Several people have challenged me about what tax compliance might be in comments in other postings on this blog. So I thought I'd better tackle the issue again.
Tax compliance means complying with the law. The spirit of the law. Not seeking to get round the law. In which case of course incorporation is allowed. I dispute that it's always worthwhile for small business though. I think many would be much better off as LLPs, but since it is allowed it cannot be avoidance, in principle.
I'd add that I think the government were wrong to castigate those who incorporated as avoiding tax. It seemed to me that they were planning to give a tax break to small business when they offered the nil rate band. If that was not their intent they should not have done it. People who incorporated complied with the law, subject to one condition. They did not comply if they then spun the benefits around the whole family when there was only one real earner in the business. The economic rate of return on a nominal £1 invested is not up to 50% of the profits which clearly come from labour. The settlements legislation has been appropriately used to attack this - and any practitioners who did not know this was possible had, in my view only themselves to blame. I took it into account in the 80s and nothing changed my opinion since.
Why is this avoidance when incorporation with the benefit (even if as dividend) being paid to the person who does the work compliance? That's simple to explain. The economic substance of an incorporated company paying a return to a person who undertakes the work for the company that generates its profit is aligned in his case with the tax burden. This is within the spirit of the law. If the government in that case does not want them to enjoy the income as a dividend they have to change the law, as Norway, for example, has. But spreading the income to family members who did not work for it does not reflect the economic substance. So that is avoidance.
The thinking is simple. It's a threefold process:
1) Is the economic substance / benefit of the transaction being considered aligned with the person who picks up the taxation liability or tax relief?
2) Did the government clearly intend this option to be available (even if it appears daft that they did)? I stree, a choice between options at this stage is perfectly acceptable tax planning. It is rare that there is only one option available. Tax planning does not go away when one is tax compliant.
3) When all cards are face up on the table could you defend the allocation of income or the claim for a tax deduction as reflecting the economic substance of the transaction, tax legislation and the clear intent of Parliament and the Treasury (the latter being necessary since I accept that Parliament's review of legislation is too cursory t ensure this a sufficient test, whatever i might desire).
If you can be sure of these things there's a good chance you're tax compliant. Which means you can sleep at night, and so can the taxpayer you're representing if you're an agent. That's the economic benefit of this. And I reckon the value if a good night's sleep pretty much incalculable.
Of course judgement is still required. But the management thinking process is different if one is tax compliant rather than being a tax avoider. That is the key change it reflects. There will be a change in tax liabilities on occasion as a result, although frequently it may be immaterial. But let's also count the benefits:
1) Much reduced risk of tax investigation
2) Reduced risk of unforeseen liabilities, which can be crippling
3) Enhanced ability on the part of the adviser and client to concentrate on entrepreneurial activity, where money is really made
4) Ability to hold one's head up high (I'm serious - paying the right amount of tax can make you feel good - I've advised people who have paid millions who have felt relieved to have an adviser who gave them permission to do so)
5) Peace of mind
It's a winner.
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Richard, I understand where you are coming from, but, ‘avoidance’ is still complying with the law as it is written, as for the spirit of the law, well it should be written clearly, and written in such a way that does not allow for interpretation, we are seeing more and more the Revenues interpretation is getting further away from that of practitioners, so if the law/legislation is written in a manner that is not open to interpretation (what you Richard will no doubt call avoidance, but I call tax planning) then it is no wonder practitioners interpret it in a way that benefits their clients, that is their job and one they are paid by their clients to do.
I think to use the term ‘in the spirit of the law’ though is a cop out, it’s too easy to say that’s not how it is meant to be interpreted. Tackle the underlying issue, which is to stop writing tax legislation poorly and write it in a robust, straight forward, clear and concise manner that avoids interpretation.
Let’s quickly look at Film Partnerships, they provide(d) funding for the film industry, nothing wrong there, and oh yes they have(had) a tax benefit to investing in them, nothing wrong there, after all you need to give someone an incentive to invest their hard earned money, but, the Revenue are now tackling those who invested with the use of S417 of ICTA1988 (which I must add has always been a risk as this is old legislation written before LLP structures came into existence) stating that where the client investing owns and controls his/her own limited company then everyone else like him/her who invested in the film partnership are associated for tax purposes, again, this is the Revenues interpretation of an act that was unfortunately written before LLP’s as investment vehicles came in to existence and not amended to account for them. So, how would you view a film partnership investment, tax avoidance or tax planning Richard?
I know how I think the Revenue view them.
Jason
I call that the ‘have you stopped beating your wife’ question.
First of all I think the government got this relief wrong. They shouldn’t have offered it because, to put it bluntly it ranks with the corporation tax nil rate band as an error of judgement on their part. The relief tried to distort the market and at the same time produced distortions in tax which did not match the underlying economic realities of what was happening. And as sure as eggs are eggs, when they realised they attacked the outcome. That’s not to their credit. But if you practice tax compliance it was foreseeable. I did foresee it. I gave up work with a TV company client when they planned to use it. I think my comment was ‘this will end in tears’. I’d have said the same to clients who wanted to use it.
Incidentally I said the same of the nil rate band and no client incorporated for that reason. None have complained. In fact they’re rather pleased they were not lumbered with an inappropriate structure.
That’s the benefit of tax compliance. You don’t look at it from the perspective you’re using Jason of whether it’s legal or not. You look at it from the viewpoint of does this make economic sense or not, for me, those involved and the government that has given it, knowing for the time being that they make mistakes and will continue to do so until the realign their own thinking on tax management. Then you decide to do it if you think it’s going to work, not just because it’s legal but because it is sustainable.
The result is better tax management. The answer to your question therefore is that film management plans were tax avoidance. I did not and would not go near them. I think I was right.
Richard
Interesting, I would put them in the tax planning basket, but, yes they do ‘avoid’ tax, they are however in my opinion another weapon in the tax planner’s armory.
The reasoning behind them was to fund the film industry to make films that may not have been made otherwise (makes you wonder if there was a reason they would not have been made!), the reasoning was fair enough, and the results were, as you rightly say Richard, foreseeable, as was the NIL rate band.
I have to be honest, we have not put any of our clients in film partnerships nor incorporated any for the 10% tax band reason, but I do enjoy playing devils advocate with you, more fun than agreeing or just disagreeing.
Incidentally, we have always made our clients aware of such schemes and then made them aware of the downsides/inevitable outcome.
Fortunately, none have gone the route of saying ‘I want a piece of that’ and I say fortunately because if a client wanted to use such a risky scheme which would cause a lack of sleep for me, then they would no longer be clients.
I too like to sleep easy at night, but I will always make clients aware of what is out there, and then they can’t say I haven’t done my job properly; the rest is up to them.
Jason
Telling the client something is out there is OK. It may even be part of compliance whilst we have decisions like Moore Stephens on the precedent book. Not doing it is also part of compliance in my opinion….
Sounds like you’re not far from it.
I used to call this process of client selection ‘dross drop’. The clients falling into this category self-selected. They weren’t aware of the term. Very few chose to apply for tax reasons. More did so for reason of not paying on time.
Richard
Sorry Richard I got side tracked by Dennis, my thread was not finished, I meant to go on to say ….
This is the problem with the current legislation and the way it is, and is continuing to be written, practitioners like myself have to make clients aware of opportunities for tax planning/mitigation that exist in order to give ‘fullest advice’ i.e. make them aware of alternatives/planning opportunities, because if we don’t a competitor will do, and then we have to make them aware of the downsides and how it is open to attack, and ultimately let them decide.
All this takes time, time to research and time to explain.
Richard, I feel at some point you will have to accept (you don’t have to like it) that tax mitigation is a necessary evil, there has to be a route by which the entrepreneur (risk taker) can reduce down his tax liability so he feels he is not only working for the treasury, but in doing so helps out some other part of the economy, which film partnerships are an example of.
It is therefore a double edge sword, for example the film partnership, without such schemes funding would not have gone into this industry, which may have resulted in a collapse, but the other side of this funding is tax mitigation for those involved, they come hand in hand like it or not.
Follow on from that on a wider scale and this results in money being spent in the economy, it’s a cycle, and tax planning/mitigation/avoidance call it what you want is part of it!
I’ve read this several times to get it clear in my mind.
What you’re asking: “Did the government clearly intend this option to be available” is almost a matter of discretion but I’d want a legal view first. This can still fail down because of issues around the ‘intended’ part of the sentence. Jason’s example of incorporation falls into the same category of ‘unintended consequences’ of what Richard agrees is oft poorly drafted legislation.
But you can’t have it both ways and expect readers to roll over and say ‘yes’ without recognising there are other facets of this implied from what is written.
There is a presumption in Richard’s thinking that you can predict what ‘might’ happen. When 9/10 you can’t predict what will happen in the next 5 minutes. You can only render an opinion. That’s as close to ‘advice’ as anyone can get. As in ‘this will all end in tears.’
I could throw the late 1980s London Docklands EZTs at you and say the same – in 1998-99 – for economic freasons. But not in 2002-3 when a number were sold. It was a bloody good investment all ends up. By any measure, tax-relieved private funding helped rejuvenate and create a vibrant community. If the investment had gone pear shaped, would you have said the same? (I know all the stuff about financial institutions. A lot of people live there as well and it ain’t all FSI)
Another problem. Tax practitioners simply don’t think that way and neither do they feel compelled to so do.
The really big corporate abuses I think are a different matter. Especially in the US where there are special problems of interpretation in a system where tax avoidance is built into the reliefs – for starters. And let’s not go to Delaware.
That of course is in the absence of a GAAR, which as you know in Canada, is being challenged left and right.
“When all cards are face up on the table could you defend the allocation of income or the claim for a tax deduction as reflecting the economic substance of the transaction, tax legislation and the clear intent of Parliament and the Treasury”
There are two issues at play here. ‘Cards face up’ is a good expression given the obfuscation that goes on. But – the way it’s couched leads me to think that there is a whiff of criminality implied here. If that’s the case, then transgression needs to be criminalised with an option for civil settlement.
But it is still problematic because again there is a presumption of future events – ie a challenge that cannot be accurately predicted. Opinion would need to be sought to meet your criteria. Now let’s get real.
In each and every case where I was considering a scheme – not once did I advise without making very clear that the Revenue might challenge. In particularly complex transactions, we always sought Counsel’s opinion and/or that of Andersen (at the time.) The same ‘do you realise…’ discussion was always repeated. I find it hard to imagine that practitioners who engage in this kind of scheme would avoid advising clients of the potential downside. But then I am happy to be labelled ‘naive.’
But the biggest problem is that while these proposals sound reasonable:
1. They’re not reflective of the professional code of ethics
2. Tax practitioners cannot know what is meant by ‘spirit of the law.’ It is only possible to do that – under the current system – through the lens of hindsight based on settled decisions.
Much more needs to change than simply handing the Sword of Damocles to the professional accountant – or at least the average CA.
Jason
I had hopes for a minute. And now you\’ve dashed them.
The reason is simple. Inside your comment is an antipathy towards government that indicates that somehow it is not a part of the economy at all. But just try for a moment thinking that paying tax does, as you put it \” result in money being spent in the economy, it’s a cycle\”. This is, of course the Keynesian logic which has driven the Nordic countries to continued success, has kept the US going and which we abandoned at considerable cost to this country in the 80s to follow the now discredited ideas behind monetarism. This \”cycle\” as you put it is in fact the Keynesian \”multiplier\” – the same multiplier that keeps Cumbria going despite Stuart Jones\’ protestations and the same \”multiplier\” that supplies the entire infrastructure business needs before it can even open its doors in the morning and which it is quite unable to provide for itself.
More important than a film, I\’d say.
And actually quite a useful thing for which business should pay, because it could not survive a day without it.
But until accountants see that they actually have to work with government, and that this is what society wants I\’ll remain of the view that they want to be outsiders. And actually that I really am pretty much in the mainstream.
No wonder accountants talk about an \’expecation gap\’.
Richard
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I have reflected hard on the way this debate is going.
Having done so I have decided that neither I or most of my readers are much benefiting from it.
I do not agree with the practitioner views presented here. But rather than have this descend into a tit-for-tat which will not benefit learning, the debate or this site I am disengaging from discussion with those whose main object appears to be to defend the current position of the profession, coupled with freqeunt attacks on government.
I take it as read that the profession has to change and am willing to discuss constructive alternatives about how it might do so.
I also take it as read that the government makes mistakes. I also believe it is an essential partner to business, which it matches in terms of both efficiency and the capacity to err.
Richard
Richard, I do actually understand where you are coming from, and on a certain level totally agree with you, I do actually think tax ‘avoidance’ is unpleasant, and something the higher earners do rather than the bulk of society, but, and this is the reality check, it is with us, and until tax systems are simplified, as I have said many times before, tax needs to be written in a robust and clear way that make ‘avoidance’ impossible, but as well as that, government waste has to stop and tax rates reduce to ensure the UK can be competitive in the global markets, then we will have a fairer system for all including the entrepreneurial high earners!
Incidentally you accuse me of ‘antipathy, towards government, you are right, I actually do dislike the way this government has hindered small business and introduced ill conceived and poorly reasoned legislation which has allowed abuses of the system, but, as we are still a free country that is my prerogative.
As an aside, we some time ago locked horns over government waste, as I remember you found this very hard to believe and asked for proof, a book written by Matthew Elliot and Lee Rotherham and published in February 2006 cites government waste at £81Billion, all funded by the British tax payer; now if this was stopped you could have your tax avoidance free environment and I could have my lower tax rate system too!
Link to where the book can be bought from:
http://www.harriman-house.com/pages/book.htm?BookCode=22852
Also, have you looked at the site of The TaxPayers Alliance (http://www.taxpayersalliance.com) on Monday they ran a posting on Whitehall pensions, as the rest of us in the UK struggle to pay our rising council tax bills, tax bills, mortgages, pensions etc it makes very interesting reading!
Sorry Richard,
Posted my comment before I read yours.
Jason
I realise that this site promotes the payment of tax but I am a little disappointed that discussions have to be ended just because not everyone accepts one opinion. (perhaps I am misisng the point of this site)
I feel that visitors to this site should see an opposite view. That it is not a right of government to tax people without due course of law and then to waste that money as they think fit.
That government should be continually challenged on waste, spend and interference. We are paying for services that often are not delivered.
To concentrate on tax`payers, who pay their taxes according to the law ,misses the whole picture.
(By the way I have met with many tax inspectors and they have not mentioned spirit of the law when trying to squeeeze out every penny in a tax audit!)
I also do not understand about the profession having to change. Accountants represent their clients under the law as it stands. In some cases the government (or its agents at HMRC) takes a different view of the law. The accountants surely still has to represent his clients interest otherwise he is just a postbox for HMRC.
David
I am not saying you may not post your views.
But I have to be realistic about the amount of time I can spend on this blog, and a small number of those who read it (97% of readers have never commented). And as such I am saying I cannot engage in a debate in the comments section any longer.
Richard