bit like having planets that can behave like baseballs if they want to.

And the best bit is that the tax system isn’t like physics, which gets done to us and we just have to try to work it out from the evidence. The international tax system is something we’ve done to ourselves (albeit perhaps indirectly, in that it’s actually the work of elected politicians).

Now, I have to say that if we were in a position to be able to revise the equations that govern the temperature that the sun burns at, or the force exerted by gravity, I’d probably advise caution in the choice of those writing the new rules. I’d certainly want them to have a pretty firm grasp of astrophysics; a background in marketing or even an advanced degree in economics just wouldn’t quite be what I was hoping for.

But when it comes to the tax rules, there is a nasty tendency for the value of knowledge and experience to be ignored. I’m sure it would be terribly helpful to have the sun coming out at night instead, when the light would be more useful. Clearly weakening the force of gravity would make us all lighter and put diet clubs out of business overnight. Spinning the planet’s axis of rotation through 90 degrees would put London in the tropics and make for much warmer winters; bound to be a good thing.

It’s fairly obvious that actually none of those would be terribly good ideas, and no half-sane scientist would ever fall for them. But of course that’s another advantage the physicists have; they can be reasonably certain that their system works and they’re not at serious risk of breaking it. Tax systems aren’t like that. The British one was described this week as “complex, confused, irrational, punitive and in urgent need of root and branch reform”. And that got it a rating of 21st out of 34; quite what they’d have to say about the US system (33) or the French (34) is anybody’s guess. And yet unsound proposals get put forward for tax all the time in the comments columns of the internet, and explaining why they won’t work can require a degree of engagement and willingness to learn that all too few seem prepared to put in. I’d love to help more people understand the basics of tax system design, it’s really important stuff. I’ve tried to do some of it here: http://bit.ly/TaxSimplicity

But please, don’t ask me to condense 746 pages of BEPS documentation into 140 characters. It’d be about as much use as posting  and if you know what that means, you don’t need me to explain it.

(It’s the Tsiolkivsky Rocket equation, for which I must thank Randall Munroe, of XKCD – see http://what-if.xkcd.com/7/ )

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By Jason Piper, tax and business law manager, ACCA

Among the themes covered in the ongoing debates around BEPS and international tax, there’s been a strand of discussion around “tax competition” – the practice by governments of attempting to make their jurisdiction look more attractive than others by reducing the tax burden on businesses.

The argument runs that by encouraging a move away from taxation of business, tax havens and rich countries are imperilling developing countries who need tax revenues.

But if making your tax system “competitive” costs you money, why would anyone bother? Perhaps because the indirect consequence is that you make more out of the VAT, PAYE and simple GDP effects of inward investment than you lose by reducing the tax due on any profits that the company may book in your jurisdiction.

For that to work though, you need a number of conditions to be true. In particular, you need to have effective collection mechanisms for VAT, and a secure taxpaying base of employees. You need to be comfortable that you have the economic capacity to service the increased production and demand for the GDP growth to have value.

For most developed countries that is very much the case. They typically collect 30-40% of GDP in taxes, and less than 10% of that comes from corporation tax – so 3-4% of GDP is collected as corporation taxes. But in developing countries, the level of GDP collected as tax falls to 10-20%, while the proportion of overall taxes attributable to corporation tax rises to nearer 20%. So we’re still looking at around 2-4% of GDP collected as corporation tax.

And that means that the economics of “tax competition” doesn’t work for a developing country; it would need to have twice the GDP impact per pound of corporate profit untaxed to get in the same level of VAT or employee income tax as recompense – yet proportionally the amount of tax that developing countries should typically be able to extract from the international businesses who might invest in them should be far higher. The reason that big business goes to developing countries is typically natural resources – and those resources are not typically mobile. If business wants them, there’s only the one jurisdiction they’ll be coming from, so the local government should have business in a firm grip when it comes to extracting tax revenues.

And there’s another twist. Remember those percentages of GDP collected as tax? Well, it’s generally reckoned that a nation needs to devote around 15% of its GDP to government in order for government to be stable. Or in other words, if you as a business are looking at investing into a market where less than 15% of GDP gets collected as tax, then you’ve got more to worry about than just business rates and form filling; there’s a good chance that the whole infrastructure will be unstable. Whether that’s political instability, or a lack of roads on which to transport your produce, there’s going to be additional risk factors to play into your analysis of whether the investment is sound.

And therein lies the challenge for a business decision maker. In a developed country, with a high level of maintained infrastructure and political stability, corporate tax is a pure cost to be managed down. The net marginal benefits accruing from payment are nil, while the government may even be prepared to forego those taxes in order to attract your business; official resistance to corporate tax minimisation is likely to be low.

In a developing country, taxes paid to central government may have a very real benefit to business, for the simple reason that without them the whole investment may become worthless in very short order. Tax is not so much a deduction from profits as a cost of sales; it’s an essential element in allowing those profits to be earned in the first place.

To be fair, this probably isn’t something that big business needs to be told. They know full well that however valuable the resource in a mine might be on paper, it’s worthless if they can’t safely extract and process it. Political stability is a key element of their risk analysis. If the people at the top of multinationals weren’t smart enough to have worked this stuff out for themselves, they wouldn’t be there.

But there’s a lot of other people who haven’t spent a lifetime making difficult decisions based on complex yet incomplete information. And if they end up running tax administrations, then there’s a risk that they might consider tax holidays for big business to be a good way forward to attract international investment – when in fact, it may be the very last thing they need, and the very last thing that a rational business would ask for. What’s sauce for the goose may not be sauce for the gander, or indeed the value burger of your choice. When it comes to domestic tax policies in respect of international investment, it most definitely is horses for courses.

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By Jason Piper, technical manager – tax and business law, ACCA

I’ve spent the last few weeks making people laugh. Not intentionally you understand; in fact, I’ve been talking about something which is really rather horrible. But every time someone asks “so what have you been up to then?” I’ve told them I’m putting the finishing touches to a paper on pillage. To be fair, not everyone laughs. Quite a few people just look puzzled. After all, I’m supposed to be working on business law and tax issues; pillage sounds more like an academic historian’s territory.

But here’s the thing, it’s not. Pillage isn’t about Viking longboats any more, or even squads of cavalry sweeping over the hill, knocking down haystacks and stealing barrels of beer. Pillage these days is big business. If you’re reading this then there’s a fair chance you’re doing so at least in part using pillaged goods. You may be wearing, eating and looking at things produced as a result of pillage.

We’re living in a world of long supply chains and minutely differentiated products. Someone recently worked out there were over a million variants on one new model of car launched by GM. You can order your mobile phone in the colour of your choice, buy cheap clothes at the out-of-town mall full of chains stores you choose, and buy customised birthday cards one at a time off the internet. And behind that incredible array of choices lies a global web of trade and manufacture which almost defies comprehension. Not so long ago in Europe, it was discovered that horsemeat had been entering the human food chain, often labelled as beef. And supply chains were so long, so opaque, so poorly understood, that even the supermarkets who were supposedly at the head of them had to admit that they didn’t know what they were buying; they didn’t know what was going into their own-brand products.

Pillage is a legally defined criminal offence. It’s theft in the context of military action, and it’s a lot more common than perhaps we’d be comfortable thinking about. But it’s also hard to prove. And because there can be big money involved, there’s a very significant incentive for players further down the chain to close their eyes and close their minds to what may be going on. Minerals taken from mines in conflict zones, timber logged by warlords, cotton processed by victims of war, all can be classed as pillaged goods.

And over the last few years there have been a range of developments which have revitalised the importance of the crime. Pressure groups are looking at the jurisprudence of recent judgments and finding grounds to launch actions at corporate level. Consumers are more aware of supply chains. And theft, including handling of stolen goods, has become one of the offences which can lead to a conviction for money laundering.

So if you’re a business and there’s goods in your supply chain that might be tied up with pillage, you could be in trouble on 3 fronts – if the pressure groups can’t get a prosecution for war crimes, the authorities can come after you for financial crimes. And in either case, your PR consultants will (or at least, should be) waking in a cold sweat in the middle of the night thinking about the reputational damage that association with either event could cause – not to mention the bottom line impact of being barred from public procurement contracts.

Pillage is no laughing matter; it never has been. But now it is becoming more than ever the spectre behind the high street, a pollutive taint spreading throughout the production process of goods enjoyed around the world. If not for the sake of the victims, then at least for the sake of their own bottom line, business should be looking to do all it can to eradicate every link with pillaged goods.