“Fair share of tax” – Does this mean anything at all to HMRC?
If ever there was a topic nearly as hot as immigration in the minds of the general public, it is the question of who does and who does not pay their fair share of tax. What actually constitutes a fair share of tax is very difficult to define. However, the public does seem to think it knows who does not pay their fair share of tax: Google, Facebook, Amazon and Starbucks, for example, and maybe Sir Philip Green too?
In any tax system, fairness is a very difficult concept to pin down. Should partnerships be taxed more heavily than limited companies, for example? And if so, why? Should employees pay more than the self-employed? Should some industries and asset classes attract effective subsidy through the tax system while others do not? The fact is that Governments routinely exercise choices about how much tax should be exacted in various circumstances whether we agree with them or not, and in many cases, it appears that expediency is a bigger factor in the equation than fairness.
It is not my intention to attempt to answer such thorny questions in this article. Instead, I am going to focus on what HMRC seems to think is the fair share of tax it expects individuals and businesses to pay. In examining this issue, I will not dwell on HMRC’s words, framed as they all too frequently are in standard Civil Service doublespeak, but on two of their recent actions through the Courts and Tribunals involving real people, not theoretical circumstances. You may be surprised by what HMRC considers to be “fair”.
What HMRC apparently considers to be “fair”.
Take the recent case of Mr & Mrs De Merwe. Mr De Merwe and his wife entered into a trust arrangement in March 2006 at a time when Mr De Merwe was not domiciled in the UK but was aware that he would become deemed domiciled for Inheritance Tax (IHT) purposes in the following tax year and his share in the house would then be subject to IHT in the future if he took no action. Unfortunately, Mr De Merwe was unaware that the tax law regarding such arrangements had been changed just a few days earlier and as a consequence of the transfer, he became immediately liable to IHT at 20% of the value transferred and would be subject to a further 6% on each 10 year anniversary . He became aware of his mistake some time later and went to the High Court to seek to have the transfer set aside, as he was perfectly entitled to do.
However, HMRC got wind of this and decided to pursue the tax, mistake or not. They applied to be joined as a defendant in the proceedings, arguing on arcane technical grounds that they should have their pound of flesh, irrespective of how much it cost the De Merwes and despite the fact that no funds were realised in the transaction which would enable them to pay any of the tax charged. Thankfully, good sense prevailed and the High Court granted the relief requested.
Another recent case involved a barrister, Mr Ignatius Fessal, who specialises in Criminal law. Mr Fessal has a particular interest in human rights issues and this case involved one of those rights recognised in the Human Rights Act 1998, namely the right to peaceful enjoyment of his possessions. Like other barristers, Mr Fessal had accounted for his professional practice income on the cash basis until the law was changed and required him to have accounts prepared on a true and fair basis, subject to transitional provisions. After an HMRC enquiry, it was discovered that Mr Fessal had paid too little tax for 2006/7 and 2008/9 but had paid too much for 2005/6 and 2007/8. To cut a long story short, HMRC demanded the underpayments but refused to repay the overpayments. Mr Fessal argued that this meant that he was now paying tax on the same profits twice. HMRC remained unmoved and even applied to have Mr Fessal’s appeal struck out on the grounds that it had no merit. However, the Tribunal judges refused HMRC’s application and went on to uphold Mr Fessal’s appeal.
It might be thought that these cases are somehow exceptional. Unfortunately, this is not the case, and they reveal double standards on HMRC’s part which are rather disturbing.
The first double standard concerns HMRC’s interpretation of the law which is anything but fair and even-handed. When HMRC deals with tax avoidance or, to put it another way, tax planning that achieves a result they do not like, they routinely argue before the Tribunals and the Courts that the law should be interpreted “purposively”; in other words if the plain meaning of the relevant legislation yield a result that is disappointing to HMRC, then that meaning should be set aside if it appears to defeat the “evident intention of Parliament”. Now nobody who actually reads Hansard (an unfortunate occupational hazard for tax advisers) or, even more disheartening, reports of the proceedings of the Public Accounts Committee, could possibly believe that MPs have much understanding at all of the tax legislation Parliament passes; far less do we get the impression that Parliament has any “evident intention”. The “evident intention of Parliament” is little more than a convenient fiction created by the judiciary to defeat tax planning which conforms to the letter of the law but produces a beneficial result for the taxpayer rather than for the Exchequer.
Now some might even say that “fairness” goes out of the window and rightly so where tax avoidance is concerned. Yet neither of the cases mentioned above concern tax avoidance as most people would understand it and in both, HMRC argued for a result that would have unfairly impacted on the taxpayers. And these cases are just the tip of a veritable iceberg of evidence that suggests that HMRC has an alarming tendency to abandon all thoughts of “fairness” when the letter of the law works in its favour, however unjustly it might impact on the unfortunate taxpayer.
The second double standard relates to the different ways it treats individuals and SMEs compared to its relationship with multinational companies. The whole culture of HMRC seems to have changed in recent years when it deals with ordinary taxpayers and the missionary zeal it now shows in attacking marketed tax avoidance appears to be leaking into areas where it does not properly belong. This does not seem to affect relationships with the multinationals, which are much cosier. Those taxpayers that HMRC leaves waiting endlessly on the phone will have their own thoughts on the subject of fairness when they learn that HMRC’s customer relationship managers are on first name terms with their counterparts in big business. Compare and contrast, for example, the treatment of café owner, Icilda Newell who almost faced bankruptcy after being asked to pay £500,000 of tax she didn’t owe with that of HSBC, Goldman Sachs, Vodafone and Glaxo Smithkline by former HMRC Permanent Secretary, Dave Hartnett. While the public sees multinational groups paying their fair share of tax as the preferred method of shoring up the country’s finances in times of austerity, it seems that HMRC has other ideas.
Can we expect this to change in the future? It seems not. In its latest Departmental Plan, HMRC states that its three main priorities for 2015-2020 are to:
Maximise revenues due and bear down on avoidance and evasion
Transform tax and payments for our customers
Design and deliver a professional, efficient and engaged organisation
Maximising revenues due (not merely being more efficient in collecting tax but getting people to accept higher tax liabilities without any change in the law) is not only a very different objective to ensuring that individuals and businesses pay their fair share of tax, but is arguably diametrically opposed to it. This is an extremely worrying development for any taxpayer facing an enquiry or investigation into their affairs. HMRC is no longer seeking a fair result but the one that secures them the most tax. Clearly, and disappointingly, fairness is not one of HMRC’s priorities, however much the tax-paying public might want it to be.
It will therefore be more important than ever that HMRC enquiries and investigations are handled robustly and tenaciously, by tax advisers who fully understand not just the technical issues but HMRC’s new focus on collecting as much tax as possible from individuals and SMEs. Otherwise, you or your business could end up paying considerably more than your fair share of tax.
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