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HMRC urged to clear schemes backlog

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12th Nov 2014
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Leading tax experts have called on the government to settle a backlog of 65,000 tax avoidance schemes, as more evidence emerged that the “Hodge effect” is making HMRC staff reluctant to settle disputes without recourse to litigation.

“We have reached the point where the open wound that is the huge backlog of schemes is not worth the ongoing damage to the UK’s international reputation and the sheer amount of resources that HMRC has to commit to it,” said Ray McCann, tax partner at Pinsent Masons.

McCann, writing in Tax Journal, warned that “there are more avoidance schemes out there than HMRC can reasonably expect to clear up by any conventional means, such as scheme-by-scheme litigation”.

He suggested an “overall resolution strategy” to facilitate settlement of any kind of scheme. “Getting rid of the backlog will be of huge benefit to the UK exchequer and those who are tired of the status quo. Opponents … will need to reflect upon a simple fact: they have no practical workable alternative.”

Tax barrister Jolyon Maugham said last night that the taxpayer has “some £14bn” of exposure to marketed, artificial tax avoidance schemes, while scheme users are “desperate to settle”.

A courageous government would “act in the public interest and settle these cases at knock down prices”, he said, and “relinquish the contingent £14bn in return for a certain £11bn”.

The ‘Hodge effect’

Tackling marketed tax avoidance was the theme of Maugham’s Hardman lecture at the ICAEW’s Tax Faculty. He found the notion that there is a moral element in taxation to be “entirely free of difficulty”, but warned that the moral voice “must not be confused with the legal voice”.

“More serious – but no less alarming – is the notion that the moral voice should become an arbiter of tax consequences. And there is a lot of that happening.

“There are some inspectors at HMRC who are refusing to do deals with taxpayers that they absolutely should do,” he said. “And they are refusing to do those deals because they are afraid of those deals being hauled over the coals by the Public Accounts Committee. And I know this because they’ve told me. Explicitly.”

Pinsent Masons tax disputes partner Ian Hyde told the Telegraph in July 2013: “The public has a perception of HMRC settling too readily. [HMRC] wants to settle but they need to win cases in public to show they’re fighting – and that takes time and money and clogs the system up.”

‘Compromise can be reasonable’

McCann said Sir Andrew Park’s review of five large tax settlements, prepared for the National Audit Office in 2012 amid controversy over the taxation of multinationals, “made it clear that compromise can be reasonable and lawful”.

The NAO reported that “these large settlements are complex and there is no clear answer to what represents the ‘right’ tax liability”.

Promoters

Maugham told his audience that accelerated payment notices (APNs), introduced by Finance Act 2014, had fundamentally altered the dynamics of tax avoidance. The attractiveness of some arrangements “really did depend on them being no worse than cash-flow neutral”.

APNs for schemes within the DOTAS regime would remove the cash-flow advantage, he noted. “So promoters have responded by searching high and low for schemes that don’t need to be disclosed under DOTAS. Or for people who will say that schemes don’t need to be disclosed under DOTAS.”

He argued that tax barristers should be more accountable for opinions given to IFAs, accountants and tax advisers who sell avoidance schemes on the strength of those opinions.

He was concerned that the high-risk promoters regime, also introduced this year, “might be too gentle a piece of legislation”. It requires “multiple failures” before a promoter becomes a monitored promoter, he said.

It is clear, Maugham suggested, that a number of people have found themselves “involved, quite unwittingly, in transactions with a higher risk profile than they would choose”.

There is room for HMRC to “be more activist in encouraging people to engage with reality”, he added, revealing that there are signs that a big four accountancy firm may back his “badging tax risk” project.

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Replies (22)

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By johnjenkins
13th Nov 2014 09:25

I'm all for compromise

It shows common sense. However what really bugs me is the hypocrisy of it all. Not too long ago Customs had a backlog of vat applications. So they ditched all the applications and told people to re-apply. The Northern Rock scandal, Immigration etc. etc. etc.

What if we decided to do a similar thing. Sorry Co House, HMRC we have a backlog so we are doubling up next year. Can you imagine the uproar and penalties.

This sort of thing needs to be stopped. We need staff with balls, instead of mamby pamby, afraid of their own shadow, "Hodge effect" staff.

Of course we will have to do a deal with these companies but let's stop these schemes before they get off the ground.

Prevention has always been better than cure.

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By ShirleyM
13th Nov 2014 18:09

65,000 schemes?

Assuming just 100 members per scheme, that's potentially 6.5m people avoiding tax, or there may be fewer people, but using more than one scheme each.

No wonder the country is bust!

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By Trethi Teg
13th Nov 2014 20:39

Tax Experts? Accountants?

It is quite clear that our tax experts are not very good with facts. There are approximately 1,200 schemes on the HMRC APN list if I rember rightly. There are approximately 65,000 individual tax payers (companies or individuals) involved in those schemes. I suspect that some use more than one scheme and therefore the the number of taxpayers involved is in the range between 30,000 to 50,000 - roughly.

With regard to our accountant - Shirley M - she uses the figures to estimate that there may be 6.5 million tax avoiders in the country or if they use - say - 2 schemes each, then there are 3.25 million tax avoiders - using DOTAS registered schemes.

Common sense says that the only users of tax avoidance schemes are going to be quite high earners e.g £100,000 or maybe £200,000 per year upwards. Common sense also says that the majority of high earners cannot use tax avoidance schemes e.g. doctors in the NHS, council leaders, huge numbers of civil servants etc etc.

I havent checked the economic statistics but I suspect that we do not have 3.25 million (out of a working population of 30 million) or anything like that figure who earn large sums let alone use DOTAS schemes. Therefore our accountant cant have used a reality check before publishing the comment. The figure is between 30,000 to 50,000 - roughly.

Come on guys, if we are to have sensible debates about a very serious professional matter please put some effort into checking your numbers. Its what we are supposed to be good at!

 

 

 

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Replying to lionofludesch:
Stepurhan
By stepurhan
14th Nov 2014 11:28

Putting some effort in

Trethi Teg wrote:
Come on guys, if we are to have sensible debates about a very serious professional matter please put some effort into checking your numbers. Its what we are supposed to be good at!
You say that the 65,000 being taxpayers rather than schemes is an HMRC published figure. Presumably that means you can provide a link for it. Otherwise we have no reason to accept that your figures are correct, given they differ from the figures already appearing in the article. Acting as if everyone should just take your word for it isn't exactly helping the quality of debate either.
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By ShirleyM
13th Nov 2014 20:58

I thought I was being conservative ...

There were more than a thousand members in the K2 scheme. So 1200 schemes with maybe 1000 members each? It's still an awful lot of tax avoiders.

I wonder where 65,000 schemes came from then?

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By Trethi Teg
13th Nov 2014 21:09

Conservative?

About as conservative as Arthur Scargill!

I understand that the scheme providers send a list of participants in each scheme to HMRC. Therefore the 65,000 figure for individual taxpayers. That is a published figure by HMRC. There tax "expert" obviously got a little confused. Hopefully better on Finance Acts.

I also understand that quite a number of schemes were registered but never found their way to market hence the low overall average per scheme.

 

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By ShirleyM
13th Nov 2014 21:27

That's rather provocative!

I object strongly to being compared to Arthur Scargill.

Is it a game? ... shall we compare you to a promoter of such schemes ... who happily bite the hand of the country that feeds (provides) such riches?

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By johnjenkins
14th Nov 2014 12:15

So if we are

to believe the figures in the article, we have 65,000 tax avoidance schemes saving around £14b tax. Commission on that would be say 10%. Then that banker did use £180m on foreign exchange to make a profit of $633m. Not bad, I'm definitely in the wrong profession. 

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By Trethi Teg
16th Nov 2014 15:25

Putting Some Effort In

https://www.gov.uk/government/publications/issue-briefing-tax-avoidance-...

Here we go Stepurham.

The number of taxpayers is 43,000 according to the HMRC article. Therefore there cannot be 65,000 schemes.

I think I did say "understand", but at least my figures in the right ballpark.

Hope this helps.

If Shirley M would like to compare me to a "promoter" (much worse than Stalin or Hitler) then that's fine. I am not particularly precious.

 

 

 

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Replying to [email protected]:
Stepurhan
By stepurhan
17th Nov 2014 07:56

Comparing apples and oranges?

Trethi Teg wrote:
https://www.gov.uk/government/publications/issue-briefing-tax-avoidance-...

Here we go Stepurham.

The number of taxpayers is 43,000 according to the HMRC article. Therefore there cannot be 65,000 schemes.

I think I did say "understand", but at least my figures in the right ballpark.

Having read the article you linked to, I wonder if you are actually talking about the same thing. The article you linked to talks about 43,000 taxpayers (individuals and businesses) being subject to accelerated payment notices. The original article above simply talks about schemes where HMRC has a dispute. Those are not necessarily the same thing. Since I can't find it in Jolyon Maugham's speech, I'd now be interested in a link to where the 65,000 schemes figure came from. Only then can we see if we are considering the same thing. No point in debating two unrelated figures.

Since you are so concerned with accuracy, I do have a couple of issues with your post here. My name is stepurhan, not stepurham. Also, you say your figures are "in the right ballpark". Your previous posts adopted the 65,000 figure from the article, but claimed that was taxpayers, not schemes. Based on the article you linked to, 65,000 is an overstatement of about 50%, and so could hardly be considered close. If you are going to be bullish about stating someone is wrong, it is best to ensure your own figures are correct. Indeed, this makes me think it more likely we are talking about different things. The same figure being labelled as schemes rather than taxpayers is plausible error. With two significantly different figures then the link starts to look more tenuous.

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By ShirleyM
16th Nov 2014 18:35

I had a quick gander

It just says 43,000 taxpayers currently under dispute. It doesn't give a total of the taxpayers using tax avoidance schemes.

It does say, however, ..... 

Some cases involve wealthy individuals who are trying to avoid over £10 million of tax through the use of avoidance schemes.

Quite a nice little earner for those promoters. No wonder they want avoidance schemes to be left alone. Such a pity the country pays the price, ie. no funds for the NHS, etc.

ps. if you don't like a return volley, then don't make personal comments to fellow contributers.

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By AndyC123
17th Nov 2014 11:48

Tax confusion....

The facts of the matter are that;

 

Wealthy individuals are avoiding £85,000,000 a DAY in tax.

Large companies deliberately slash their profits by paying staff wages to reduce corporation tax.

Some bloke down my pub drives a fancy car and boasts that he pays no VAT on his income.

Amazon has trillions of pounds in profits earned worldwide that should be taxed in the UK

People who want to believe that tax evasion is endemic will believe anything no matter how ludicrous and without facts to back it up if it supports their viewpoint

A 'loophole' is now any law that legally allows you to pay less tax than the absolute maximum you possibly could. 

Sighing wearily and saying "it's not actually that simple"  means you are supporting tax evading big business.

 

And so on.........

 

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By hiu612
17th Nov 2014 12:21

The Hodge Effect

I love that as a description. I wonder how it would be defined if it made it into the Dictionary as 2015 word(s) of the year. It seems like an extension of the deliberate muddying of the evasion/avoidance waters by the government press machine - scaring HMRC into a corner from where they don't dare exercise any initiative or cost / benefit analysis for fear of being lambasted on the news at 10. Seeing her in action always reminds me of the episode of Yes Minister where Humphrey has to stonewall a similar committee. A bit like the boys from the big 4 did, a few months ago.

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By davtax
17th Nov 2014 17:01

Wealthy individuals are avoiding £85,000,000 a DAY in tax.

1. £85m a day = £31bl p.a. when the NAO/HMRC report that the TOTAL tax recoverable for all fiscal years to date = £14bl. Someone's  got the math badly wrong here!

2. Wages/Salaries comprise a sizeable proportion of most business's overheads. Tax is payable on Net Profits not Gross income. Surely one cannot seriously grudge the hired help being paid for the work they do - and for which the paying employer has to shell out ERNIC payroll tax as well as PAYE/NIC etc. on the sums paid out - tax avoidance staff wages are certainly not!

3. Many legitimate businesses do not pay VAT e.g. The guy might run a Nursery or other VAT exempt business, is under the VAT threshold and / or was possible gifted the car in question.

4. Amazon is not a UK company so all of it's worldwide profits are simply not chargeable to tax in the UK. Headquarters in USA who have first taxing rights on all worldwide income, subject to inter fisc. DTA's.

5.Contrary established case law precedent says "Every man is entitled to order his affairs so that the tax attaching under the appropriate Acts is less than it would otherwise be" 19TC 490 at 520.

 

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By AndyC123
17th Nov 2014 17:57

FAO Davtax

Prehaps I should have made clear that it's EACH wealthy individual that is evading £85,000,000 a DAY in tax?

Or perhaps it should have been obvious that I was just making things up and exagerating them for effect to demonstrate some of the sillier things that pass for 'facts' in the current debate on tax?

 

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Replying to chicken farmer:
Stepurhan
By stepurhan
18th Nov 2014 08:49

Not good debating

AndyC123 wrote:
Prehaps I should have made clear that it's EACH wealthy individual that is evading £85,000,000 a DAY in tax?

Or perhaps it should have been obvious that I was just making things up and exagerating them for effect to demonstrate some of the sillier things that pass for 'facts' in the current debate on tax?

Not really adding to the debate is it.

If you have a problem with the figures being produced as fact you could challenge them for backup. Or provide links to figures showing the position to be different. Or, as davtax did, address the issues in a reasoned and logical manner.

Simply ridiculing a position you disagree with lowers the level of discussion to the playground. Surely as professionals we are capable of better.

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By CoxE
17th Nov 2014 19:43

The mystery of the DOTAS figures

Given that things have become a little fractious I will say at the outset that I do not profess any singular expertise in this matter, but neither does anyone else, and that perhaps is the difficulty.  

The following, therefore, is my take upon the facts and figures that I have gleaned, thus far and I am quite prepared to be shot down in flames if needs be.

My understanding is that the 65,000 figure was offered up some months back as being the number of open enquiries/ appeals into individual cases using DOTAS registered schemes.

The 43,000 is the number of APNs being issued currently and therefore  constitutes 43,000 of the total 65,000 cases already under scrutiny, as payment can only be accelerated if there is postponed tax already in the system.

The big question in my mind, and it may be that which most correspondents have been trying to pin down, is how many users of DOTAS schemes are there in total, if the 65,000 is only those already under enquiry or appeal?

Is the 65000 the merest tip of an imponderable iceburg, or has HMRC already taken on a sizeable tranche of the overall total in opening enquiries into 65000?  My suspicion is the former rather than the latter.  HMRC's computer must contain this data but I cannot re-call having seen anything explicit and there may be more than a little coyness where this is concerned.  

Whatever the true statistics it remains the case that APNs and Follower Notices can only be used against cases already under enquiry or appeal so, in order for this new weaponary to be used to real effect, HMRC will still have to open enquiries into all of the rest, however many that may be, which is a prospect that does not appear to have been aired in public so far, possibly suggesting that the iceburg analogy is correct.

If this is the case, only the surface will be scratched until/unless a very much larger number of enquiries is opened, creating an even larger backlog, thus much exacerbating rather than resolving the problem.  Perhaps this is the proposition that underlies the various lines of thought and reasoning in the banner article.

Call me old and foolish if you will - my friends do!

 

 

 

 

 

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By johnjenkins
18th Nov 2014 11:30

Fractious, Fictious

Delicious or any other itious (bless you) doesn't take away the fact that HMRC are not collecting £11 - £14b that they should be. At this stage it's obvious that these cases will have to be settled by agreement and the quicker that is done the quicker HMRC can spend time on sorting future mess out.

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By AndyC123
18th Nov 2014 12:50

@stephuran

My apologies, I didn't realise that attempts to lighten the mood were not allowed,nor was I ridiculing anyone's position.

I was just worried that tax advisors might be seen as a dull, humourless lot.

 

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By johnjenkins
18th Nov 2014 14:23

@Andy

Sorry matey you can only lighten the moood with banter after 32 posts and 11 thanks.

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By AndrewTall
19th Nov 2014 18:36

Source of the 65k?

The number is quoted in the Tackling marketed tax avoidance consultation document in David Gauck's forword "Around 65,000 people and businesses have used marketed tax avoidance schemes that need to be investigated and litigated""" ." and variants are in various press articles.

"""."""I know that some people make heavy use of schemes so I suspect a degree of double counting, one company I had unhappy experience with used 3-6 schemes a year to keep its 9-digit tax bill in single digit percentages (this was admittedly a few years ago now).

As to whether the £11/£14bn should be collected, that assumes that it is legally due - HMRC counts cases that it loses in its Tax Gap estimates but that does not mean that these amounts are due either morally or legally, just that HMRC tried to collect the amount.

The amount also does not account for amounts collected that are every bit as contrived to be above what a reasonable person would consider proper, as some of tax sought to be avoided by contrived avoidance schemes - oddly morality only seems to go one way in HMRC's eyes.

Another omission is regard to those schemes which are used to eliminate phantom profits or permit a deduction for costs incurred that would otherwise be nothings - are those "immoral" uses of schemes when all they do is correct defective legislation (often excessive anti-avoidance legislation of course)?

There is also the slight issue of how HMRC calculates the £14bn number - for example I wonder how much relates to EBT schemes where HMRC insists that all monies contributed should be subject to PAYE - even where the monies have remained in the EBT, or have been loaned to a shareholder who has never been remunerated other than by dividends.  I don't blame HMRC for aiming high, it can certainly get the attention of the board when it does so, but what might possibly be due and what is reasonably expected to be due are not necessarily the same thing.

Still, with DOTAS schmes reducing in numbers year-on-year and HMRC getting every power it wants rubber-stamped by Parliament the backlog should slowly be cleared, a sensible way forward on settling cases would clear the backlog and allow new cases to progress more quickly but I suspect that Senator McCarthy of the PAC is indeed deterring such progress.

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By AndrewV12
21st Nov 2014 12:13

I say keep going

“We have reached the point where the open wound that is the huge backlog of schemes is not worth the ongoing damage to the UK’s international reputation'

 

I say keep going, though I doubt HMRC will, without some form of amnesty / compromise.

 

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