What the government isn’t telling accountants about their tax policy

Mike Warburton, a speaker at this year’s IRIS World 2010 conference for accountancy practices, offers his views on the government’s plans for tackling tax evasion and what the reforms will mean for the accounting community.

As a tax director who specialises in providing advice to a range of high net worth entrepreneurial clients and frequently appears in court on forensic tax litigation assignments, one would expect Mike Warburton to revel in the complexities of tax law – after all, without it, he wouldn’t have much of a job! This couldn’t be further from the truth, however, as the Grant Thornton director is passionately opposed to over complex legislation and supports the government’s new Office of Tax Simplification. Despite this, he’s not quite so keen on their latest plans for tackling tax evasion and avoidance, as he explained to us this week.

Q: What’s your opinion of the government’s renewed focus on tax simplification?
Mike:
There is (quite rightly) a big change going on at the moment concerning how tax policy is set. Accountants see the end result of this legislation but don’t always get to see how it’s arrived at, and I think it’s important for accountants to know what happens behind closed doors in terms of the way policy is arrived at. Tax legislation has become far too complicated and it needs to be simplified. The Office of Tax Simplification is a step in the right direction and John Whiting, who has been appointed to head it up, is the right man for the job.

Q: What’s your opinion of the government’s new £900m plan to tackle evasion and avoidance? Do you think they will recover the £7bn a year by 2015 they are projecting?
Mike:
Every government says they’re going to tackle avoidance and every government should tackle evasion because that’s illegal and there’s absolutely no justification for it. The previous government did a good job of tackling avoidance with their disclosure regime. However, I’m a bit sceptical about whether there is an additional £7bn a year to be found – I don’t think that scale of tax avoidance is going on. It’s a wild overestimate of the actual situation.

Q: Does HMRC have the resources to recover the projected amount of tax being lost through evasion and avoidance?
Mike:
 Pressure from the Treasury will see cuts in expenditure at HMRC along with other departments, but HMRC is already stretched and could encounter difficulties with the extra burdens being placed upon them.
The root problem is that successive governments have created a tax system that is too complicated. The volume of tax legislation doubled under the previous government and that’s a big legacy to live with. HMRC and accountants are having to cope with this.

Q: Many commentators in the accounting and business communities have complained about the conflation of evasion with avoidance. Do you see this as a problem?
Mike:
Evasion and avoidance are two entirely different things: One is legal and one is not. The last government said there was ‘acceptable avoidance’ and ‘unacceptable avoidance’ and then used this idea of ‘unacceptable avoidance’ to treat avoidance and evasion as if they were one and the same, but they’re not.

However, it’s important to be sensitive about the current situation. At the moment, there are massive cuts going on, people in the public sector are losing their jobs, VAT is going up and so I can well understand how politically sensitive this subject is. There is a moral argument for people who – albeit legally – take steps to avoid their taxes to be questioned about this and of course the government is entitled to change the law if there is evidence this is going on. The ‘catch me if you can’ sentiment is not good message for tax advisers and firms to putting out – after all, we are responsible citizens like everybody else. However, the scale of it is being completely overstated and it’s not going on in the way that’s been suggested. I don’t recognise those numbers at all.

Q: We are likely to see lots of reform over the next 12 months as the new government beds in – what should accountants be preparing their clients for?
Mike:
As well as amendments to specific tax legislation such as entrepreneur’s relief and capital gains, accountants should be aware that tax litigation against accountants is increasing. This always happens after a recession, and as tax legislation has become more complex, clients have grown increasingly litigious and lawyers have been keen assist in such areas, the number of cases has increased. In my talk, I’ll be flagging up a few warning signs to show how easy it is for accountants to finish up on the wrong side of a court case, based on my experience as an expert witness.

One common theme in this area is the use of emails. Many accountants are not aware of the increased risk this type of communication presents, so in my talk I’ll be offering tips on how to handle communications with clients so as not to expose yourself to risk.

Mike Warburton is speaking at IRIS World 2010, a series of events for accountancy practices offering an insight into the latest trends and issues affecting businesses today. The one-day programme will be taking place in London on 5 October, Birmingham on 14 October, Leeds on 19 October and Glasgow on 20 October. To find out more about the event and reserve your ticket, visit www.irisnews.co.uk/irisworld/index.php

 

Comments
johnjenkins's picture

Tax

johnjenkins | | Permalink

Mike is right in what he says. I've been in the game for 45 years (how many years?) and in that time there really hasn't been such an eroneous and  sustained attack on the SME's. Where are all these numbers coming from? If they are to be believed then everyone in the country is on the fiddle. If that is right then the tax system definately has to be changed. We've had 13 years of GB moaning, now Cleggy is having a go. I have a BIG message for Government. If things are really that bad then SORT IT.

I agree with Mike. Their figures are wrong. No not just wrong, not just a wild overestimate but a figure that doesn't bear any resemblance to reality. It might even be a DC ploy to keep Cleggy busy and out of the way for a few years.

If Mike, I and many others are right and the figures are wrong shouldn't the Government be bought to task for scaremongering? To think policies will be shaped on this rubbish is astounding.

Wild Billy's picture

I'm always impressed...

Wild Billy | | Permalink

... with the certainty of those expressing an opinion which states, with certainty, that HMRC MUST be wrong even when they don't have access to all the data and information that HMRC has. It must be brilliant to live with a mindset that says "I'm right, you're wrong" and I don't much care that you have more evidence to base your theories on than me. How can you know £7bn cannot be recovered through tackling avoidance and evasion? You can only know that if you have seen and understand the data underpinning the assumption.

If a pilot says you are due to land 15 minutes ahead of schedule but in the 100s of flights you have taken you have always been 15 minutes late then you would be right to be sceptical. But what makes you right and the pilot wrong? The pilot can access the weather charts, wind speeds and knows how fast the plane is flying. You, in the passenger seats, know none of that so can't really judge but happily express your view that the pilot is wrong with a certainty that bores everyone like a drunk in a pub.

 

johnjenkins's picture

Experience

johnjenkins | | Permalink

is a wonderful thing. It enables one to call upon what has been learned over a number of years and scenarios and apply a common sense and flexible approach. Something Government have replaced with compliance and rigidity.

Tax Avoidance is legal therefore not collectable. That's not rocket science

Tax Evasion. Does anyone know how many people do "privates" without declaring - NO. and so we go on.

The figures used by Government are based on assumptions. Its easy to say for every evader we catch there must be 2,3,4 or 5 we don't catch.

When Government realise that their assumptions are wrong and that there aren't that many people "on the fiddle" we might see a proper simplification of the tax system. Until then more of the same rubbish.

...

Trevor Scott | | Permalink
  • It isn’t merely a case of what people may be actually fiddling, it is also a case of what can be proved and then recovered on a practical and economic basis. Take a look at the history of Government claims on expected tax intake from such campaigns and you will see that they always come miserably short of their original PR claims. There simply isn’t a point spending say £900 million on a further drive to increase the take of taxes when only a similar/not much higher amount is collected, even more so when the tax collected is extracted from those that are generally honest but who are mainly guilty of being not so wised up on book-keeping etc…the result being that many taxpayers simply stop trading and paying tax to UK Plc.  

 

Avoidance and evasion.  

  • If I drive at 69mph on a motorway I do so because, other than for safety factors, I wish to act within the law and avoid the subsequent consequences of falling foul of the law. In doing so I am not acting surreptitiously to deprive the government of the opportunity to fine me and therefore evade a speeding fine. To think such undermines my presumption of innocence and cannot be a legitimate thought for a civil servant acting within the civil service code.
  • The benefit of using a motorway speed limit analogy is that the motorway speed limit is clear and well known, if only the tax system could be more concise and clearer; rather than a deliberately created grey area open to complications and varied interpretations.

Above, JJ has asked do we know how many people do privates on the side. I ask, do we know how many small traders incur expenses and don't declare them because they loose/don't get an invoice/receipt? What about the number of people who have false starts in their business and incur much losses, but then simply write it off as a bad memory and can't/don't want to do anything about the losses. There are endless possibilities, including businesses who at their owners expense will freely provide services to people in the community which should be done and paid for by local government; this includes delivering food to the elderly and fixing holes in roads!

last part of Mike Burton's post

pauljohnston | | Permalink

was about emails  One common theme in this area is the use of emails. Many accountants are not aware of the increased risk this type of communication presents, so in my talk I’ll be offering tips on how to handle communications with clients so as not to expose yourself to risk.

I would be very interested to hear morw

 

I'm always not impressed

ThornyIssues | | Permalink

Wild Billy says "... with the certainty of those expressing an opinion which states, with certainty, that HMRC MUST be wrong even when they don't have access to all the data and information that HMRC has."

The first mistake Billy makes is that he assumes that HMRC do have the data when in fact they do not. This fact has been uncovered by the PCG when MPs asked the Paymaster General in the House to defend her RIA assertions of monies to be raised for IR35 and also the monies that had been actually be raised to date . The reply was, slighted paraphrased  " ... HMRC do not retain or have the means to identiy the figures .... " ( a search of Hansard will reveal the exact words if required). Repeated FoI requests were met with the same response.

It has become very clear to the PCG that this in fact the truth. HMRC do not have the mined data to hand. Secondly, as the raw data lies in the domain of the outsourcer (remember WHO lost HMRC data recently), obtaining mined data has been quoted at such high fees by the outsourcer, HMRC will not (cannot) afford it.

Conspiracy theory will of course state that this state of affairs is by design.

 

Philipredhead's picture

Avoidance and Evasion

Philipredhead | | Permalink

The above comments highlight the problems of distinctions between tax avoidance and tax evasion. To make this distinction clearer the office of tax simplification should be tasked with reviewing the many grey areas in UK tax legislation to make them clearer, therefore making the distinction between evasion and avoidance black and white rather than the murky grey it is at present. Surely this would make everybody's life that little bit less stressful and enable HMRC to concentrate on the true evaders rather than cases where people fall foul of different interpretations of unclear legislation.

It would be interesting to see how much the estimate of £7 billion offered by the government would change following such a review. I would suggest that this would reduce significantly, unfortunately making such a review less likely.

 

SME's being HMRC fodder

ThornyIssues | | Permalink

JohnJenkins says " ..... Mike is right in what he says. I've been in the game for 45 years (how many years?) and in that time there really hasn't been such an eroneous and  sustained attack on the SME's....."

This is undoubtedly very true. HMRC has always sought the easy targets where they can use Fear, Uncertaintly and Doubt (FUD) to bully their customers, sorry, taxpayers into submission .... or at least a deal to cough up. With IR35 though, HMRC bit off more they can chew and there is no doubt that the PCG, via their policy of taking any member deemed caught under IR35 to (special, not general) tribunal to amass over 1600 wins against HMRC's 4 wins and secondly, when the PCG took HMRC all the way to the House of Lords and won with S660A, the balance has moved in favour of SMEs at long last. 

Incidently, talking about S660A. HMRC recently, despite the loss at HoL, tried FUD tactics and brought another S660A case to court. They lost obviously. What a waste of taxpayers money and as far as I'm concerned, warrants a malfeasance in public office case.

My main point though, give the audience, is how the accountant allowed this case to go to court in the first place? Doesn't the ICAEW/ICAS not broadcast such information? 

Nick Graves's picture

Thorny's right

Nick Graves | | Permalink

Not only is there a climate of FUD, where scrappy bookkeeping is now classified as BrinksMat, we have this fundamentalist doctrine from HMRC. If they're gonna conflagrate "Avoidasion", then I'm gonna conflagrate their mixture of inefficiency and morally bankrupt IR35/s.660 dogma into "HMRC corruption".

Seems fair to me.

 

 

 

 

 

ARE TAXPAYERS THE ONLY ONES USING SUSPICIOUS TACTICS

Ian Thompson | | Permalink

The goverment talks as though it is aiming to collect more tax from wealthy taxpayers with well planned evasion schemes. In reality I am coming across a different tactic from HMRC; namely demanding payment of unsubstantiated amounts and threatening legal action in the very short term if payment is not made. These amounts are often balances dredged up from old disputes, dropped in the past, or from PAYE/VAT inspections where ridiculously high assessments are made with immediate threat of action. The small taxpayers often agrees to some compromise with payment by installments rather than use accountants/tax advisers to investigate the cases as no guarantee of succes can be given. Yesterday I had 2 clients ring me when they had received demands for VAT on this kind of basis. I then spent most of the day on the phone with various VAT offices where the staff know very little about the tax but talk as though any balance on their ledger puts a god-given obligation to pay on the taxpayer without any right to question or challenge. The overall theme here seems to be obtaining tax by intimidating small taxpayers.  

     

The real tax evasion

darrellfoley | | Permalink

Clearly the biggest form of tax avoidance is the inheritance tax system which, subject to the odd mistake and a bit of bad luck, allows wealth to be passed from generation to generation tax free.

 

How is it a fair system for two people over the age of 18 to each receive £40,000 and be taxed so differently?

 

Person A works 60 hours per week as cleaner and pays tax of £12,000, leaving net income of £28,000.

 

Person B (let’s call them Cameron Junior (age 24)) sits around on his lazy posterior and receives £40,000 from Daddy). In fact Cameron Junior goes on an around the world cruise comes back to the UK and is still better off than the person who works.

 

What happened to independent taxation?

 

This is the most blatant and worst form of legalised tax evasion. Yet does is it even get mentioned?

 

The lump in the throat is that you get the likes of Simon Hughes/Nick Clegg et al proclaiming they want a fair society and any right minded person can see the stains of hypocrisy, like food marks on their shirts. If they want the moral high ground make sure you don’t sink in the swamp of your own greed. You would have thought they learnt the lessons of the expenses scandal but clearly Politicians have not changed.

 

Inheritance tax should be abolished and the definition of income should be extended and finally we can see the wealth between the rich and the poor close. An income tax rate of 100% will not achieve this.

 

Why does this legalised tax avoidance never get mentioned, because it has been entrenched in the system, which promotes higher taxes on the poor and ensures that Clegg, Cameron, the super rich, the rich, the upper middle class, the paparazzi and the politicians carry on their on jolly on the backs of everyone else.

 

Finally on the article he mentioned John Whiting, is this the same John Whiting who stated on national radio the governments new PAYE proposals have potential? Mike Warburton may feel he is right for the job, but unfortunately some of us would disagree.

 

@darrell

pauljohnston | | Permalink

Sadly the system you propose would only drive the wealthy and high earners offshore. 

There is no fair system just look at communism and Russia! 

There would be less demand on our tax revenues if everyone who could work did work and contributed to running the state.

johnjenkins's picture

Darrell

johnjenkins | | Permalink

tax has already been paid on the money earned to pay for the inherited property. So why should it be taxed again?? Perhaps the 18 year old should be asked whether he would prefer parents or £40K.

Philipredhead's picture

tax avoidence example?

Philipredhead | | Permalink

I agree with Darryl. Are you really suggesting that Cameron Junior's £40,000 inheritance should be taxed twice whilst the other workers income is taxed once.

Tax all the juniors..

stephen.fia.org.uk | | Permalink

Inheritances should be taxed 4 times... once on the earnings to buy the property, once on the purchase of the property, once on the transfer at death, and finally as a punitive measure upon the deceased as by dying they have wilfully ceased to be a continuing taxpayer, and that is downright evasion. The Government should then bring in immediate measures to start taxing all children's pocket money at source, at say 70%. There is no justification for giving the juniors a personal tax allowance, as they are already wholly supported by the state in giving them an education. In fact, the parents should be taxed on the transfer value of the state education. And we should then start taxing families in houses with two toilets or who spend their money on soft toilet paper... There is no limit to the sources of taxation if we apply a little imagination, and believe me, within 5 years from now, we will....

 

 

 

So what ?

mikewhit | | Permalink

"tax has already been paid on the money", yes but buying VATted goods out of taxed income is double tax as well ...

Fairness in tax

peterdell | | Permalink

I would scrap inheritance tax and bring it in line with income tax. The tax burden would shift from the poorest in society to the richest people.

Dont understand any of the points in response. Where is the double taxation? If 18 year old son has received money, 18 year old son should pay tax on it. When have they been taxed on this money before.

We dont say oh a sole trader has paid tax and therefore all its employees should be exempt. As stated we are talking about independent taxation.

Double taxation does exist for self employed, directors and employees who pay tax on their income and then pay VAT/stamp duty however I dont see the double taxation in the scenario above. Tax may not have been paid for many generations.

Not sure what fairness in the tax system has to do with communism. I object to the way certain rich, vested interest groups have hijacked the tax system and create exemptions for themselves. The gifts and inheritance tax legalislation is the type of legalised tax fraud that causes massive problems in society.

It has created a disenfranchised underclass which dont have a stake in society. This is a problem no matter what your political persuasion.

As for driving rich people overseas, if you dropped tax rates at around 35% which you would be able to do with the extra income, then you would in fact attract more high flying professionals who are leaving these shores for lower income tax regimes, as one my banker clients is telling me he is going to do.

"There is no fair system just look at communism and Russia!"

chatman | | Permalink

 What is wrong with Communism?

petersaxton's picture

Wages

petersaxton | | Permalink

"We dont say oh a sole trader has paid tax and therefore all its employees should be exempt."

But a sole trader doesn't get taxed on the money they receive to pay the wages.

"What is wrong with communism?"

Ninian | | Permalink

Wouldn't it be a lot quicker to list what is right?

johnjenkins's picture

Communeism

johnjenkins | | Permalink

Nothing wrong in living with lots of other people, free love and all that.

Taking that a stage further. Everybody works and Government give pocket money according to job rank etc. No unemployment (those that refuse to work are shipped off to Delhi to help with CG or somewhere else just as encouraging). No taxation. No retirement, so no pension problems etc. etc.etc.