Code of Conduct » Tax Research UK

Tax need not be an ethics free zone – what we need is a Code of Conduct

Code of Conduct, Economics, HMRC, Tax Justice Network 1 Response »

Dec 212011

What the PAC report on HMRC’s management of the tax affairs of large corporations has shown is that tax management has become an ethics free zone. That need not be the case. I argued very strongly for a Code of Conduct for tax a couple or so years ago, and as a result drafted the Tax Justice Network and Association for Accountancy and Business Affairs Code of Conduct on taxation. This is available here.

The actual Code is just two pages long and reads as follows:

A Code of Conduct for Taxation

Objective

This Code of Conduct relates to the payment of taxes due to a State or other appropriate authority designated by it.

Scope

This Code applies to:

Governments and their agencies in their role as tax legislators, assessors and collectors;

Taxpayers, whether individuals, corporate bodies or otherwise;

Tax agents, whether they are undertaking tax planning or assisting with tax compliance.

Application

It is intended that this Code be voluntarily adopted by States and should be used to guide the conduct of taxpayers and their agents who choose to comply with it whether or not they reside in a State which has adopted the Code.

The Code

The Code is divided under six sections, each of which includes three statements of principle.

1. Government

a. The intention of legislation is clear and a General Anti-Avoidance Principle (‘Gantip’) is in use;

b. No incentives are offered to encourage the artificial relocation of international or interstate transactions;

c. Full support is given to other countries and taxation authorities to assist the collection of tax due to them.

2. Accounting

a. Transparent recording of the structure of all taxable entities is available on public record;

b. The accounts of all material entities are available on public record;

c. Taxable transactions are recorded where their economic benefit can be best determined to arise.

3. Planning

a. Tax planning seeks to comply with the spirit as well as the letter of the law;

b. Tax planning seeks to reflect the economic substance of the transactions undertaken;

c. No steps are put into a transaction solely or mainly to secure a tax advantage.

4. Reporting

a. Tax planning will be consistently disclosed to all tax authorities affected by it;

b. Data on a transaction will be consistently reported to all tax authorities affected by it;

c. Taxation reporting will reflect the whole economic substance and not just the form of transactions.

5. Management

a. Taxpayers shall not suffer discrimination for reason of their race, ethnicity, nationality, national origin, gender, sexual orientation, disability, legal structure or taxation residence; and nor shall discrimination occur for reason of income, age, marital or family status unless social policy shall suggest it appropriate.

b. All parties shall act in good faith at all times with regard to the management of taxation liabilities;

c. Taxpayers will settle all obligations due by them at the time they are due for payment.

6. Accountability

a. Governments shall publish budgets setting out their expenditure plans in advance of them being incurred, and they shall require parliamentary approval;

b. Governments shall account on a regular and timely basis for the taxation revenues it has raised:

c. Governments shall account for the expenditure of funds under its command on a regular and timely basis.

Enforcement

States seeking to comply with the Code will voluntarily submit themselves to annual appraisal of their Conduct. These appraisals will in turn be reviewed by a committee of independent experts appointed by participating States. Differences of opinion will be resolved by binding arbitration.

Any taxpayer or agent wishing to comply with the Code may do so. A State should presume that a person professing compliance with the Code has done so when dealing with any tax return they submit. In consequence the administrative burdens imposed upon that person should be reduced. In the event of evidence of non-compliance being found any consequential penalty imposed should be doubled.

I believe that this is the right direction of travel for tax management: those agreeing to not abuse the tax code should get a lighter touch regime from HMRC. Those not signing up should expect the consequences. And we’d need to know who is who.

But note too, I’m not offering a light touch to government: legislation needs improving and so does government accountability to meet the standards set by this Code. Getting this relationship right is a two way street. What’s more it’s a long street and there’s some way to travel down it. I just wish the willingness to make the changes existed, not least on the side of government.

Tax evaders use accountants

Accounting, Code of Conduct, Ethics, Tax evasion 10 Responses »

Oct 132010

The National Audit Office has issued a report saying:

In a report to Parliament today, the National Audit Office affirms that good tax agents help their clients get their tax right. But, according to an analysis carried out by the NAO of a sample of tax returns, self-assessed income tax returns filed by customers represented by agents are more likely to have under-declarations of tax (resulting from error, failure to take reasonable care or evasion) than returns filed by non-represented taxpayers. A key reason may be that the tax affairs agents deal with are more complex. However, the analysis indicates that paying for professional help is not without risk for a taxpayer and that there might be an opportunity for HMRC to increase tax revenues by providing better support to tax agents and by better targeting of poorer ones.

Today’s report suggests that a three per cent reduction in the average amount of tax under-declared by represented taxpayers could lead to over £100 million extra revenue each year.

Turn to the detail of the report and as Accountancy Age notes:

The report, compiled by the National Audit Office, estimated that a minimum of £2.6bn could be lost by the exchequer because of underpayments by people advised by a tax adviser and suggested the maximum loss could run as high as £10.5bn.

Tax advisers believe the report provides a skewed picture, damaging the reputation of the profession, because the number of rogue advisers without accountancy qualifications was not considered by the NAO.

The report looked at a sample of approximately 5,000 cases from where HM Revenue & Customs had reviewed tax returns to establish if there were under-declared liabilities.

The audit body reported 37% of self-assessed income tax returns from people who employed tax advisers had under-declared liabilities compared to 26% of returns filed by taxpayers on their own.

Am I surprised? No, not at all I’m afraid. We have a tax profession in the UK that in far too many cases is deeply antagonistic to the state, to HM Revenue & Customs and to society at large. That profession seems utterly unable to comprehend the benefits that tax provides, and instead sets out to undermine society at every opportunity. Through its promotion of tax avoidance (and yes, it does openly promote that abuse) it seeks to undermine the mandate of democratically elected governments and their mandate to deliver services the public wants. But most of all, the perverse logic of economic maximisation has been interpreted, on the basis of very little knowledge by many in the profession as equating to tax minimisation – which they do, yet again, on the basis of very little knowledge and no small amount of risk to reduce tax bills whether or not it is legally appropriate to do so, with the consequence the NAO have seen.

And I do not for one moment buy the profession’s defences that this is a) because of unqualified advisers and b) because represented people have more complicated affairs – the latter being a particularly crass claim – after all they presumably use advisers to make sure they comply despite that fact.

What is the consequence? First, note the data on this from HMRC’s tax gap, available here. This estimates the maximum error rate on all tax returns to be £6.6 billion – and the NAO say it may be £10.5 bn on tax returns from represented taxpayers alone. Yet again the evidence is clear: HM Revenue & Customs underestimate the tax gap.

Second, the desire to evade is stoked by the profession and its rhetoric. The population as a whole it less likely to under declare, with he excuse available to them that they did not know what they were doing.

Third, the profession must be dramatically under-reporting its money laundering concerns.

Fourth, the idea that the profession can in this situation increase compliance rates is, frankly, ludicrous unless – and it’s a bug unless – some more of the profession spend a little more time at Her Majesty’s pleasure, as I suspect some should. It is only time behind bars that frightens many in the profession. Everything else is just occupational risk.

So what to do? The following:

More tax officials are needed to collect the tax that is very obviously due;
More local tax offices are needed to restore the local knowledge base of HMRC;
More willingness to prosecute offenders;
More willingness to tackle advisers with a record of abuse;
Invest by all means in better relationships with advisers who are known to be good – but be harsh on the rest.

And what can the profession do. First it can promote a Code of Conduct. See here for an example.

Second it can promote tax compliance. Tax compliance is seeking to pay the right amount of tax (but no more) in the right place at the right time where right means that the economic substance of the transactions undertaken coincides with the place and form in which they are reported for taxation purposes. I built a whole practice on the basis of doing so.

Third it can get rid of those whose work is known to be unacceptable. Accountants are meant to report unacceptable work to their professional body when they see it and I bet almost none do. Why not? This is a complicity in silence.

Fourth – the profession can start talking about the merits of a good society – not a big one – just a good one. And they are funded by tax.

HMRC Charter

Code of Conduct 1 Response »

Nov 282009

HM Revenue & Customs has launched its new Charter. The full text is here. The summary is:

Your rights

What you can expect from us:

Respect you

Help and support you to get things right

Treat you as honest

Treat you even-handedly

Be professional and act with integrity

Tackle people who deliberately break the rules and challenge those who bend the rules

Protect your information and respect your privacy

Accept that someone else can represent you

Do all we can to keep the cost of dealing with us as low as possible

Your obligations

What we expect from you:

Be honest

Respect our staff

Take care to get things right

I welcome this charter. I do, however, have reservations. First, the emphasis, even within this summary is wrong. The tax payer has as many obligations as rights. This summary and the text itself does not make that clear.

Second, the text does not make it as clear as it might that tax compliance is what is expected of people. Tax compliance is seeking to pay the right amount of tax (but no more) in the right place at the right time where right means that the economic substance of the transactions undertaken coincides with the place and form in which they are reported for taxation purposes. The Charter does say with regard to tackling people who deliberately break the rules that:

The great majority of people are honest and get things right. We want to protect them from the effects of people deliberately breaking the rules. We will also challenge those who engage in avoidance, deliberately bending the rules. We will treat genuine mistakes, acting without reasonable care and deliberately misleading actions differently from each other.

We will:
‚Ä¢ identify people who are not paying what they owe or claiming more than they should
‚Ä¢ recover the money they owe and charge interest and penalties where appropriate
‚Ä¢ distinguish between legitimately trying to pay the lowest amount and bending the rules through tax avoidance
‚Ä¢ use our powers reasonably

Whilst useful – especially with regard to avoidance, this is curiously treated as being a right of the taxpayer to expect HMRC to do this, and not as an obligation of the taxpayer. Tax compliance is the taxpayer’s obligation. It should be stated as such. I do not think this explicit within the taxpayer’s obligation to be honest, which says:

We need you to be honest with us. If someone else acts for you, we expect them to be honest too.

We expect you to:
‚Ä¢ be truthful, open and act within the law
‚Ä¢ give us accurate information
‚Ä¢ give us all the relevant facts
‚Ä¢ tell us as soon as you can if you think you have made a mistake.

This too easily excuses avoidance – which all accountants and lawyers say is within the law. A dichotomy is therefore left present in the Charter which should not be there. This could have been addressed if the Charter had included a commitment to a General Anti-Avoidance Principle and purposive legislation in future: then the vision inherent in the document would have been clear. As it is, there is doubt and that will lead to on-going problems.

And this too is the only occasion when the behaviour of agents is referred to. I think there should be explicit reference to them in the Charter, unless a specific Code is introduced for them.

One final thing: the Charter should have included a specific obligation on government to better account for what it does with taxpayer money. It is just not good enough on this issue.

So, fell marks for trying. But 7 out of 10 at best for delivery I’m afraid.

My version is here.

The proposed Bank Code of Conduct

Banking, Code of Conduct 1 Response »

Sep 232009

The FT has noted:

Banks and their advisers have hit back at the government’s proposals to crack down on tax avoidance, claiming a new code of conduct would damage the competitiveness of the sector.

The Treasury’s proposed voluntary code to curb avoidance by banks was also lambasted as potentially unconstitutional and discriminatory in strongly worded submissions to a consultation that closes later this week.

This was the message the FT chose to headline. yet cutting out the more extreme views the Tax Justice Network view seemed realistic. We have submitted our own tax code of conduct with covering comments, interpreted by the FT as:

The Tax Justice Network, a campaign group, argued against limiting the code to the banking sector and said it should apply to an entire bank and not only its UK operations.

It’s a view the Chartered Institute of taxation seem to endorse:

The Chartered Institute of Taxation said to limit the code to banks might amount to discrimination under European Union law. It called on the Treasury to state clearly there was no intention to extend the code to other taxpayers.

Of course, I’d argue it should extend it. But the British Banker’s Association might also see merit in our position:

The British Bankers’ Association said it was committed to working with the government to find “a sensible and practicable” solution. “We are firmly of the view, however, that an international approach works better than a series of national approaches,” it said.

I like the TUC position:

Brendan Barber, the general secretary of the TUC, said: “Moves to improve tax compliance amongst banks are timely and welcome.”

“However, there is no evidence that banks will comply with the requirements of any code. As such, the TUC believes a statutory basis for the code is essential so that those who transgress can be prosecuted.”

I have a strong suspicion that this is where this is heading. As the Law Society noted:

The Law Society said the code “comes dangerously close to departing from the fundamental constitutional principle that a tax should be imposed by law, not by executive action”. It voiced concern that the Revenue would take on a “quasi-judicial” function, cutting across separation of powers between legislature, executive and judiciary.

So let’s make it law and be done with it. Because candidly, as the FT notes, the banks aren’t committed to this so why not impose it? That’s where a general anti-avoidance principle enshrined in law would come into play.

Making me feel nauseous

Code of Conduct, Ethics, Liechtenstein 6 Responses »

Sep 012009

My own profession can disgust me. Lawyers take the prize making nauseous though. Take this:

Opportunity for offshore account holders to slash the cost of using HMRC’s new “tax amnesty”

Qualifying UK taxpayers advised to open a Liechtenstein bank account before making a disclosure

More generous “tax amnesty” for offshore accounts opened locally rather than through UK branch or agency

Savings could run to hundreds of thousands, or even millions, of pounds per account holder

UK taxpayers planning to declare assets held in offshore bank accounts under HMRC’s latest “tax amnesty”, which begins on September 1, could slash the cost of making a disclosure by transferring assets into a Liechtenstein bank account first, says McGrigors, the leading commercial law firm and tax investigation specialists.

Phil Berwick, Director of Tax Investigations at McGrigors, comments: “HMRC is offering far more generous terms to UK taxpayers with Liechtenstein bank accounts than it is to those with offshore accounts in other jurisdictions. By opening a bank account in Liechtenstein and transferring funds there qualifying taxpayers will be able to take advantage of these more generous terms and substantially reduce their total liability.”

HMRC’s New Disclosure Opportunity (NDO) and Liechtenstein Disclosure Facility (LDF) will offer reduced penalties to individuals and businesses with undeclared income or gains held in offshore bank accounts or investments if they make a full disclosure.

Under the terms of both the NDO and the LDF taxpayers will be required to pay the tax due on income and gains on their unassessed tax liabilities (including those arising on shore), as well as interest and, in most cases, a fixed 10% penalty.

However, under the NDO, taxpayers will be required to disclose undeclared amounts going back 20 years, whilst under the LDF account holders will be required to come clean just for the last 10 years.

Now I know which firm I’d be giving a very hard time if they brought forward cases from Liechtenstein if I was an HMRC inspector.

Note to McGrigors: HMRC read this blog.

And this sort of abuse is precisely why we need much tougher regulation of those allowed to practice tax law in the UK.

Time to refer, once more to Association for Accountancy and Business Affairs’ and Tax Justice Network’s Code of Conduct.

It’s not fair, blah, blah, blah

Banking, Code of Conduct 13 Responses »

Jul 012009

The predictable response to the new Banking Code has arrived. Accountancy Age has reported:

Michael Wistow, head of tax at City law firm Berwin Leighton Paisner, said that the code would make the UK ‘a less attractive place to do business, which cannot be helpful in these most difficult times and will further damage the UK as a major financial centre.’

The code stipulates that banks be expected to follow the ‘spirit of the law’ as defined by HM Revenue and Customs rather than legal precedent.

‘All taxpayers, including banks, should be able to rely on the courts and Parliament alone,’ he said.

Of course: the law is supreme. But all the Code asks banks to do is comply with it. Now what’s the problem with that?

Tax Code of Conduct: HMRC should have defined tax compliance

Code of Conduct, Tax compliance Comments Off

Jun 292009

The Chartered Institute of Tax has issued a press release about the new Tax Code of Conduct for Banks, saying they welcome it, and:

The CIOT’s initial view is that much of the code reflects good governance and the need for an open and transparent relationship with HMRC which we support. However, the CIOT would prefer that the process of making tax law is improved so that it is clear to all what the intention of Parliament was and so codes seeking to establish what the intention might be are unnecessary.

Peter Fanning, CIOT Chief Executive, said: "Defining the purpose of established law can be very difficult. The quantity of HMRC guidance is ample proof of this. Even in law, not everyone agrees. The challenge is to decide who decides what the ‚Äòspirit’ of the law is and how they decide it. If future tax law is clear then following its ‚Äòspirit’ will be much easier but establishing the ‚Äòspirit’ of previous complex legislation will be a challenge.”

This is predictable and simply not helpful. As a matter of fact i also challenge their opinion: I think the intent of parliament can almost always be discerned, as is also HMRC’s view.

But the sorry fact is that this problem could have been avoided if HMRC had said the Code demanded tax compliance. this can be defined as:

Tax compliance is seeking to pay the right amount of tax (but no more) in the right place at the right time where right means that the economic substance of the transactions undertaken coincides with the place and form in which they are reported for taxation purposes.

It’s always much better to define a positive goal than to expect a negative to be avoided. It seems an elementary mistake as a result to create a Code to defeat tax avoidance rather than to promote tax compliance as a consequence.

I hope it’s not too late to change this. I will be contributing to the consultation.

The Tax Code of Conduct for Banks: 1 failure, 1 omission and 3 oversights

Accounting, Banking, Code of Conduct, Tax avoidance 1 Response »

Jun 292009

The good news about the government’s new Tax Code of Conduct is that it exists. It would be churlish not to recognise that.

But, that said, it really does not go far enough. In keeping with the government’s lack of willing to tackle the banking industry it tackles the issue and then fails to address it.

The issue is that:

The Government believes that, in the light of the significant taxpayer support provided to stabilise the banking system, taxpayers are entitled to expect that banks, important taxpayers in their own right, and their customers pay their fair share of tax.

The failure is a simple one: if the government really meant to tackle this issue it should have backed any Code of Conduct with statutory powers to enforce it. In this case that would require a General Anti-Avoidance Principle (GAntiP), an issue I explore in more depth here. In essence a GAntiP says that if a step is added to a transaction with the sole or principal aim of securing a tax advantage (which is defined as a saving in tax) then that step in the transaction is ignored for tax purposes. This is that the new Code of Conduct also seeks to say: why not back it with law?

The omission from the Code is the obligation it should have put on the government to make it easier to determine what the ‚Äòspirit of the law’ and the ‚Äòintention of parliament’ is. Again, I have written extensively on both issues, most accessibly here. The government has a duty to publish purposive legislation, and it must empower courts to interpret the law of tax purposively. If not we will always end up with the courts undermining any Code – a fate that an attempt at a general anti-avoidance rule (note, rule not principle – they are not the same) has suffered in Canada.

And then there are three oversights: the first is that this Code does not extend to the advisers and auditors of banks. That seems a serious error: these parties should be covered with the obligation to ensure their clients comply or to decline to act. Second, it’s not clear if the Code extends outride the UK, when clearly it must if tax haven activity is to be included. Third, there is no requirement on the government to ensure its own activities are also compliant. That would mean it would be banned from using artificial structures such as orphan entities, too commonplace in PFI for example, or from artificially promoting tax competition. Reciprocity is key to the acceptance of voluntary obligations, and I am not seeing it here.

All of which leaves me grateful that this will be reviewed in twelve months, and worried that it will be the Tories who review it, which gives more than enough reason for going the extra mile now.

The new Tax Code of Conduct for Banks

Code of Conduct 1 Response »

Jun 292009

This is the Tax Code of Conduct for Banks on which the government is now consulting:

OVERVIEW

1. The Government expects that banking groups, their subsidiaries, and their branches operating in the UK, will comply with the spirit, as well as the letter, of tax law, discerning and following the intentions of Parliament.

1.1 This means that banks should:

‚Ä¢   adopt adequate governance to control the types of transactions they enter into;

‚Ä¢   not undertake tax planning that aims to achieve a tax result that is contrary to the intentions of Parliament;

‚Ä¢   comply fully with all their tax obligations; and

‚Ä¢   maintain a transparent relationship with HM Revenue & Customs (HMRC).

GOVERNANCE

2.The bank should have a documented strategy and governance process for taxation matters encompassed within a formal policy. Accountability for this policy should rest with the UK board of directors or, for foreign banks, a senior accountable person in the UK.

2.1 This policy should include a commitment to comply with tax obligations and to maintain an open, professional, and transparent relationship with HMRC.

2.2 Appropriate processes should be maintained, by use of product approval committees or other means, to ensure the tax policy is taken into account in business decision-making. The bank’s tax department should play a critical role and its opinion should not be ignored by business units. There may be a documented appeals process to senior management for occasions when the tax department and business unit disagree.

TAX PLANNING

3.The bank should not engage in tax planning other than that which supports genuine commercial activity.

3.1 Where the bank is principal, transactions should not be structured in a way that will have tax results that are inconsistent with the underlying economic consequences unless there exists specific legislation designed to give that result. In that case, the bank should reasonably believe that the transaction is structured in a way that gives a tax result which is not contrary to the intentions of Parliament.

3.2 Where the bank is not principal, but is providing or facilitating transactions undertaken by other parties, there should be no promotion of arrangements unless the bank reasonably believes that the tax result of those arrangements is not contrary to the intentions of Parliament.

3.3 Remuneration packages for bank employees, including senior executives, should be structured so that the proper amounts of tax and national insurance contributions are paid on the rewards of employment.

RELATIONSHIP BETWEEN THE BANK AND HMRC

4. Relationships with HMRC should be transparent and constructive, based on mutual rust wherever possible.

4.1 The features of this relationship should include:
       ‚Ä¢   disclosing fully the significant uncertainties in relation to tax matters;
       ‚Ä¢   focusing on significant issues;
       ‚Ä¢   seeking to resolve issues before returns are filed whenever practicable;
       ‚Ä¢   engaging in a co-operative, supportive and professional manner in all interactions;
       ‚Ä¢   working collaboratively to achieve early resolution and hence certainty.

4.2 Where the bank believes its proposed transactions may be contrary to the intentions of Parliament, the bank will explain its plans in advance with HMRC.

4.3 If, exceptionally, the bank discovers a transaction or arrangement has taken place where the tax result may be contrary to the intentions of Parliament, it will disclose the circumstances to HMRC at the earliest available opportunity, without waiting for the relevant tax filing date.

This can be contrasted with the Code I wrote for the Tax Justice Network and Association for Accountancy and Business Affairs which says:

A Code of Conduct for Taxation

Objective

This Code of Conduct relates to the payment of taxes due to a State or other appropriate authority designated by it.

Scope

This Code applies to:

Governments and their agencies in their role as tax legislators, assessors and collectors;

Taxpayers, whether individuals, corporate bodies or otherwise;

Tax agents, whether they are undertaking tax planning or assisting with tax compliance.

Application

It is intended that this Code be voluntarily adopted by States and should be used to guide the conduct of taxpayers and their agents who choose to comply with it whether or not they reside in a State which has adopted the Code.

The Code

The Code is divided under six sections, each of which includes three statements of principle.

1. Government

a. The intention of legislation is clear and a General Anti-Avoidance Principle (‚ÄòGantip’) is in use;

b. No incentives are offered to encourage the artificial relocation of international or interstate transactions;

c. Full support is given to other countries and taxation authorities to assist the collection of tax due to them.

2. Accounting

a. Transparent recording of the structure of all taxable entities is available on public record;

b. The accounts of all material entities are available on public record;

c. Taxable transactions are recorded where their economic benefit can be best determined to arise.

3. Planning

a. Tax planning seeks to comply with the spirit as well as the letter of the law;

b. Tax planning seeks to reflect the economic substance of the transactions undertaken;

c. No steps are put into a transaction solely or mainly to secure a tax advantage.

4. Reporting

a. Tax planning will be consistently disclosed to all tax authorities affected by it;

b. Data on a transaction will be consistently reported to all tax authorities affected by it;

c. Taxation reporting will reflect the whole economic substance and not just the form of transactions.

5. Management

a. Taxpayers shall not suffer discrimination for reason of their race, ethnicity, nationality, national origin, gender, sexual orientation, disability, legal structure or taxation residence; and nor shall discrimination occur for reason of income, age, marital or family status unless social policy shall suggest it appropriate.

b. All parties shall act in good faith at all times with regard to the management of taxation liabilities;

c. Taxpayers will settle all obligations due by them at the time they are due for payment.

6. Accountability

a. Governments shall publish budgets setting out their expenditure plans in advance of them being incurred, and they shall require parliamentary approval;

b. Governments shall account on a regular and timely basis for the taxation revenues it has raised:

c. Governments shall account for the expenditure of funds under its command on a regular and timely basis.

Enforcement

States seeking to comply with the Code will voluntarily submit themselves to annual appraisal of their Conduct. These appraisals will in turn be reviewed by a committee of independent experts appointed by participating States. Differences of opinion will be resolved by binding arbitration.

Any taxpayer or agent wishing to comply with the Code may do so. A State should presume that a person professing compliance with the Code has done so when dealing with any tax return they submit. In consequence the administrative burdens imposed upon that person should be reduced. In the event of evidence of non-compliance being found any consequential penalty imposed should be doubled.