Archives For Tax

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.

 

Fight hard but fight fair

accapr —  27 October 2016 — Leave a comment

By Yen-Pei Chen, ACCA’s Corporate Reporting and Tax Manager

 

Reading news report about tax avoidance, one might be forgiven for thinking that tax practitioners, unhappily repeating the mantra that tax avoidance is not illegal, are opposed to the government and HMRC’s efforts to fight tax avoidance.

But the truth is most tax practitioners – and certainly ACCA – fundamentally agree with the lawmakers that aggressive tax avoidance needs to be tackled. Yes, we believe that all individuals and businesses have a responsibility to pay their fair share of tax. And yes, tax practitioners have a responsibility to act in the wider public interest: this includes working hand-in-hand with tax authorities to counter unethical tax behaviour.

Indeed, tax practitioners are some of HMRC’s most important allies in tackling tax avoidance. They advise clients on tax planning opportunities, and as such, are the first line of defence in warning clients against aggressive tax avoidance. Without tax practitioners disclosing information to HMRC, many tax avoidance structures would not have come to light.

However, it was with trepidation that we received HMRC’s consultation document, ‘Strengthening Tax Avoidance Sanctions and Deterrents’. Our concerns extend beyond the realm of tax, to wider issues of public interest. So to ensure a full response we collaborated across the tax and regulatory teams and with our Global Forums for Taxations and Ethics.

The proposed measures cast a wider net over all those ‘design’, ‘market’, facilitate’, and ‘promote’ tax avoidance arrangements, by levying penalties on each agent, adviser and intermediary involved whenever an arrangement is ‘defeated’. Besides punishing those who enable tax avoidance, the consultation document also proposed corresponding penalties on the taxpayers who use such defeated tax avoidance arrangements. Our three main concerns are:

  • For an arrangement to be defeated, a penalty does not need to be charged on the taxpayer. This means that HMRC could deem an arrangement to be ‘defeated’ simply by reaching ‘an agreement with the taxpayer […] that the arrangements do not work’, without a case going through Tribunal. Given the line between legitimate tax planning and aggressive tax avoidance is still blurred, this reliance on moving goal-posts could put off tax practitioners from providing ordinary tax planning advice;
  • The proposed trigger for penalties, without considering the taxpayers’ or tax practitioners’ motives, means that penalties are likely to be both disproportionately high, and disproportionately expensive for HMRC to administer;
  • HMRC seems to favour an approach where tax practitioners, other intermediaries and taxpayers are guilty until proven innocent. Their intention, it seems, is to get everyone into the net from the start, and then put the onus on each accused party to appeal against penalties. Granted, ‘fairness’ in tax is a difficult and divisive concept, but such a move does appear to us to be fundamentally unfair.

The bottom line is this: regulatory burden can become so great that compliance becomes impossible given the resources available. The proposed measures follow a whole raft of recent measures in the UK: General Tax Avoidance Rules, Disclosure of Tax Avoidance Schemes, and Promoters of Tax Avoidance Schemes. The existing rules oblige tax practitioners to tell HMRC about tax avoidance schemes; the new rules threaten to punish the same tax practitioners for the tax avoidance schemes that they tell the HMRC about. Some practitioners, particularly in small and medium practices, may be driven out of the tax advisory business by the cumulative and often contradictory effects of recent regulation. At the same time, unethical and aggressive tax avoidance behaviour will continue underground which no one wants to see.

Our one message to HMRC is: work with us, not against us. In order to fight tax avoidance effectively in the long-term, HMRC needs to build a relationship of trust with tax practitioners. The way forward is to work with the profession to strengthen and improve ethical standards, not by adding another layer of regulation.

Read ACCA’s full response here

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.

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By Jason Piper, tax and business law manager, ACCA

History tells us that if communities are going to grow beyond a particular size then they will have to rely upon a level of infrastructure spending which can only be provided by the state. Philanthropy and altruism, on the part of private resource owners, get us only so far when it comes to providing sufficient quality and quantity of the pure public goods needed to support the sort of society that has developed over the last few thousand years.

There’s a lot of debate internationally at the moment on whether you can ‘tax yourself into prosperity’ with opinion clearly divided on whether it is possible. At one level, the concept seems to be nonsense. Taxation diverts privately controlled resources into state hands. Simply moving funds from one pot to another like this can’t possibly increase the overall level of funds available, can it?

It is what the various controllers of this revenue might do with those resources if placed in their hands that makes all the difference. After all, a bucket full of water can be left to stagnate by someone with no interest in gardening, or taken by a green-fingered neighbour and used to water their crops. By the same token, if a government can clearly identify resource owners who aren’t generating prosperity with their funds and take it from them to be put to some other use which might enhance prosperity, then it is possible that the tax system could be a mechanism towards that end. (nb that’s a really big “if” on identifying who can best use resources, and it’s keeping a lot of economists busy trying to work out how, or even whether, we could do it).

Taxation is an idiosyncratic and asymmetric process. At its core, it is about taxpayers more or less (mostly less) voluntarily surrendering resources which they could have used directly for their own benefit, to be used instead ‘for the benefit of society.’ That means clear parameters have to be created to help guide policymakers when they’re exercising this unique power, and perhaps even more importantly, to evaluate their success after the event.

Whether we agree with what a particular policy is trying to achieve is an individual value judgement. Regardless of this individual view, we can form an objective picture of whether the policy has been executed effectively, and measure the impact of the changes on the tax system.

When evaluation is done, changes should be assessed on the three core tenets of the tax system – simplicity, certainty and stability. While there is likely to be some compromise on at least one of those factors in any new measures, policymakers need to understand why they are proposing the changes, and what they could do differently to ameliorate any negative impacts without diluting the ultimate policy impact.

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/ )