13 October 2016

A shot in the foot?

The proposals for penalising advisers

by John Watson

Ok, so what’s the big deal?  Sure, Monday was the final day for responses to the HM Revenue and Customs Consultation Paper “Strengthening Tax Avoidance Sanctions and Deterrents”, but what has that got to do with the Shaw Sheet?   What is a technical article doing in a political magazine?  Wake up editorial board!  This is stuff for accountants and people like that to worry about, not highly respectable readers who would sooner sell their grandmothers into slavery than avoid a penny of tax which was legally or morally due.

If you came from the Middle East, or one of those places where they read books and consultative papers backwards, you might, for a time, think that that was right.  That is because some of the proposals towards the end of the document are perfectly sensible.  For example, the idea that a taxpayer, if he gets things wrong in his tax return, should have the burden of proving that he exercised reasonable care if he is to avoid a penalty.  After all, he is the one who knows the facts.  Some of the suggestions about HMRC sending warnings to taxpayers about schemes may have theoretical attractions too, although HMRC will certainly have to beef up their firepower if they are to work successfully.  Still all these concerns are for those who flirt with tax avoidance. They have nothing to do with us.

The early part of the document is much more worrying.  That isn’t because it bears hard on those involved in tax avoidance.  Who cares about them these days?  Nor is it that the proposals might make life difficult for professional firms.  They have a way of looking after themselves.  No, the reason that part 2 of the document is important is that the proposals contained in it threaten to undermine the UK’s economy and, following the Brexit vote, that is a very serious matter indeed.

I have your attention now, don’t I?  Well, let’s take advantage of that and explain something of what the early part of the document actually does.  Amongst other things it proposes penalties for those who advise on failed tax avoidance arrangements.  Now “tax avoidance arrangements” sound pretty dubious; “yucky”, yes that is the word.  They are not, however, fraudulent.  Concealing things from HMRC so that they can’t tax you is already a criminal offence as is advising people on how best to do it.  Tax avoidance is quite different. Tax avoiders are people who organise their affairs in a way which is legal but reduces the tax they pay.  It becomes “defeated” tax avoidance if, in the end, the courts decide that it didn’t work after all and the provisions under consultation would impose penalties on the advisers if the reason for that defeat is that the arrangements are shot down by one of the UK’s many targeted anti avoidance rules – rules saying that you don’t get a tax deduction if it would have been a main benefit of your transaction, that sort of thing.

With me so far?  Then let’s move to the boardroom of Meginvest Inc, an American company setting up in the UK.  The time is late 2017.

John Meginvest III: “Say now, UK advisers, I’d like to use a structure which should reduce our UK tax bill.  I circulated it before the meeting.  Can we use it in a way which complies with UK law?”

UK advisers: “We can’t advise you on that”

John Meginvest III: “Hey, what do you mean, you can’t advise me?  I need to know if this is okay or whether it is barred by the UK’s anti-avoidance rule.  I run an honest company and would not want to do something that was against the law here.  C’mon, you are expensive enough.  You must be able to tell me if it is a ‘no, no’ or, if it is allowed, how to make sure it works.”

UK advisers: “Yes, we think we know the answers but we can’t tell you. It’s a matter of our insurance.”

John Meginvest III: “Insurance? Look I know that it isn’t always possible to be completely certain and that you will qualify your advice accordingly, but I need your best shot on this.  You know, what you really think and, if it is OK, how best to do it.”

UK Advisers: “No you don’t understand, Sir. Under the UK’s new tax laws, advisers who advise on arrangements which they think are OK by the rules and turn out to be wrong have to pay penalties in proportion to the tax.  Meginvest is a very big corporation and our insurers would not cover the risk.  We simply daren’t advise you on the arrangements.”

John Meginvest III: “How in tarnation (yes, I believe that in some states, Americans still speak like this) do I find out whether I can use this structure in a way which complies with UK law or not? Do I have to toss a coin or do I deal with advisers who are beyond the reach of the UK Revenue authorities?   That isn’t the way I like to do business.  I think I’ll invest in Germany instead.”

Before you brush all this away as unimporant, give a thought to India, a country which, for reasons concerned with a domestic legal monopoly, for many years barred foreign law firms from practising there.  The absence of firms able to deliver a high quality combination of local and international expertise is said to have cost India billions of pounds of investment and to have been a major factor in holding back its economy. No certainty: no investment.

The success or failure of post Brexit Britain will depend on our success in attracting international trade and one of the advantages that we rely on to help us do this is the fact that our laws are clear and fairly interpreted by the courts. However there is absolutely no point in having clear rules if people cannot get professional advice on how they apply. That loses the certainty on which business relies every bit as surely as unclear rules or bad courts. If the new Financial Secretary begins her term in office by shooting the basis of the country’s prosperity in the foot, no one is going to forgive her.

Occasionally, when I eat too much, I suffer from nightmares.  Last night it was that the Financial Secretary read this article and was told by her officials that there was no need to worry because advisers were protected by the provisions listed in paragraph 2.29 of the consultative document.  Do not be fooled, Madam.  These protect those whose advice is “benign” in that they have had no part in designing the arrangements.  That is not good enough.  The reality is that Mr Meginvest would ask his advisers not just whether his structure was legal but how, if it was, it should best be implemented.  Advisers who reply “yes” or “no” in monosyllables are useless.

If the provisions are enacted in the manner contemplated they will undermine the clarity which investors are entitled to expect from a first world country. That will be hugely damaging. What about the alternative, then, of enacting the proposal but giving a much wider exemption for professional advice?

It would be possible to address the problem in this way at the cost of some legislative contortion.  To do so, however, misses a bigger point.  There is no doubt that UK tax avoidance reached an unacceptable level in the first decade of this century.  A battery of legislation has now been enacted to counter that and, perhaps more to the point, avoiding tax is no longer regarded as respectable.  The truth is that the job of stemming avoidance has already been done and the enactment of further legislation is now driven more by the need for politicians to strike at a fashionable villain than the need to curb an evil which is already dying.

Certainly there are still some things that can usefully be done and the change in the burden of proof on reasonable excuse is an example of that.  It is really not the time, however, to do things which will harm the nation’s trading position when they are no longer necessary.

 

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