The Fizz! Blog

Thoughts on Panorama's corporate tax avoidance edition

I just got round to watching the Panorama documentary on corporate tax avoidance, originally broadcast on Monday:

http://www.bbc.co.uk/iplayer/episode/b01hzg7y/Panorama_The_Truth_About_Tax/

If you read Private Eye, there's nothing new in it - the prevalance of high profile British corporations shifting profits to Luxembourg to slash their tax bills has been exhaustively covered there.  I'm sure it will have been eye opening to many viewers though.

Most interesting were the ideas discussed in the last few minutes - the implications of changes in modern business and tax planning. as opposed to their mechanics.

The suggestion is that, as countries compete to create attractive tax regimes to tempt multinationals to their shores, governments will just have to accept this siphoning of profits to low tax regimes if they want the multinationals' presence.  I think that's probably completely accurate.  It used to be the case that the head office of a massive company was an almost impossible thing to move.  Now it's an inconvenient thing to move.  If the tax savings are big enough, the the inconvenience can happily be swallowed.  So anybody hoping that some kind of aggressive crackdown on this type of corporate tax dodging/planning is going to be disappointed.

The logical conclusion that follows on from that is that low tax/low spend government is going to be much more compatible with modern business than high tax/high spend government.  It's easy to forget that almost all tax revenues are ultimately derived from the activities of business, but governments will overlook that at their peril.  At the moment, though, it seems fairly clear that the public mood is very much anti-business.  It's a tough spot for a politician - on the one hand, the reality is that they must be business-friendly, because that's where all the money comes from.  On the other hand, they must convince a large part of the electorate that they're going to come down hard on businesses and somehow punish them.  That can't be sustainable indefinitely.

www.fizzhq.com

There's nothing new about government staff being paid via limited companies

Limited companies tend to be the structure of choice for most reasonably profitable businesses, as they allow the owner to minimise tax and National Insurance liabilities.  The principal ways of achieving that are a) by being paid via NI-free dividends and b) perhaps by sharing the income with a spouse or partner to use a second person's tax allowances.  It's not the right solution for every business, but it's standard tax planning for many.

Through the 1990s, more and more highly paid employees started to use this structure as well, particularly in the IT industry.  The man on the street would probably have though that many of these people weren't really running a small business, but really just had a job, but there was nothing to stop them from exploiting this same limited company structure to save tax and NI.  They were giving up employment rights, but the often massive decrease in tax and NI bills generally made up for that many times over.

After a while, HMRC got fed up with employees going home on a Friday with their P45, then coming back on Monday, sitting at the same desk, doing the same work, but invoicing their former employer via a limited company, with a consequent drop in the tax and NI going to the Exchequer.  In 2000, a rule known as IR35 came in.  In very basic terms, it said: if what you're doing really amounts to a job, you can't use dividends to save NI and you can't split income with your spouse to save tax.  Your company has to pass pretty much all its income on to you via PAYE salary, meaning the tax and NI take is pretty much what it would have been if you had been on PAYE in the first place.

IR35 hasn't worked that well.  Firstly, there are a lot of grey areas in many people's relationship with their customer/employer.  Some people had some of the characteristics of employment, but some of self-employment as well.  If HMRC decided to try and impose IR35 upon them, it could take years to resolve, and HMRC generally seemed to lose the argument in the end anyway.  Secondly, the initial onus is on the taxpayer to put their hand up and pay any tax and NI due under IR35.  Almost nobody put their hand up, and HMRC had nothing like the resources to police it.  Overall, I would think that even HMRC themselves would have to acknowledge IR35 as somewhere between a disappointment and a failure as legislation.

There's now an attempt to portray as a scandal the number of people being paid via these arrangements by the government itself.  It's being painted as a coalition problem, but the truth is that this story could have come out any time in the last 15 years - these arrangements have been commonplace for ages.  I completely agree that they are undesirable - it's grossly unfair that highly paid people can afford to put these arrangements in place but that it isn't economical for someone on £15,000 a year - but they're normal.  For them to be stopped, it will need either a) IR35 to be changed so that it works or b) tax and NI to be fundamentally changed so that the company route offers no material tax savings.  Probably, neither of things will happen.  What will actually happen is that a few high profile arrangements will be changed now, words will be spoken about lessons learned, the media will get bored, and then it will be business as usual.

www.fizzhq.com

Rangers and the problem with aggressive tax saving schemes

It's been well publicised over the last few days that Glasgow Rangers FC are on the verge of administration due to disputed tax bills.  It's actually a story that's been ongoing for some time now, without making the headlines.

Very broadly, Rangers used an tax planning scheme involving Employee Benefits Trusts - EBTs.  Rather than paying their players via PAYE, they paid the money into trusts.  The trusts then lent the money to the players, enabling them to avoid paying most of the tax that they would normally be due to pay.

Ever since these schemes were introduced, they were controversial and many advisors wouldn't recommend them.  There's a spectrum of tax planning, from the safe as houses (e.g. ISAs) to the very aggressive and borderline abusive.  It was known that HMRC considered the EBT schemes to be off the scale at the abusive end and would try to prevent their use if they possibly could.

We've always said that a big problem with aggressive tax schemes like this is the years of uncertainty you'll have to endure before being sure they've succeeded - seven to eight years is a good rule of thumb before the processes available to HMRC and taxpayers are exhausted.  For most of us, it's better to spend seven or eight years getting on with running our businesses, not worrying about tax schemes that may or may not work and very clearly lie outside the spirit of the law.  Even if you do go ahead with such a scheme, you're well advised to keep the tax saved to one side, in case the scheme collapses.

Amazingly, Rangers are now attempting to blame HMRC for this drawn out process:

"Even if Rangers wins the tribunal, HMRC has made it plain that they will ‘appeal, appeal and appeal' the decision.  The practical effect of this will be to plunge the club into years of ongoing uncertainty. It would also mean the club having to pay immediately a range of liabilities to HMRC."

Well, tough.  That appeal process and the time it takes would (or at least should) have been laid out to them as a basic caveat when the scheme was put in place.  It's no use crying about it now.  If you attempt to use such aggressive tax planning, you have to be aware of the risks.  Unfortunately, many taxpayers get blinded by the tax savings - which may, in this case as in many others, turn out to be illusory.

www.fizzhq.com

The power of headlines

The same story was presented today as:

Telegraph - "1.2 million owe tax after HMRC error"

Accountancy Age - "PAYE reconciliations show sharp improvement"

The latter is much the fairer headline.  HMRC are supposed to check each year whether those on PAYE who don't have to submit a tax return have underpaid or overpaid tax.  Over the last few years they've done a horrible job of this.  For 2010/11 they seem to have done miles better.

The existence of a lot of people who didn't pay the right amount of tax via PAYE doesn't in itself constitute an error on the part of HMRC.  Sometimes they just don't have sufficient information to sort someone's tax out until after the year's finished. That's completely normal.

So, on this occasion, HMRC are right and the Telegraph headline is wrong - though it should be noted that the content of the Telegraph story doesn't really match up to the headline, being more even handed.

www.fizzhq.com

Budget spin on beer

In his budget speech, George Osborne announced that there would be no additional tax on beer.  That's technically true - there will be no tax rise apart from the ones that were already scheduled.  As Pete Brown points out (and if you're interested in beer and the pub trade, his blog should be one you check out regularly) we'll still have a 7.2% increase in duty, because the coalition is sticking with the duty escalator put in place by the last government.

Still, that's they way it goes in politics - say things that are technically true but utterly misleading, in the knowledge that most people won't notice until it's old news.

www.fizzhq.com

Small company accounts must remain available to the public

One of the benefits of trading via a limited company is that, if things go wrong, then - assuming you've done nothing wrong or reckless personally - you can walk away from any liabilities that your company can't pay.  The price that you've always had to pay for that privilege is that you have to file documents including annual accounts at Companies House, so that the public can see (in pretty general terms) who is behind the business and how it's doing financially.  If you want to keep that information private, that's absolutely fine - you just don't form a company.  You remain as a sole trader or partnership, and in return for the privacy you consequently accept a greater degree of personal risk if things go wrong.

The idea has now been proposed of exempting small companies from making accounts available at Companies House at all.  So, the shareholders would still have the benefit of being able to walk away if things go wrong, but the public would have no right to see who was behind a business or how it was doing.

That would be grossly unreasonable.  Whenever someone wants to pitch something to us or otherwise do business with us, or when we meet people at networking or other events, we'll routinely download their accounts from Companies House.  And the information this turns up can often be really interesting and relevant.  It's not unusual to find businesses telling the public one story about their prosperity when the accounts tell a very different story.  And sometimes we find that companies are hopelessly in arrears with their own accounts and compliance - which should give pause for thought to anyone thinking of doing business with them.

Take that facility away, and the business is getting the benefits of limited liability without fulfilling their part of the bargain.  However much money that saves, it isn't fair on the public or on other businesses.

www.fizzhq.com

Compulsory staff pensions from 2012

From 2012, employers will be obliged to pay into a personal pension on behalf of their employees, and the employee will be obliged to contribute as well.  Although there had been some speculation that small employers might be exempted, the government has decided that won't be the case. 

Although I'm not sure I agree with the scheme as a whole - instinctively I'd rather state interference in people's choices was limited to just what's absolutely necessary - I think it's quite right not to exempt small employers.  For donkey's years everyone in the business community has been asking for simplification of the rules for businesses, and for donkey's years the government has been responding by making the rules more complicated.  So the move over the last few months towards simplification is very welcome.  If this system's going to come in, far better for there to be no doubt about which employers have to do it and which don't.

If you are taking on employees, then you are taking on responsibility for treating them professionally, like it or not, and it isn't fair for the employees of small companies to be treated less well than those of bigger employers.  If you're not willing to accept the responsibilities of an employer, then you don't have to be one.  Business isn't for everyone.  Let's keep the pension rules as simple as possible.

www.fizzhq.com

Making the PAYE fiasco worse

Given that HMRC have discovered overpayments and underpayments of tax for millions of PAYE employees, it would be really helpful if they could communicate clearly to taxpayers what has happened.

I've a tax calculation in front of me issued by HMRC to a taxpayer for last tax year.  On the first page it says "Your personal allowances exceed your taxable income, no tax is due".

This is literally true, but completely misleading - the person in question has had tax deducted from their income, and since their tax bill for the year is zero they are entitled to have that repaid to them.  Why on earth can't HMRC put "you are due a refund" somewhere on the cover sheet rather than "no tax is due"?

It's by no means certain that the refund will be issued automatically without the taxpayer requesting it, and I can guarantee that thousands of people will look at the front page and mistakenly believe they're not owed money.  Whoever has come up with the template has thought of it just from their own perspective, and given no consideration to the recipient at all.  If you get a tax calculation from HMRC, read all of the pages!

www.fizzhq.com

HMRC's tax demands - can you refuse to pay?

As you'll no doubt have noted from the extensive news coverage, HMRC have realised that 1.4 million taxpayers have been underpaying tax as a result of HMRC database problems.   Today is the day that the first demands will start arriving on taxpayers' doormats.

It appears that the problems largely relate to taxpayers' PAYE codings not being adjusted to reflect 'benefits in kind' like company cars and medical insurance provided to them by their employers.  Every employee is issued with a PAYE coding that tells their employer how much tax to deduct from their salary.  If you have, say, a company car, you are issued with a code that results in your paying more tax than would have otherwise been the case.

Anyone who has been submitting tax returns shouldn't be affected by this, by the way - on your tax return, you'll have declared your income and benefits in kind to HMRC and paid over any tax owed as a result, either in a lump or by having your PAYE coding adjusted for a subsequent year.  If HMRC had failed to issue you with an appropriate PAYE coding, you'd simply have paid more tax after submitting your tax return.  It all comes out in the wash.  It appears that it will be those who don't have to submit returns who are affected here.

There's also a great deal of coverage about the possibility of escaping paying underpaid tax by claiming under "Extra Statutory Concession A19".  That's a piece of HMRC guidance that - I'm paraphrasing here - says that if a) you could reasonably have believed you were paying the right amount of tax and b) HMRC had all the information they needed to determine that you were paying the wrong amount of tax then, once 12 months have passed, it's too late for HMRC to ask you for any tax owed.

Whilst it will certainly be worth making an application under A19, I think success will be determined by item a).  If someone's PAYE code isn't updated to reflect the tax due on your company car, is it reasonably to believe that you're paying enough tax?  Undoubtedly, few taxpayers understand their PAYE code.  If it's changed and they take home more money, they'll probably be happy, but if it's changed and they take home less money they'll grumble.  Is it reasonable to take no interest in it, and just accept what the system gives you?  I'm not sure.  It's a grey area.  Part of me thinks that, if you're going to just go with the flow then you ought to be consistent - if you unwittingly pay too little tax, fine, keep it, but if the mistake gets uncovered, tough, pay up.  But at the same time, the whole point of the PAYE system is that it's supposed to get these things right so that taxpayers don't have to worry about it.

And there's a question of degree too.  Is it reasonable to not realise you're failing to pay £8 tax a month on your company BUPA scheme?  Probably.  Is it reasonable not to realise you're failing to pay £200 tax a month on your company BMW?  Maybe not.

In any case, it will be interesting to see if taxpayers successfully avoid paying.  We can't see many, if any, of our clients being affected - they've largely been submitting tax returns all along - but if you receive one of these demands, do let us know.

www.fizzhq.com

Requests to delay payment of VAT will still very probably be accepted

It's not a very interesting title for a blog article, is it?  Which is probably why the press has been describing some new statistics on "Time to Pay" arrangements a bit differently over the last few days.

For the last couple of years HMRC have offered a "Business Payment Support Service" - enabling businesses to agree payment plans for tax bills that they can't afford to pay in one go - commonly referred to as "Time to Pay" arrangements.  There have been a few stories in the papers and trade press over the last few days - like this one in Taxation - about HMRC turning down twice as many requests now as they were rejecting at the end of last year.

That's one way of looking at it.  But, if you actually examine the numbers, there's another way of interpreting it:

Businesses seeking time to pay on VAT bills are twice as likely to have their application rejected as they were last year, according to a leading independent finance provider.

Figures obtained by the company Syscap under the Freedom of Information Act show that the number of refusals by HMRC of requests to delay VAT payments more than doubled to 11.2% in the first quarter of 2010, compared with 5.3% in the same period of 2009.

So, in other words, in Q4 of 2009 94.7% of requests to delay payment were accepted - nearly all of them - and in Q1 of 2010 88.8% of requests to delay payment were accepted - nearly all of them.  I'd suggest that the title of this blog is just as valid as the (also accurate) description of refusals doubling.

www.fizzhq.com