Tax Research UK

I just noticed I had a letter in the London Evening Standard yesterday. It said:

Chris Blackhurst is right that public attitudes towards tax avoidance have changed, but the Government could be doing much more.

The UK has £28 billion of unpaid tax debt. I estimate tax avoidance (legal but unacceptable abuse of tax law) to run at £25 billion a year and tax evasion (fraudulent law-breaking) at £70 billion. Tackling these issues could close the fiscal deficit.

The first step is for Revenue and Customs to recruit significant numbers of new staff, reversing recent job cuts, to address the tax evasion problem, which would also  save millions in benefit costs. Tax debt must be
tackled aggressively. UK law needs a general anti-avoidance provision that stops tax abuse before it starts; and we need to take on offshore tax havens by demanding full information from them on all income received by UK
passport-holders in those places, while abolishing the domicile rule.

If the Chancellor announced this programme next week, he’d have the country behind him.

Richard Murphy

Director

Tax Research LLP.

John Christensen covered the original story here.

I genuinely think Blackhurst is right.

People are fed up with abuse.

Richard Murphy Tax avoidance, Tax evasion

Chris Tailby CBE, former head of tax avoidance at HMRC, wrote a comment on the blog in response to my report on tax avoidance and evasion for PCS. He said:

Targets for measuring the success of the anti tax avoidance strategy are difficult to devise. Getting the DOTAS regime to work effectively so that aggressive schemes were closed quickly was a key plank of the strategy and we estimated we protected about £14Bn tax since the regime started.  DOTAS helped to change the culture of avoidance but there are still fundamental problems in the tax system which make challenge to tax avoidance difficult to succeed.

For example, at the micro level, a win on one case cannot be automatically applied to a similar case.  Each case has to be painstakingly prepared for trial using scarce resources then at the door of the Court the appellant withdraws and pays the tax which was always due.  But the root of the problem is that we have a tax system which allows avoidance to happen.

Until we have a tax system which is proof against tax avoidance, businesses and individuals will try to avoid tax and the rest of us will have to stump up to cover the shortfall which the avoiders create!

An avoidance-proof system should be the target for HMRC and I would like to see it spend serious money and if necessary buy in more specialist resources into achieving this goal.

I’ve a lot of time for Chris.

I agree that there are problems in assessing avoidance.

There are fewer problems in assessing evasion though.

And I wholeheartedly agree that we need a system that is proof against avoidance. As I’ve argued for some time this is possible. As I wrote in 2007:

Having determined principles [for taxation] there is a further vital issue to resolve, relating to how the law of taxation should be interpreted. There are two options. Interpretation can based upon the principles inherent in legislation or the strict construction of legislation.

The legal systems of the world vary considerably, as do the jurisprudential systems that they use. These two possibilities do, however, accord with the broad categorisation of determining obligations in accordance with the principles of either equity or law. For these purposes “equity” is the name given to the set of legal principles which supplement strict rules of law where their application would operate harshly. The intention is to achieve “natural justice.” In contrast the “law” refers to laws enacted by Parliament or established by “common law”, the latter being based on precedents set by judges when they decide cases.

It has been commonplace for tax to be charged in accordance with “law”. For example, it was decided in a legal opinion given in the House of Lords in the United Kingdom in 1869 that:

If the person sought to be taxed comes within the letter of the law he must be taxed, however great the hardship may appear to the judicial mind to be. On the other hand, if the Crown, seeking to recover the tax, cannot bring the subject within the letter of the law, the subject is free, however apparently within the spirit of the law the case might otherwise appear to be. In other words, if there be admissible, in any statute what is called an equitable construction, certainly such a construction is not admissible in a taxing statute.

This principle remains enshrined in most British tax law (in particular) and appears to heavily influence taxation thinking in general. This decision has implicit within it the following assumptions:

1. That the right to hold property is sacrosanct and that taxation violates that property right. As such tax may only be charged when specifically sanctioned irrespective of the equity of the resulting payment, or absence of payment of taxation;

1. The letter of the law can be determined without reference to the intent of those who created it or the context which gave rise to it, even if the circumstance in which it is used was not envisioned by those who created it;

1. That it is equitable as a result that some will, or will not, fall out of the charge to tax on the basis of the strict interpretation of the meaning of words which could not have been envisaged by those who passed them into law and whether or not (as is explicitly noted in the legal opinion, above) the resulting charge to tax is equitable or just.

The alternative approach to legal interpretation with regard to taxation is purposive. It may be summarised by an Australian law of 1901 on legal interpretation which said:

In the interpretation of a provision of an Act, a construction that would promote the purpose or object underlying the Act (whether that purpose or object is expressly stated in the Act or not) shall be preferred to a construction that would not promote that purpose or object.

In this context interpretation ‘looks though’ the strict structure of the words in the law to determine their just and equitable meaning, and uses that meaning in deciding upon the application of the law.

The United Nations Universal Declaration of Human Rights is based upon principles. It is concerned with justice and the equitable treatment of all people. In that context a purposive or equitable approach to the interpretation of law is essential if miscarriages of justice contrary to the spirit of equity, noted to be possible in the UK legal decision of 1869, are to be avoided.

Equitable construction of the law is therefore considered an essential element of any set of principles for taxation that recognise the rights of the citizen and the mutuality of obligation inherent in the relationship between the citizen and State, and between states.

---

Partington v. Attorney-General (1869), L.R. 4 E. & I. App. 100, per Lord Cairns at p. 122.

Section 15 AA of the Acts Interpretation Act, 1901 downloaded 4 December 2006 from http://www.austlii.edu.au/au/legis/cth/consol_act/aia1901230/s15aa.html

I persist in the belief that this is the direction in which we should move. This basis of legal interpretation and a General Anti-Avoidance Principle will undermine the whole basis of tax avoidance.

What are we waiting for?

Richard Murphy Tax avoidance

I’ve written a new report under the above title on behalf of PCS – the union that represents more than 80% of HM Revenue & Customs’ staff.

As the executive summary says:

The UK has been in recession, and may well be in recession again soon. Through no fault of its own, the income of our government has collapsed whilst its obligations have increased. A gap between government income and expenditure of up to £175 billion a year has emerged as a result. This though is not a spending crisis: this is an income crisis.

This report argues that the scale of that income crisis is being increased as a result of policies being pursued by HMRC. Those policies were created before the onset of recession. They have two aims. The first is to cut over time the number of staff engaged by HMRC by 25,000 – 17,000 have already left. The second policy is to close many of the local tax offices from which HMRC used to undertake its work in local communities. Over 200 offices have either closed already, are about to close, or are under threat of closure. It is fair to say that all offices are under scrutiny. When the programme is complete some people in the UK will live more than 50 miles from their nearest tax office, making it impossible for many of them to turn to this natural source of help and advice when seeking to fulfil their obligation to pay tax. In addition, HMRC are about to press ahead with the closure or severe reduction of its drop-in enquiry centre facility, which has previously provided a local and immediate tax advice service for both members of the public and tax professionals.

As this report also notes, too many people do not pay the tax due by them in the UK. HMRC have estimated the ‘tax gap’ in the UK – the difference between the tax they think is owed and the tax they actually assess – to be about £40 billion a year. We argue that this dramatically underestimates the total tax gap, particularly with regard to tax evasion.

To data previously published by the TUC which estimated total UK tax avoidance at £25 billion we now add an estimate of £70 billion for tax evaded within the UK. We can provide detailed and precise workings for this sum and also outline why the estimates of this sum produced by HMRC and the National Fraud Authority inevitably understate this figure.

When the total outstanding debts now owing to HMRC are added to these two sums, which when last estimated was £28 billion, we suggest the total tax gap in the UK is now likely to exceed £120 billion.

It is very obvious that the UK cannot afford this tax gap. It is equally obvious that if investment were made in additional resources for HMRC then this tax gap could and would be substantially reduced.

In arguing this we make the following points:

Recommendation 1: The basis for estimating tax avoidance should be revised to use a definition widely recognised in society and which correctly reflects areas of continuing policy concern as well as those abuses making use solely of artificial arrangements.

Recommendation 2: HM Revenue & Customs should be required to prepare estimates of evasion of direct taxes on a “top down” basis, as they do for indirect taxes.

Recommendation 3: H M Revenue & Customs should recognise that their existing bottom up methodology for calculating the tax gap for direct taxes will inevitably seriously under-estimate the size of that estimate.

Recommendation 4: HM Revenue & Customs should recommence publication of the many statistics on taxation produced by the former Inland Revenue which have ceased to be available since its demise, the lack of which make objective appraisal of the performance of the tax system hard to achieve.

Recommendation 5: HM Revenue & Customs should engage more staff to tackle tax avoidance and tax evasion.

Recommendation 6: HM Revenue & Customs must on occasion select cases for investigation without consideration of potential tax yield, and make clear that this happens to protect revenues from those on lower levels of earnings.

Recommendation 7: More staff should be engaged to scrutinise tax repayments before they take place.

Recommendation 8: More staff should be engaged to recover tax debt owing, and limits on sums to be pursued for collection should be lowered considerably.

Recommendation 9: The local office closure programme being pursued by HM Revenue & Customs should not just be stopped, it should be reversed. Tax must be seen to be collected in the community.

It is our firm believe that adopting these policies would highlight the true extent of the UK Tax Gap, provide the data needed to appraise progress in tackling it, and be cost effective methods of achieving that goal for al the reasons this report outlines.

I’ll be featuring more of what I say in this report over the next day or so.

The key issue is a simple one though: why, at a time when we need every penny of tax revenue we can get are HM Revenue & Customs doing everything possible to increase inefficiency in the tax system.

And remember – it’s not just me or PCS who are saying this. So too are the Treasury Select Committee. And I’d just point out that it’s not just PCS who are affiliated to the Tax Justice Network, so too are the Revenue & Customs’ group of the First Division Association of senior civil servants.

The Treasury select committee said, for example this week:

[HMRC’s Chief Executive] further that there was “lots of evidence” to show that HMRC’s anti-avoidance strategy was working. This is though not reflected in the Annual Report which records that it is too early to give an assessment of HMRC’s efforts to increase tax and National Insurance contributions actually received relative to the amounts that should be received.

And to reflect what I wrote on the lack of data and transparency from HMRC they also wrote:

As we have also previously noted, there is a similar lack of transparency in HMRC’s Annual Report on tax avoidance. In all, the Annual Report records no milestones against three out of the four [key] performance indicators .

Two reports happening to be in agreement does not say we’re both right. But I’ll venture on this occasion that we are.

Richard Murphy HMRC, TUC, Tax avoidance, Tax evasion, Tax management

When is a non-resident a resident under British tax rules? - Times Online .

The Times notes:

[A] seminar that Withers held last month — entitledShould I Stay or Should I Go? — found that Switzerland remains a particularly popular destination [for those looking to leave the UK for tax reasons]because of its proximity, if not its sizzling culture, while Hong Kong and Singapore appeal to the banking set.

They then note

The question of leaving the UK because of the tax burden has grown in importance with the impending 50 per cent top rate, which many predict will lead to an exodus of high-earners and the international companies that employ them. However, Woods says the Withers seminar found that it is the uncertainty in the UK tax system, not higher taxes, that is driving people away.

“Plenty of people are still looking at becoming non-UK tax residents,” agrees Herring. “They are just going to have to be more careful about how they do it.”

But as we know just 1,079 bankers (who are those most likely to leave) applied to go to Switzerland in 2009, down on the previous year.

The continuing coverage of this story is pure politics. The reality is that some people go abroad to advance their careers - and always will. The number who go into tax exile is minimal - and most who do don’t need our sympathy and would not understand it if we offered it.

Richard Murphy Tax avoidance

FT.com / Technology - Google in Brussels antitrust inquiry.

The European Commission has launched a preliminary antitrust investigation into Google’s search engine and its search-advertising service.

How about an inquiry into its tax affairs as well?

Richard Murphy Tax avoidance

Farmland: A growing investment | Money Matters | FT.com.

This article highlights what is so wrong about the UK.

Tax driven incentives for ‘investment’ are being used to divert scarce government revenue into tax avoidance creating artificial bubbles in so called investment media - in this case agricultural land - which add nothing to the real value of the economy but which force out those who are best placed to employ these resources - in this case farmers.

There is a simple solution to this abuse - which is to limit total claims for allowances and reliefs over and above the basic personal allowance to a sum not exceeding £5,000 when gross income for tax purposes (i.e. before any such allowances are offset) exceeds £100,000.

The benefits are obvious: the tax system is simplified, tax ceases to drive resource misallocation, asset bubbles are avoided and more tax is collected. I call that a quadruple whammy.

Bring it on, as I think some say.

Richard Murphy Tax avoidance

I don’t always agree with George Monbiot, but he’s on form this morning, writing:

It’s a bitter blow. When the government proposed a windfall tax on bonuses and a 50p top rate of income tax, thousands of bankers and corporate executives promised to leave the country and move to Switzerland. Now we discover that the policy has failed: the number of financiers applying for a Swiss work permit fell by 7% last year. The government must try harder to rid this country of its antisocial elements.

Executive flight is the corporate world’s only effective form of self-regulation: those who are too selfish to pay what they owe to society send themselves into voluntary exile. It’s an act of self-sacrifice for which we should all be grateful. It’s hard on the Swiss, but there’s a kind of mortal justice here, too: if you sustain a crooked system of banking secrecy and tax avoidance, you end up with a country full of crooks and tax avoiders.

As he concludes:

These efforts [to tackle tax abuse] scarcely scratch the problem. International attempts to close down tax havens remain halfhearted. But if, by some miracle, these measures were to succeed, one haven – let’s say St Helena – should be kept open. It should be furnished only with rudimentary homes. All who chose to could live there in peace. Every penny they possessed would remain safe from the taxman, as long as they never set foot in another land. They could sit in their cells and count their money for the rest of their lives. Parties of schoolchildren would be brought to the island to goggle at these hermits, and learn some lessons about the follies of wealth.

And I’ll guarantee you this, there are plenty enough sad people that there would be queues to live there. The world would, as George rightly says, be a better place without them.

Richard Murphy Secrecy jurisdictions, Tax Havens, Tax avoidance

The Tax Justice Network blog has an entry on an old bête noire of mine, flat taxes. As they note:

Citizens for Tax Justice in Washington has another excellent short paper, this time about the flat tax. It begins:

Since 1995, Senator Arlen Specter of Pennsylvania has introduced legislation to create a federal “flat tax” in every session of Congress, including this session. This single-rate tax would replace the existing progressive personal income tax, as well as the corporate income tax and estate tax.

Now what’s wrong with the flat tax?

Well, for starters, there is the fact that the people who dreamed up this gimmick in 1983 admitted that a flat tax "will be a tremendous boon to the economic elite” and that “it is an obvious mathematical law that lower taxes on the successful will have to be made up by higher taxes on average people.” This table provides the evidence:

And CTJ’s time tested number crunching has analysed the proposal, and worked out that it would involve:

• Enormous tax cuts for the richest five percent of taxpayers, including an average tax cut of $209,562 for the richest one percent in 2010.
• Tax hikes for all other income groups. The bottom 95 percent of taxpayers would pay an average of $2,887 more in federal taxes in 2010.
• Low-income Americans would lose the refundable credits that they receive under the current income tax.
• The form of income that mostly flows to the wealthy — investment income — would be exempt from the personal income component of the flat tax, while all compensation for work, including wages and even employer-provided health care benefits, would be taxed.
• There would be little simplification in taxes for the majority of Americans. Replacing progressive tax rates with a single rate has nothing to do with simplicity, because progressive rates are not what makes the current system complicated.

What actually makes the tax system complicated are the various loopholes and special breaks that mostly benefit businesses and higher-income individuals. Capital gains income (which wealthy investors tend to have) is currently taxed at a lower rate than the wage and salary income that constitutes almost all income for most Americans.

Many wealthy people therefore have an incentive to use various schemes to disguise what is really compensation for work as capital gains income. But instead of addressing this by taxing all income the same way, the Specter flat tax makes capital gains income entirely tax-free!

As CTJ concludes:

Senator Specter’s flat tax is not so much about eliminating loopholes as it is about consolidating loopholes for the rich.

—————

To which I would add just one thing: remember it was not long ago George Osborne was flirting with this idea. Why was that, I wonder?

Richard Murphy Conservatives, Tax avoidance, USA

Under pressure: tax inspectors turn up the heat on the rich | Business | The Observer .

The Observer relaunches its business section by highlighting the abuse of the tax profession.

This is a battle HMRC has to win - and it will get ugly before they do. Expect more accountants to spend time at Her Majesty’s pleasure - and it won’t be garden parties we’re talking about.

Until the profession rediscovers ethics it deserves to be treated like a pariah - because that’s the way too many of its members behave.

Richard Murphy Accountancy, Ethics, Tax avoidance

I’ve just noted the finance minister of India saying:

The structure and the location of the group entities of the multinational enterprises exploit the favourable tax regime offered by the low tax jurisdictions and tax havens.  This has lead to accumulation of wealth and shifting of intellectual capital to these jurisdictions.  The role of tax havens and low tax jurisdictions has become an area of great concern for a country like India which is putting its all acts together to mobilize resources to attack on poverty and illiteracy.

Then I read in Business Week that:

Software and computer companies such as Microsoft Corp., Hewlett-Packard Co. and Dell Inc. are gearing up to fight an Obama administration plan to curb offshore tax avoidance.

The $15.5 billion proposal in President Barack Obama’s 2011 budget targets what the Internal Revenue Service calls the growing problem of so-called transfer pricing. The technique allows companies to reduce their tax bills by transferring intangible property such as patents, trademarks and licenses to offshore subsidiaries.

The Business Software Alliance, a Washington-based trade group that represents technology companies, said it would “educate policy makers” on how the proposal would hurt U.S. companies, jobs and the economy.

The finance minister of India speaks with some authority on the issue. Microsoft and its chairman seek to direct world development through charitable structures whilst diverting attention  from the secretive tax policies that deny tax revenues to places like India by selling them product from places like Ireland so limited local taxable revenues arise.

Is this what Microsoft wants to ‘educate’ Washington about?  Is this to be a lesson in how to move wealth from the poorest to the richest in the world, because that’s what these structures are used to do.

And how does that help your charitable objectives Bill? Let’s debate it, anytime, anywhere. Your call.

Richard Murphy Development, Tax avoidance, USA