Tax compliance » Tax Research UK

Incorporation with limited liability is a privilege. It should not include anonymity

Jan 202012

I’ve long argued for the contention in the title of this blog. I am convinced legal limited liability is a privilege - after all, if people sign a piece of paper to form a company they no longer have to accept full responsibility for their debts. That’s an extraordinary state of affairs, and a massive privilege. But I have said that, like all responsibilities, this one comes at a price. The price is to say who you are i.e. to disclose who really owns the company and who really runs it, as well as to say what you do i.e. to put true and fair accounts on public record.

For a long time this argument has been resisted, so it’s especially welcome to note the Economist saying this week:

Limited liability—a commercial venture that protects its shareholders from personal bankruptcy—is one of the greatest wealth-creating inventions of all time.

I agree. And it then follows up saying:

But limited liability is a concession—something granted by society because it has a clear purpose. It is unclear why in parts of the world anonymity became part of the deal. Efforts to withdraw that unjustified perk deserve to succeed.

And as they add:

In dozens of jurisdictions, from the British Virgin Islands to Delaware, it is possible to register a company while hiding or disguising the ultimate beneficial owner. This is of great use to wrongdoers, and a huge headache for those who pursue them (see article). Anonymously owned companies can buy property, make deals (and renege on them), launch intimidating lawsuits, manipulate tenders—and disappear when the going gets tough. Those who seek redress run into baffling bureaucracy and a legal morass. Seeking real names and addresses means dealing with lawyers and accountants who see it as their job to shield their clients from nosy outsiders.

And as they continue:

It does not seem unreasonable to ask who are the main recipients of this benefit [of limited liability] (with, say, stakes above 5%). Legitimate concerns for owners’ safety, such as biotech firms hunted by animal-rights activists, are rare. In many more cases, such as Caribbean holding companies controlled by well-connected Russians, greater transparency is on the side of democracy and freedom. If the owners of an enterprise really want to preserve their anonymity, they can still opt for an unlimited option—but that will be their risk.

That last point is well made: limited liability is a choice. As they conclude:

Reform ought to be simple. Anyone registering a limited company should have to declare the names of the real people who ultimately own it, wherever they are, and report any changes. Lying about this should be a crime. Some dodgy places will try to hold out. But anti-money-laundering rules show international co-operation can work. You can no longer open an account at a respectable bank merely with a suitcase of cash. Let the same apply to starting a limited company.

The Task Force on Financial Integrity and Economic Development has campaigned on this issue – as have I, Global Witness, The Tax Justice Network and others who are all members of that body. It’s great to see support for our call for reform from a paper like the Economist.

Now will the UK reform its company registry to comply?

And will offshore listen?

A GAAR for the UK – one step closer today

GAntiP, HMRC, Tax avoidance, Tax compliance 8 Responses »

Nov 212011

Graham Aaronson QC’s report for HM Treasury on the desirability of a General Anti-Avoidance Rule (GAAR) for the UK is published this morning, and I warmly welcome it.

There are two reasons for me saying that. First, in the days when Vince Cable and I used to talk he was quite a fan of my work, and as a result he and Matthew [Lord] Oakeshott put this idea, for which I had campaigned hard, into the LibDem manifesto on 2010. From there it went into the Coalition agreement and so I might, I think, fairly claim a small credit for the fact that this issue has reached this stage.

Second, and in the interests of full disclosure it is only fair to record I met Graham Aaronson twice during the course of his work, doing so on behalf of the TUC who I advise on tax. I did as a result have a chance to read drafts of this report and to input into the process, and both appreciated that opportunity and Graham’s receptiveness to ideas, many of which he took on board.

So what of the outcome? Well, this is more like a principle than a rule, and I appreciate that. It would be hard to see how a piece of legislation could more precisely enact the will of parliament without using those words than this draft does. It’s very clever in that respect, and I welcome that.

I also think that many appropriate checks and balances are built in to the drafting. HMRC cannot use this willy nilly, and that’s right. This should be a tool of last resort and not a battering ram for widespread use. Appropriate defences for action are built in. Safeguards to prevent HMRC over-using the provision are included. The result is that the rule will be used against egregious cases, and not be aimed at all tax planning. That’s right: where the law provides for choice planning is inevitable and right and I for one have never denied that fact.

But let’s also be clear: this suggested rule says very clearly that things that may be legal can also be morally unacceptable and the chance to prevent a person availing themselves of that abuse should exist. That is an enormous step forward in UK tax law if it comes to be enacted and I welcome it. So should all wise companies and tax professionals, not least because this means no one is now obliged, even in their wilder moments, to mention these egregious schemes any more: they can simply say they are sure they will fail and as such can recommend clients to ignore them. Companies can also do so with a clear conscience, knowing the chance of failure in using such schemes has now increased, a lot. Anyone who does not welcome this is simply saying they think abuse of the law is desirable: it will be a foolish person who does that. Certainty is, incidentally increased because such schemes will also now be unavailable

But that said there are compromises which I would not have embraced. For example, I think the burden of proof should rest with the taxpayer in all cases when an action is taken under these rules. It has been made so hard for HMRC to begin them I think that the right balance. Right now that’s not the case: in all but the cases most likely to impact on small business and individuals the balance of proof is on HMRC. That, curiously, is reversed in the case of what will arise for most small businesses and individuals and the impression that this is another measure that picks on the small player is reinforced as a result. That is unfortunate.

Second, I think there is real risk that the tax profession may have too much influence on the advisory board that will be established to run this GAAR. That would be a serious problem and more balance is required in my opinion.

Third, the scope is simply not wide enough. NIC and SDLT should be in from the outset.

I would hope that progress can be made on all these issues, but let’s have no doubt about it: this is a very big step forward for tax justice and I warmly welcome this report and hope it moves rapidly towards becoming law. The Tories will need to be held very firmly to account on that one.

Why the tax gap matters – or why I appeared in court for UK Uncut

Tax avoidance, Tax compliance, Tax evasion, Tax gap, UK Uncut, Uncategorized 13 Responses »

Sep 252011

I wrote the following at the request of the Brighton Evening Argus for publication after the close of the UK Uncut trial in that city, in which I appeared as an expert witness to explain the links between tax avoidance and the cuts agenda of this government.

I regret that the judge, sitting as a magistrate, did not accept that the link was close enough to justify the actions taken during peaceful protest by UK Uncut supporters: equally I am pleased he appeared to accept the link existed but was simply not sufficiently immediate in his view on this occasion (which does of course beg the question when it might be, but let’s leave that aside) and as such five of the nine charged were found guilty of criminal damage. That he gave them conditional discharges for six months does also suggest how trifling he thought the absurd case brought against them to be.

But, back to the Argus article:

Nine people from UK Uncut have been on trial in the last fortnight in Brighton for allegedly causing criminal damage during a protest in Brighton’s Top Shop last December. The damage they’re alleged to have caused was trivial and they admit they stuck themselves to the window of the store. The much more interesting issue is why they did it.

As a chartered accountant I appeared in court when asked to do so by their defence lawyer to explain just what the issues they were protesting about were. These are both complex in detail and relatively simple at the same time to explain.

Everyone knows that the UK is facing cuts at present and we are told they are inevitable. So benefits and pensions are being cut, school funding is down, hospitals are having budgets frozen, the arts and leisure are seeing cuts all over the place and the armed forces are having their numbers slashed. What I argue and what UK Uncut argue is that this is not as inevitable as it seems. There is, in fact, an alternative and it is one that the government is refusing to pursue.

That alternative is called ‘closing the tax gap’. The tax gap is the difference between the amount of tax which the law suggests should be paid in the UK and the amount actually paid. There are three parts to the tax gap. The first is the tax that tax payers have admitted they owe but which they then do not settle on time or at all. This amounts, according to H M Revenue & Customs to about £25 billion at present. If we got this money in the country would not have to borrow so much so it’s a big deal.

The second part of the tax gap is tax that’s evaded. Tax evasion is a criminal activity. It’s what happens when people don’t declare their income to H M Revenue & Customs or when they claim expenses to offset against their income to which they are not entitled. Of the two the first is the most important. Estimates of the total sum evaded each year vary. H M Revenue & Customs estimate the sum to be approximately £35 billion a year but there’s good reason to think that’s a serious underestimate. I think it’s £70 billion a year.

The third component of the tax gap is tax avoidance. This is the element that most people find hardest to understand. Tax avoidance is not the act of claiming the allowances that you are entitled to in law. So, for example, claiming your personal allowances is not tax avoidance. Nor is paying money into a pension fund, or saving in an ISA. Tax avoidance is instead seeking to get around the law so that less tax is paid than Parliament intended on the economic activity that a person undertakes.

This “getting round” the law can be done in a number of ways but the most common is to find loopholes in UK law or between UK law and the law of other countries. These can be complicated; a lot of it involves offshore tax havens, and because it’s expensive to set up it’s largely done by the wealthy and multinational corporations. I estimate it costs the UK £25bn a year, split between individuals and companies.

So the tax gap is, I estimate, up to £120 billion. In fairness I should note H M Revenue & Customs do not agree, but because of my work they have published their own estimates, which come to £60 billion at present – exactly half of what I suggest. It’s curious to note in this context that ‘benefit fraud’ is just over £1 billion a year – but is the issue to which all attention is given.

Either way, and whoever’s figure for the tax gap is closer, it’s an enormous amount of money. My figure would pay for most of the NHS. The point is collecting even some of this money – again whoever’s estimate is closer – would eliminate the need for a lot of cuts – hence the name of UK Uncut. They are saying, and I have said for a long time that if only we collected the money due from tax cheats and crooks then we would either need many fewer cuts or we would not need tax increases. And what I have shown, sometimes working with politicians like Caroline Lucas, is that the measures needed to collect some of this tax are relatively simple, are quick to enact and would work.

Nothing though would work better than having more people on the job of collecting the tax owed to H M Revenue & Customs and yet extraordinarily at a time when the government needs every penny it can get in tax it is sacking tax staff as fast as it can. There were almost 100,000 HMRC staff in 2005: there will be 50,000 in 2015. Rarely has a policy designed to offer ‘savings’ been so misguided. It’s like a company facing a cash flow problem deciding to sack all its debt collectors. But the important point is this: that the government has not only decided to continue with this plan conceived when the economy as booking and it might have made sense, it is accelerating it.

As a result it is clear that the Coalition is choosing to leave money with the tax crooks and cheats instead of collecting it to pay pensions, educate children, fund the NHS, keep our armed forces armed and so much more. It’s that choice that UK Uncut were highlighting – picking on Top Shop because Sir Philip Green’s family are widely reported to have actively avoided £285 million of tax in one year in the mid noughties. He’s just an example, nothing more. But the example is important: there’s cash out there; this government needs it and UK Uncut and others expect them to collect it, now, for the sake of us all. And by demonstrating UK Uncut have made clear that this option is available, which is why I supported them by giving evidence during their trial.

Tax responsibility: at the core of the corporate responsibility

Tax compliance Comments Off

Jul 122011

I have not given fair publicity to a new report from Fair Pensions, Action Aid and others on the fact that tax avoidance creates reputational risk for business. Their report, published yesterday, is here.

As they say:

The group’s briefing argues that ‘tax responsibility’ must take into account three key insights:

1. Compliance with the letter of the law is no longer sufficient to protect business from the risks associated with tax planning

2. Lack of transparency around tax planning leads to increased risk

3. The structures and practices of tax planning are at the heart of tax responsibility, rather than the amount of tax paid, which is an outcome of these practices.

I endorse that.

Choose life: choose to pay tax

Accountancy, Ethics, Tax compliance 3 Responses »

Jun 292011

Art Uncut have an article in the Guardian this morning on their objectives. They say:

Art Uncut aims to bring about a culture shift, to create a world where people automatically and instinctively think about tax ethically.

First, we want to empower people to “Just Say No!” to the tax accountant.

Hear, hear, I say.

And by chance my old blogging friend Dennis Howlett sent me a link, this morning to an article by J K Rowling written a year or so ago in which she said:

Now, I never, ever, expected to find myself in a position where I could understand, from personal experience, the choices and temptations open to a man as rich as Lord Ashcroft. The fact remains that the first time I ever met my recently retired accountant, he put it to me point-blank: would I organise my money around my life, or my life around my money? If the latter, it was time to relocate to Ireland, Monaco, or possibly Belize.

I chose to remain a domiciled taxpayer for a couple of reasons. The main one was that I wanted my children to grow up where I grew up, to have proper roots in a culture as old and magnificent as Britain’s; to be citizens, with everything that implies, of a real country, not free-floating ex-pats, living in the limbo of some tax haven and associating only with the children of similarly greedy tax exiles.

A second reason, however, was that I am indebted to the British welfare state; the very one that Mr Cameron would like to replace with charity handouts. When my life hit rock bottom, that safety net, threadbare though it had become under John Major’s Government, was there to break the fall. I cannot help feeling, therefore, that it would have been contemptible to scarper for the West Indies at the first sniff of a seven-figure royalty cheque. This, if you like, is my notion of patriotism.

Hear, hear again I say.

The evidence that a person can be ethical about tax is proven. The evidence that some accountants recognise the issue is alos laid bare for all to see.

So why aren’t there more who do just that? Who say ‘choose life, choose to pay tax’?

If you really believe in small business then you have to ensure that tax cheats are driven out of the market

Accounting, Companies House, Conservatives, Corporation Tax, Ethics, HMRC, Tax compliance, Tax evasion, Tax gap, Uncategorized Comments Off

Jun 102011

Only one in three companies in the UK pay tax.

It’s likely that up to one in two, at least, should.

The rest don’t pay because they’ve realised that H M Revenue & Customs don’t have the staff needed to chase them. So they get away without paying, scot-free.

But that begs a big question. How can an honest small business have a chance of surviving when so many of its competitors are cheating? Of course the one that pays tax as it should will be at a disadvantage.

The government’s failure to collect tax from hundreds of thousands of companies that owe it in this country is tearing the guts out of honest enterprise. You could be honestly mistaken into thinking it was government policy to support businesses that cheat based on this neglect on their part.

There are only one ways to get round this. The first is we need more tax inspectors. And we need them to go after the people who don’t pay and not the ones who do.

Is that really too much to ask?

And is it really too much to expect of a supposedly pro-business government?

The second is we need to supply those tax inspectors with more information. Some very simple data will do. As Caroline Lucas MP’s Tax and Financial Transparency Bill demands, all that we need to do is to ensure that every financial institution in the UK that opens a bank account for a UK limited company, LLP, trust or other arrangements constituted under statute must tell H M Revenue & Customs and, if appropriate Companies House that they have done so. They must also advise them when they close those accounts.

A company with a bank account is a trading entity, almost certainly. What is undoubtedly true is that if it has a bank account then it is an entity that has a duty to file a tax return and pay any resulting tax that is due. The provision of this information, with whether or not the entity has a bank account being recorded on public record ( without, of course, account details being disclosed) would result in three highly desirable outcomes.

First, we would know which companies were likely to be trading, or not. At the moment this is is a matter for self declaration, and the opportunity for fraud is enormous, and I suspect prevalent.

Second, the Revenue could then demand tax returns from all those companies where it was appropriate, knowing that they had targeted the right entities. At present this process is largely dependent upon the self declaration of companies, and again, this is widely open to abuse, and fraud.

Third, if Caroline’s Bill became law Companies House would not be able to strike off a company with an open bank account, or if it had had a bank account during a period and had not filed accounts for that period. In other words, company directors would be forced to fulfil their obligations to file accounts on public record. Additionally, HMRC could then object on an objective basis to any company being struck from the Register if it knew that a company had operated a bank account but had not filed a corporation tax return for the period when it did so. Once more, the power to enforce regulation would exist based upon relevant and reliable information.

As a result a fair, open, and accountable playing field that is level for all participants will be created. The cheats will not be able to avoid their obligations any more. Honest business will be supported by our government. The tax system will support those who pay.

One final provision within Caroline Lucas’ Bill would help that. If HMRC were given the power to demand from a bank full details of the beneficial ownership of the company recorded for money-laundering purposes, full details of the directors of the company and their current addresses as recorded by bank, and full details of its bank account activity if HMRC could show that they had made an enquiry of the company to secure a corporation tax return and no information had been provided to it within three months of that enquiry being made then the Revenue would have access to all the information that they would need to firstly raise estimated tax assessments and secondly make contact with those people who were really managing the affairs of the entity, meaning that they could hold them to account for the actions of the company. Again, that information would eliminate cheating within our society, uphold honest business, and ensure that a level playing field is created within the UK business environment.

I would, quite candidly, be astonished if any chartered accountant, any business organisation, any lawyer and any politician could oppose such proposals. This is all about ensuring honesty, accountability, transparency, justice ad equal treatment for the honest business community of this country which needs to be defended from the cheats who can at present undercut their best efforts by not paying their taxes, by employing people in the shadow economy and by undermining their prices through evading VAT.

Can anyone really object to that?

Tax is not a cost

Economics, Ethics, Tax avoidance, Tax compliance, Uncategorized 12 Responses »

May 092011

I was asked one question on two separate occasions last week. It was “is tax a cost of business?”

The answer is a resounding “no, it isn’t!”

The idea that tax is a cost of business is a convenient myth – one propagated by the tax avoidance industry to provide an all too ready excuse for its clients who justify their tax abuse by saying “it’s all in the shareholders interests.”

We do not however have to go far back in history to realise that in a more enlightened era those responsible for accounting saw through this untruth. It’s not by chance that in the profit and loss account of any company tax is shown as a payment after its profit has been struck. In that sense the tax charge of a company stands alongside the payment of dividends to shareholders as a distribution by the company out of its profit. This makes abundantly clear that tax is not a cost, any more than payments of dividends to shareholders are costs. The payment of tax is a distribution.

Dividends are a distribution to the owners of a company paid in return for the capital that they provide to allow it to trade.

Tax is a payment made by a company to the society that grants that company its right to operate.

And there is no company that can say it has not been granted a licence to operate. Most companies trade in the states in which they are incorporated. In that case their certificate of incorporation – the certificate that proves they have a legal existence – that is their quite literal licence to operate. If they trade in a state other than the one in which they are incorporated then most states require that they be registered before being allowed to do so – in which case that registration becomes their licence to operate.

And have no doubt that this licence is very real: the licence may be cheap, but it carries with it too significant and unavoidable obligations.

The first such obligation is to comply with the tax charges created using the very same legal process that granted the company a licence to operate.

The second obligation is, I think, to be transparent and accountable for their actions by putting financial statements on public record.

These are reciprocal obligations for the right of limited liability that has been granted by a state. And yet we have allowed them to be corrupted. So much so that we don’t enforce them any more resulting in a loss, in my estimate of up to £16 billion a year in tax revenue.

Which is something we really can’t afford.

Tax compliance wins the day

Ethics, Tax avoidance, Tax compliance 4 Responses »

May 052011

I mentioned yesterday that I was to give evidence yesterday afternoon to the House of Lords Finance Bill Sub-Committee. I did so alongside John Whiting and Ian Menzies-Conacher (of Barclays) representing the Chartered Institute of nTax and two representatives of the Association of Taxation Technicians.

I guess what surprised me was that on so much the CIOT (the ATT having mumbles to say) were on the same ground as me. Several of these areas of agreement are important to record, so I’m going to do so on separate blogs and then draw conclusions.

Let me start though with a pretty fundamental issue. John Whiting and Ian Menzies-Coucher agreed that there is no doubt that taxpayers have a duty to pay tax in accordance with the will of parliament. It is the spirit and not the letter of the law that matters – and it is the spirit that should be complied with. The complaint was (and I have to agree there are grounds for this) that it was hard on occasion to determine just what that will is.

So there are some prelims to overcome (who said life was easy?) but I think it deserves to be noted that the leading tax institute in the UK in that case says that taxpayers have a duty to be tax compliant.

Tax compliance is different from tax avoidance and tax evasion because it is defined (admittedly by me) as 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 significant difference between tax avoidance and tax compliance is the intent of the taxpayer. A tax avoider seeks to pay less than the tax due as required by the spirit of the law. A tax compliant tax payer seeks to pay the tax due (but no more).

But that begs the question, why isn’t this in their code of ethics and why do so many of their members act otherwise? Because there is no doubt that far too many do. Tax avoidance would not be so prevalent unless that were the case.

We don’t need to get rid of NIC – we need an investment income surcharge

Tax avoidance, Tax compliance, Tax management Comments Off

Mar 212011

There is much discussion going on about a possible merger of income tax and national insurance in the UK. This follows a report from the Office for Tax Simplification suggesting this and a belief that such a merger fits George Osborne’s simplification agenda (or “don’t make it complicated as George won’t understand it” agenda as it might be called in the civil service).

It’s important to get facts right on this. First, the principles underlying these taxes remain quite different despite all that is said: national insurance does, effectively, fund old age pensions. And the reality is that right now entitlement is dependent upon contributions – meaning that the claim that national insurance is just taxation is just a false statement by those who have either a) been in work all their lives or b) can safely ignore their entitlement to a state pension as they have so much cash it will be an irrelevant part of their income in old age. That’s a tiny minority largely represented by those from big firms of accountants who talk about this issue. For the rest it’s a much bigger deal.

And even then much of the discussion ignores some really important aspects of the debate, which are however of significance to millions.

It’s entirely true for a person of working age who is in employment and who has earnings of less than about £43,000 a year tax and national insurance look pretty much like the same thing and add up to total tax deductions on a payslip.

But for pensioners introducing combined income tax and national insurance would be a massive blow: many do pay tax but none pay national insurance. Combine the two and effective tax rates on pensioners rise considerably. Is that the new deal Osborne wants to offer?

There are also several pillion self employed people in the UK (and yes, I’m one of them). We pay less NI – because we get many fewer benefits if out of work. What’s the deal going to be here? Are benefits to be made available if the self employed pay pro rata? And how could that be policed? There’s been good reason for the reduced benefits – because the self employed can easily manipulate their income. But why deny them benefit if they pay full tax?

And what happens to employer’s NIC? Does it simply become a payroll tax? And what then for the self employed? And what for the varieties of reduced NIC for employers making pension contributions? And many aspects of NIC and employee benefits in kind are, of course employer contributions and so would, presumably survive in any payroll tax?

What too for the fact that this will very obviously look like a tax increase for those on lower pay but not those on higher pay – because NIC bar 2% (from 6 April) those paying higher rate tax do not pay NIC. So the differentials are suddenly eroded. Is that right?

These questions are all very real. They imply this to me:

a) If there is to be a payroll tax on employers if NIC is merged with income tax there will be almost no tax simplification for employers at all – they will still be calculating two taxes on payrolls. So this is a waste of time.

b) Aligning benefit in kind rules for employers would be useful – but let’s not deny they’ll still be complex – because employers will abuse anything that is simple. Sad , but true, with the biggest abuse being by the biggest companies. So we’re still going to live with complexity.

c) In that case simplification hopes go straight out of the window.

d) Making the significant self employed community pay more is something a Tory government is not likely to do – so complex rules will be inevitable. Or alternatively opportunities for abuse will be high.

e) The idea of 32% withholding rates is interesting – but how likely is it?

f) Massively generous allowances for pensioners may not be welcome – some pensioners can, after all, afford to ay ax – but this is political nightmare area;

g) The big abuse merger would stop is the small business abuse of limited companies to pay dividends to save NIC. That’s the big anti-avoidance measure that has proved elusive so far – and given that 500,000 companies disappear a year - many of them probably abusing this on the way – this is obviously important and has to be tackled.

So the question arises that if two taxes cannot be avoided – and that has to be the case – then why bother to merge income tax and national insurance?

Why not simply do what I have often suggested, which is to reintroduce an investment income surcharge? If a 15% extra tax were charged on all investment income a person had in a year over £5,000, with an exemption for £25,000 in the case of pensioners, the abuse of small limited companies would stop, serious revenue would be raised and the absurdity of investment income carrying a lower tax rate than income from work would end. Add it to capital gains too and then offshoring and other abuses would end as a well – because disguising income as gains would be pointless and this tax would be charged on the taxpayer not at source – so offshoring would not work in most cases.

That makes an investment income surcharge a simple, neat and effective solution which would apply to relatively few people but it would stop abuse and resolve the unfairness in the system whilst helping pay for the deficit – solely by charge on those most able to afford to pay.

And if George does not go for it – shouldn’t Ed?