As we approach the 10th anniversary of the global financial crisis it’s interesting to consider some of the lessons we can see across the economy and in particular, in tax and employment.
The most dramatic signal that things weren’t right was when Wall Street giant Lehman Brothers collapsed in 2008. As the UK approached this point, household saving in the UK was falling dramatically, and interest-only mortgages were riding a wave of popularity. Many of us were spending all the money in our pockets and leaving balancing the books for another day. (And this of course was when there was still an interest rate worth exploiting, at around 5% base.)
Questions were raised afterwards about regulation and who had been making huge amounts of money during this period. The lower-than-ever reputation of bankers is a direct result of the need to find multiple bad guys to blame for the mess. The current malaise affecting mainstream politics and the rise of the challenger banks can also be traced back to this period and the consequent recession.
But what almost everyone was guilty of a decade ago was believing that the good times would never end: “We can save next year!” - “Put it on the card!” - “We can keep moving our debt around!” - “I’ll be earning more soon, then we’ll pay off the mortgage!”
With a lack of financial education or much incisive financial comment in mainstream news, people were able to carry on regardless, in what can be best described as a “consequence-free environment” (with apologies to Austin Powers).
It seems to me that only the historically rock-bottom interest rate has prevented a more serious crash in the UK, one that affects “everyday folk”.
Exponential increases in repossessions and personal bankruptcies have been avoided, so far. News stories about food banks and other hardships are not acknowledged by a part of the population as real indicators of a financial meltdown. Though exactly what would happen after a series of interest rate rises is unclear.
There’s no doubt that part of the population has experienced pain since the crash. Austerity is not without impact. And geography can mask the picture for a London-centric media.
But it’s also true that nothing much has changed. A consequence-free environment is a very dangerous place. For many, no lessons have been learned, and the short term approaches of many politicians, exposed in the general election, only support that conclusion.
The tax factor
Recessions focus minds on money. Money gets to your pocket after tax. The MP expenses scandal, for example, involved inflated expense claims and stories about “flipping” primary residences to avoid capital gains tax on houses subsidised by these expenses. Numerous celebrities got caught up in tax avoidance schemes. Were they crooks or unfortunates caught up in a complex area of law? Whatever the truth, most of those exposed could afford to make good.
For people on the street the risk is that the lasting message is “Everyone else is doing it, so why can’t we?”
The gradual merging of avoidance and evasion in the public sphere is also deeply unhelpful. Government has allowed (presumably deliberately) the two terms to overlap, perhaps in a hope that avoiders will avoid avoidance to avoid being tarred with the same brush. That was never going to work, and the PR tactic has weakened both attacks on avoiders. As far as I’m aware social media campaigns against global companies haven’t swelled tax coffers. Nor have they helped the man on the street understand whether they are looking at something which is playing fair in the game of tax or overstepping the mark.
So what’s this got to do with tax and your everyday accountant? We are told that HMRC is looking harder than ever to close the “Tax Gap”, the difference between what should be collected according to legislation, and what actually is.
In one of the areas I work on, personal service companies (PSCs), new law arrived in April 2017 that meant that thousands of people who’d worked through PSCs needed to find an umbrella company to work through. Most faced a significantly higher tax bill than before.
A raft of new umbrella companies sprang up offering offshore solutions, marketing scheme solutions, and others - even a “pick your own tax rate” solution has been doing the rounds.
And, presumably, people are using them. Why?
I have had many discussions with clients over the years about the bright ideas they’ve been told about at the golf club/bar/gym/competitor’s seminar. Other people are using offshore payroll. Other people aren’t worrying about paperwork. Other people are making provisions for x or y or z. I even had one client many years ago talk about taking most of his pay in gold – we parted ways. I expect his eyes are on the news now.
Convincing a client how serious the risks are of one scheme or another is hard work with a capital H. But of course, many of the people using these new umbrella companies have taken no advice from an accountant. And by the time they need one, they’ll be directed towards someone who will hold their nose and take a fee.
So, agencies and end users – the whole supply chain – need to take responsibility for the solutions being used throughout their chain. They should look for trade body assurance (for example full accredited membership of the FCSA for an umbrella company).
But HMRC has work to do here too. They have more information than ever before by combining RTI, agency reporting and other sources. They need to publicly shut down and shame rogue operators – those who set up to exploit a situation like that created in April by the changes to IR35.
Never again should HMRC stick doggedly to a timetable just because it’s too late to pull out
In addition though, they need to ensure that legislation with such a wide impact is not rushed through. In the case of IR35 and April 2017, a rush is putting it politely. Never again should HMRC stick doggedly to a timetable just because it’s too late to pull out.
It is good to see HMRC publicly closing down an artificial scheme recently - a raft of companies with directors in the Philippines. But it should be remembered that involved in schemes such as these are thousands of workers, who really don’t know what they’re signed up to. It’s also good to see that Making Tax Digital is moving to a more realistic timetable.
It is vital that HMRC is seen to move quickly and fairly against avoidance. Clarity and proportionate enforcement is key. We need to reinvigorate the maxim that “if it looks too good to be true, it probably is” and leave behind the laziness of “everyone else is doing it”.
Making it easier to convince clients they should behave themselves will be better for everyone. We all have a part to play – but HMRC should remember that making life harder for compliant advisors isn’t going to result in the change they want. Generally speaking, we’re not the problem.
Chris James is an IPSE accredited Chartered Accountant, and winner of AccountingWEB’s Practice Excellence Technology Champion of the Year 2015. He is head of Accounting Services at JSA Group, which provides accounting, payroll, umbrella and business advisory services to small businesses, contractors and freelancers across the UK. JSA is a fully accredited member of the FCSA