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Companies House is a giant fraud robot. Will the Economic Crime and Corporate Transparency Bill stop it?
Companies House’s rules were created in an era of trust, where incorporating a company took time and expertise. Automation made incorporating a company much faster and easier – but the rules didn’t change. That means Companies House ends up facilitating large-scale frauds.

The Economic Crime and Corporate Transparency Bill introduces ID verification requirements, and creates a new investigative and enforcement role for Companies House. Much will depend on how Companies House adapts to that new role. But there are also key vulnerabilities that the Bill does not remove: the “false registered office” fraud, the “dissolve within a year” loophole and the “muppet director” fraud.

Companies House is just a robot

Blaming Companies House for its failings is like blaming a traffic light for turning red. It’s just following its programming.

The programming is in the Companies Act 2006 – here’s the key section stating what you have to provide to create a company:

Note what’s missing here: any requirement to prove identity, or prove that the company actually owns the registered office address (or has the right to use it). Compare, for example, with the information banks require before you can open a bank account.

And, once someone has complied with the registration requirements, Companies House is required to accept them:

And then required to incorporate the company:

The obvious missing piece: any requirement on Companies House to follow anti-money laundering procedures. Here’s 118 pages of guidance on how financial institutions are expected to prevent, identify, and report financial crime. Banks, law firms, estate agencies… all kinds of businesses are expected to comply with AML rules. Companies House isn’t.

Nor can Companies House voluntarily comply with AML rules, make sensible checks, or say “this doesn’t feel right” and refuse registration. The word “shall” in sections 14 and 15 above means that Companies House is a robot – if it receives the registration information, it creates the company.

Companies House has worked this way pretty much unchanged since 1856 – behaving like a robot, incorporating companies without asking any questions. That more-or-less worked when incorporating companies was reasonably slow and complicated – there were certainly frauds, but the numbers were limited, which made it easier for authorities to track what was going on.

The big change was automation, and the decision in 2001 to allow online filing… but without changing any of the rules. That suddenly enabled very large-scale fraud.

The consequences

Here are just six:

1. Suspicious behaviour isn’t noticed or acted on

In 2017, thousands of UK companies were set up overnight with Philippine directors, all registered to UK addresses. The resultant “mini-umbrella company” fraud cost the UK at least £50m in lost tax, and the many MUCs that followed could have cost £1bn.

The exact same fraud continues. Just last Thursday, 74 new companies were simultaneously put into ownership of Filipino directors:

These are, in principle, completely lawful transactions. There’s nothing wrong with setting up a company with a Filipino director, or appointing a Filipino director to an existing company. Doing so en masse is, however, extremely suspicious. A bank would which didn’t flag and query (or report) these kinds of transactions would be in deep trouble. But Companies House has no procedures for identifying suspicious behaviour.

2. Companies House believes everything it’s told

You can submit literally almost anything to Companies House and it will accept it.

A fake name for a director (surely a joke):

A fake registered office (surely a fraud):

and:

Even less of a joke, Graham Barrow has shown that a UK company with a fake address was used by North Korea to breach sanctions.

These are not isolated incidents. 10,000 people had to apply to Companies House last year to fix companies being wrongly (probably meaning fraudulently) registered at their home and businesses addresses. Likely there are many more that aren’t noticed.

All of these have the same cause: there is no checking of your ID when you incorporate a company, or become a director. And no checking that the registered office address is in fact yours.

3. The optionality of the PSC register

Companies are supposed to identify the actual humans who control them – the “people with significant control”. But the rules are widely ignored, and there appears to be no enforcement.¹

4. The “dissolve within a year” loophole

You don’t have to file any accounts if you dissolve a company within a year of creating it. It’s a loophole that fraudsters exploit at a large scale. Tens of thousands of mini-umbrella companies use it every year. Here’s a typical example:

5. The accounts opt-out

Companies filing accounts at Companies House usually have to include their profit and loss account, with details of revenues and expenses for the year. However, “micro-entities” – broadly meaning companies with revenues of less than £10m – can opt out of this:

Instead, they can just file what are sometimes called “filleted accounts”, containing only basic balance sheet information. That’s fantastic for anyone looking to hide what they’re up to.

6. The muppet director fraud

Being a director of a company is a serious role, with fiduciary duties and potential liability if things go wrong. You are also immediately associated with the company in a permanent public record.

These are bad things if you’re running a fraud, or expect the company to go bust with unpaid debts and/or unpaid tax. As the director, those debts could transfer to you.

So the obvious move is to not be a director at all, but be a puppeteer for a bunch of muppet² “nominee directors” who you hire off social media, either in the Philippines…

… or in the UK:

It’s a fraud because it relies upon concealment: if everybody discovers what’s going on, it doesn’t work. There’s no such thing as a “nominee director” as a matter of UK company law. A puppeteer will be a “shadow director”, just as liable as a real director. The muppet director strategy is a fraud from start to finish.

But it’s an easy fraud, because there’s no shortage of people willing to sign up as a director for a few hundred quid, and Companies House realistically has no way to know if a director is real, or a muppet.

The new Bill

All these problems have been written about for some time – nothing above is new or original. There is, however, finally some action – a host of new measures in the Economic Crime and Corporate Transparency Bill. That will end some of the frauds and loopholes, but not others.

Stopping the robot

Probably the most important element in the Economic Crime and Corporate Transparency Bill are a host of new powers for Companies House to require information from companies, modify company information at its discretion if it thinks it’s incorrect, and ultimately even strike off companies if false information was provided to Companies House:

This is a big change – Companies House is no longer a robot.

But will Companies House have the resources to use its shiny new powers? The Autumn 2021 Spending Review pledged £63m:

The SR21 period is 2022/23 to 2024/25 – so this is about £20m per year. Presumably that’s enough to establish the new ID verification systems. However it’s not intended to cover ongoing running costs – Companies House is supposed to be self-funded, by means of the incorporation and other fees it charges companies. Currently, online incorporation costs a rather derisory £12. Companies House has dropped unsubtle hints this will be going up.

How high should it go? UK Finance suggested £50 to £100; but there’s a good argument that incorporating a company should be more expensive. Back in 1990, it cost £50 to incorporate – that’s £120 in today’s money. When online incorporation was created, the costs for Companies House were greatly reduced, and so fees were cut commensurately. That looks like a mistake in retrospect – no genuine business would be deterred by a £120 fee, but it would damage the economics of some large-scale frauds. So we should consider ending the principle that the only purpose of Companies House fees is to fund Companies House.

In any case, it’s plausible that a £120 fee would be the right amount to create an effective and proactive compliance and enforcement team. It would raise around £60m per year,³ which doesn’t feel excessive. For context, UK financial institutions report an average annual anti-money laundering and compliance cost of £186m (that’s per financial institution, not the sector overall), and these are now very mature systems. Companies House would be starting from scratch.

Stopping Adolf Tooth Fairy Hitler

The Bill includes an identify verification requirement for incorporation and all delivery of documents to Companies House:

Over the twelve months after the Bill comes into force, as each company files its annual confirmation and accounts, every company will have at least one person whose identity has been confirmed. That should end Adolf Tooth Fairy Hitler.

Stopping proper accounts being optional

The very limited accounts filing requirements for micro-entities are finally being tightened. The Economic Crime and Transparency Bill requires all companies to file a profit and loss account.

But nothing to stop Cardiff flat owners receiving 11,000 tax bill

So far as I can see, the ID verification requirements won’t stop the “fake registered office” frauds.

Provided I verify that I am Dan Neidle, nothing stops me from putting a random Cardiff address as my registered office address. That would be a foolish thing for me to do, as (in theory) I could easily be found and prosecuted. But prosecution is going to be little deterrent for people on the other side of the world.

How could registered office be verified?
- Usual KYC checks involve e.g. a bank statement addressed to that office. But a company that is about to be incorporated will, by definition, not have any bills addressed to it.
- A direct legal connection between a director and the proposed address; for example the director being registered as the owner of the real estate. Will often not be the case.
- Authorisation by the legal owner of the real estate that the new company can use the address as its registered office. The authorisation would be via the Companies House portal for the company owning the real estate. In principle That would require building a system that links Companies House and the land registry; given the complexity of land titles this may not be a straighforward task.
- Or a simple fallback: Companies House send an automated letter to the registered office address, including an authorisation code, and requiring that the authorisation code be entered before incorporation can proceed. That’s how HMRC secures registration for self assessment – it’s not obvious why incorporating a company should be easier.
Nothing to close the “dissolve within a year” loophole

I’m not aware of any plan to require companies to file accounts before they dissolve. That will continue to make UK companies attractive for people trying to hide their tracks.

Nothing to end “muppet” directors

To be fair, it’s not clear how this could be done.

The splendid automation of Companies House procedures, and the fact there are lots of people happy to receive a few hundred quid for clicking buttons, means it’s hard to identify or stop “muppet” directors.

It may be worth considering a “nudge” – a page on the Companies House website, which new directors have to click through, warning them that, if they’ve been asked to become a director of a company by people they don’t know, then it could be a scam, or it could involve them in organised crime, and could result in liability for unpaid tax etc, or even criminal prosecution. How effective would such a “nudge” be? I don’t know. But it may be worth trying.

Almost nothing in this report is original; it draws on research by Graham Barrow and others.

Image: Stable Diffusion “giant looming over a pile of money” (thanks to my nine-year-old)
Footnotes
1. There’s a procedure for people at an AML-regulated firm to report discrepancies in PSC data (although it’s not clear if that is ever acted on), but no procedure for the rest of us. ↩︎
2. I didn’t invent the term for this article – it’s been used for decades. Possibly credit goes to Chris, the brilliant Clifford Chance tax partner who trained me. ↩︎
3. Assuming a 1/3 fall in the 750,000 incorporations we currently see each year. ↩︎
13 July 2023
Why scrapping VAT on sunscreen and public EV charging would be an expensive waste of money
There are currently high-profile campaigns to scrap VAT on sunscreen, and scrap VAT on public electric vehicle (EV) charging. The proposals would waste public money, and fail to achieve their objectives.

One of the benefits of leaving the EU is that the UK is no longer bound by EU VAT law, and we can create, or abolish, whichever VAT exemptions and special rates we wish. One of the downsides is that a large number of lobbyists and campaign groups are currently pushing for VAT cuts.

Here’s the Melanoma Focus campaign:

And here’s a 2021 study prepared by Transport and Environment for the Climate Change Committee:

Transport and Environment is a serious organisation, and Melanoma Focus is a serious charity. They are right to identify a public benefit in increased takeup of EVs and increased usage of sunscreen. But their proposals make three serious mistakes.
- They assume that cutting VAT will result in a price cut for consumers. Unfortunately, the evidence is that most of the cut will be retailed by retailers/suppliers, and only some (and perhaps none) “passed-through” to consumers.
- They don’t consider the deadweight cost – only a small part of the benefit of the VAT cut is going to the “new” consumers, enticed to buy the product by the VAT cut. The rest is being given to people who would have bought the product anyway.
- They don’t consider the opportunity cost – was there another way to achieve the aims (increased product take-up) more effectively/efficiently than the VAT cut? What about directly subsidising the product?
It’s worth looking at these issues in detail:

Most of the benefit won’t go to consumers

There’s a common intuition that a reduction in a producer’s cost (like VAT) will result in the producer lowering its prices. After all – the argument goes – the price of a product is made up of the cost of production plus a profit markup. So if the cost drops, the price will drop. And VAT is a cost, so if we reduce VAT, the price will drop.¹

But that’s wrong. In a market economy, economic actors charge what the market will bear. Hence, in principle, there is no reason to assume that prices will reflect the level of VAT; each case must be looked at on its own facts.

IMF researchers analysed 14 years’ VAT changes across seventeen countries, and were able to identify clear patterns in when changes in VAT rates (up and down) were “passed-through” to consumers, and when they were not. They found that the degree of “pass through” was strongly related to the percentage of overall consumption (the “consumption share”) that is affected by the change. There is no significant pass through when the consumption share is less than 10%. And when a VAT cut is targeted on one specific product or service (EV charging or sunscreen), the consumption share will always be much less than 10%.²

The National Bureau for Economic Research looked at an even larger dataset a couple of years later, and concluded that pass through is even lower for VAT cuts than it is for VAT increases.

So we should start out very sceptical of claims that VAT cuts will be passed to consumers.³

Promises from suppliers to pass on the benefit of VAT cuts are worthless

In a free market, it’s not realistic to expect suppliers to charge less than the market will bear. Promises may be made in good faith, but months later, commercial imperatives will be hard to resist.

There were two recent VAT cuts resulting from high-profile campaigns where industry pledged that consumers would benefit: the May 2020 abolition of VAT on ebooks, and the January 2021 abolition of VAT on tampons.

Here’s how the Publishers Association lobbied to abolish VAT on ebooks:

And here’s what actually happened. Comparing ebooks with other electronically-supplied products, as well as with paper books, there’s no evidence of any price cut being passed to consumers.⁴

Many retailers promised to pass on the abolition of VAT on tampons. Here’s what actually happened: perhaps 1% of the 5% cut was passed to consumers.⁵

It’s common for suppliers to lobby for VAT cuts, and I expect many of the VAT cuts included in the IMF and NBER research were accompanied by promises that consumer prices would fall. We therefore shouldn’t be surprised that these two UK examples are consistent with the general evidence on pass through.

Deadweight cost

The UK sunscreen market is worth £169m, implying that a VAT cut would cost about £30m.

Imagine if we could use that £30m to put high SPF sunscreen directly in the hands of the people that should use it, but don’t, and then persuade them to use it. That would be perfectly efficient, with zero “deadweight cost”. Of course real world programme to provide free sunscreen wouldn’t be perfectly efficient, and there would be material deadweight costs as we hand free suncreen to people that would have bought it anyway. However we would certainly not expect a deadweight cost of £30m.

The deadweight costs of a VAT cut are much more serious . First, a big chunk of the £30m will be kept by retailers, and not passed to consumers – on the basis of the evidence above, that’s probably most of the £30m; approaching a 100% deadweight cost right away. Even if we imagine that somehow all the benefit went to consumers, there would be an immediate £30m deadweight cost as we give a VAT cut to people who were buying sunscreen already. Only when we attract new purchasers are we incurring a non-deadweight cost, and this will almost inevitably be a small fraction of the overall cost of the VAT cut. ⁶

The same goes for public EV charging. Suppliers will pocket most of the benefit of any VAT cut. Then most of what’s left will go to people who already own EVs. An immediate large deadweight cost. Only a small fraction will go to people who were enticed to buy an EV by the VAT cut. The rest, again, is deadweight cost.

The bottom line: we can expect the deadweight cost to be very high, and plausibly close to 100%.

This is a problem inherent in VAT. It’s why, whilst VAT cuts often appear a simple and obvious way to achieve social aims, VAT is usually a poor tool for this purpose.⁷ ⁸

Opportunity cost

The opportunity cost is: what else could we have done with the money? Are there options that would reach more people, more efficiently than a VAT cut? (Or, another way to put it, with a lower deadweight cost?)

Some obvious alternatives:
- Simply giving sunscreen away to people who we identify as being particularly at risk of under-using sunscreen. We could buy a lot of sunscreen for £30m – probably six million bottles. Then give it away at food banks, schools, beaches, airports…
- An education campaign. Is cost really the main reason behind low sunscreen usage? Published figures suggest usage levels are too low to be explained by affordability.
- More targeted campaigns. Some Australian state governments hire people to patrol beaches, spotting people who are not using sunscreen, giving them free sunscreen, and even trying to persuade them to use it.
- Should we also be learning from the Australian experience educating children to cover up? Should we be subsidising/giving away sunhats as well as sunscreen?
I am not a health policy expert. I don’t know which of these would be most effective, or what other solutions might exist. But it’s hard to imagine how any alternative would be worse than a VAT cut, where almost all the benefit goes to retailers, and most of the rest to people who don’t need it.

Writing to the CCC

The Climate Change Committee took forward Transport and Environment’s recommendation, and have recommended a VAT cut to Parliament.

Professor Rita de la Feria and Professor Judith Freedman are two of the world’s leading tax policy academics. The three of us have written an open letter to the CCC, asking it to reconsider – thumbnails below, and PDF copy available here.

Photo by BATCH by Wisconsin Hemp Scientific on Unsplash, edited by our team
Footnotes
1. Professors Rita de la Feria and Michael Walpole wrote written about this intuition and its consequences in a compelling paper – highly recommended. ↩︎
2. Counter-intuitively there is also no passthrough when the consumption share exceeds 60%. That might explain the IFS’s surprising finding that the temporary 2.5% VAT cut in 2008 was only passed-through for the first few months ↩︎
3. We can expect even worse pass-through for public EV charging than sunscreen, given that the public EV market is much less competitive ↩︎
4. Our detailed analysis with all code and underlying data is here ↩︎
5. Again, all the analysis, code and underlying data is available ↩︎
6. Inevitably we see campaigners running surveys asking people leading questions about whether they’d use more sunscreen if the price was reduced by 20%. That tells us little or nothing about what people would actually do. ↩︎
7. The deadweight cost problem with VAT also kiboshes the much better argument for a VAT cut on EV charging: that it increases the profitability of suppliers, and so incentivises more construction of EV chargers. The deadweight cost here is large, because you are cutting the VAT, and enhancing the profitability, for existing chargers, not just new ones. Much better to directly subsidise new EV chargers. ↩︎
8. There is also a distributional problem: most VAT cuts will benefit those who consume more, i.e. those on higher incomes. Period products are unusual in that this effect is limited. ↩︎
12 July 2023
How Donna from Facebook became part of a £1bn tax fraud (part 4 of our series).
Many “tax avoidance schemes” are in fact just tax fraud. We’ve been investigating “mini-umbrella company” (MUC) schemes, where a recruitment business is split between thousands of companies, with Filipino individuals hired as shareholders/directors to hinder HMRC counteraction. Each company then fraudulently claims to be an independent small company, and claims small company tax incentives.

Part 1 explained how the schemes work, Part 2 and Part 3 looked at how eminent tax KCs’ opinions facilitated the scheme

Donna

Meet Donna:¹

Donna seems a nice person, but has a tendency to promote “get rich quick” internet promotions to her friends:

Or:

Those posts didn’t get much attention – I don’t know if anyone clicked, but nobody commented.

This one is different:

With comments like this:

What is this thing that you can do up to four times, but not if you’re Scottish, and if you’ve done one then you can’t do another?

It’s acting as the initial UK director/shareholder for a mini-umbrella company, before it is put into the name of someone from the Philippines, used as part of a MUC tax fraud, and then dissolved when HMRC catch up with it.

For example:

Josefina is a resident of the Philippines:

Donna’s done this at least 23 times – usually, she’s a director for a few months, then replaced by a Philippine resident individual, and then the company is dissolved:²

Kelly

Kelly seemed interested in the Facebook comment thread on 15 March:

And, sure enough:

Kelly hasn’t been replaced as Philippine director just yet.

What’s going on?

When I was a trainee, back in 1998, it took ages to set up a UK company. So my firm set up a few dozen companies ahead of time, with a couple of senior partners as shareholders and directors. Then, if a client needed a company sharpish, we would “pull it off the shelf” (literally, its documents would be on the shelf) and change the directors and shareholders to the new owner. This was perfectly proper and very sensible. They were “shelf companies”.

Donna and Kelly are unwittingly³ helping establish criminal shelf companies. Some unknown person sets up companies in advance. Not dozens, but many thousand. And then, when they find a criminal client, they pull the company off the shelf.

HMRC has been frantically trying to close down these mini-umbrella schemes. Our earlier pieces looked at two of the earlier schemes: the director behind one admits it was a fraud, and has been financially ruined and disqualified; the director behind the other has also been disqualified, in highly suspicious circumstances.

But the schemes continue. No longer the preserve of “legitimate” contractor businesses, armed with KC opinions, but now sometimes run by organised crime. We’ve seen estimates that total UK losses from the scheme are over £1bn.⁴

Is it Companies House’s fault?

If a bank didn’t spot someone opening thousands of bank accounts with Philippine directors then there would be an enormous scandal. Heads would roll. Enormous fines would be levied. So banks have sophisticated systems to identify suspicious transactions and report them. These systems are, as with all human systems, imperfect – but they are mostly very effective.

Companies House doesn’t have any power to check the companies it creates.⁵ It’s not much more than a robot, doing what the Companies Act requires of it.

So the MUC disaster is not the fault of Companies House.

Should the law change, so that Companies House is required to build bank-style systems to identify suspicious transactions and report them, or block or delay company formation? How much would it cost? How long would it take? How much impediment would it create for legitimate transactions? How much impediment would it create for fraudulent transactions? We don’t have answers to these questions, but we think they are questions policymakers should be asking.

And there are other, more modest, changes that could be made. These companies are usually dissolved within a year, before HMRC catches up and before any accounts have to be filed. There should be a requirement to file accounts before dissolution. And the current rules for small company accounts are too lax – small is actually pretty big (£10m) and there’s no requirement to even disclose revenue. Further simple financial disclosure could be required, still falling well short of requiring audited accounts.

So what’s the solution?

We think the answer is on the “demand” side, not the “supply side”. Close down the easy fraud opportunities which the MUCs are created to exploit.

A Government consultation document last month proposed some sensible solutions. In particular:
- Making recruitment companies and/or end-users of MUCs (legitimate businesses like Tesco) responsible for MUCs’ unpaid tax. Thus effectively forcing people to carefully consider their supply chain, and (in their own interest) ensure it is free from fraud
- Restricting or ending the tax reliefs for small businesses which, ultimately are just too juicy a target for fraudsters.
We think the consultation document is very promising, and have responded supporting its proposals (and asking for some to go further):

MUCs are a disaster. They have no purpose other than tax. They often leave the workers stranded in a tax and employment law hell, caused by a completely unknown company with untraceable foreign owners. They’ve been exploited in schemes that could have cost the UK £1bn. Ending MUCs would be a good policy outcome of the consultation.

Thanks to Simon Goodley at the Guardian for the original reporting on this, and Richard Smith, Gillian Schonrock for their amazing investigative work (again noting that they draw no legal conclusions; the legal conclusions are the sole responsibility of Tax Policy Associates Ltd).

Thanks to CompanyWatch for giving Tax Policy Associates free access to their excellent software for free (there was no quid pro quo; they didn’t even ask to be name-checked).

Photo: Calculator with the text Tax Fraud on the display by Marco Verch under Creative Commons 2.0
Footnotes
1. I am masking the name and identifying details of the individuals caught up in this scheme because I very much doubt they know what they’ve fallen into, and the attention their Facebook pages might attract if I did identify them would be unfair. If any authorities, journalists or researchers are interested in following-up on the original links/names then please do get in touch ↩︎
2. The software that extracts this data from Companies House is CompanyWatch – it’s much more sophisticated than the Companies House website, which often shows one person (even with a unique name) as multiple several people, making it hard to see all the companies they’re involved with. CompanyWatch has kindly given us a free licence to use their software free. Richard and Gillian don’t use CompanyWatch – they’ve developed their own, much more specialised, software for tracking MUCs and other Companies House frauds ↩︎
3. The Low Incomes Tax Reform Group issued a press release warning people not to get involved in these “director” schemes. This was the right thing to do, but we fear it will not reach many of the people drawn to the schemes. ↩︎
4. This is not far-fetched. We conservatively estimated the Contrella scheme lost £50m in tax. That was one scheme, in one year. Schemes have been running since 2014, with tens of thousands of companies created each year. ↩︎
5. Companies House will soon be introducing identity requirements for directors and persons with significant control. That will certainly make some frauds more difficult, but these UK and Philippine individuals really exist (as far as we know). So that won’t make a difference. ↩︎
7 July 2023
The other KC opinion behind the outrageous £50m tax scheme (part 3 of a series)
Our report on Monday revealed the scheme: it used 10,000 UK companies, supposedly owned by 10,000 Philippine individuals, to claim at least £50m in tax incentives. A central player admits the scheme was fraudulent. On Wednesday we published the Giles Goodfellow QC opinion that approved the scheme, and explained why we regarded the opinion as improper.

We now are publishing an earlier opinion from another KC, issued around the time the scheme was created. We believe the opinion is improper, as it proceeds on the basis of stated and unstated assumptions which the KC should have realised were fictional. However, it is less clear to us that this KC could or should have identified that the scheme was fraudulent – we are therefore not publishing the KC’s name (and we don’t believe it can be guessed from the opinion text).

The Goodfellow opinion related to the Contrella scheme. The director behind that scheme admits it was a fraud, and has been financially ruined and disqualified. It is not entirely clear who the commercial party behind the scheme was.

This second KC opinion relates to the MyPSU scheme, which The Guardian convincingly linked to the (now defunct) Anderson Group – and the opinion itself identifies Anderson. It is important to note that this defunct Anderson Group has no connection whatsoever to the current Anderson Group, or the many other businesses called Anderson/Andersen.

The director behind MyPSU, Scott Rooney, has also been disqualified, in highly suspicious circumstances.

The opinion

We are publishing a full copy of the opinion here, with our commentary.

The opinion is remarkably short, and light on technical content. Most of the tax conclusions follow immediately from key assumptions, presented to the KC by the client. Those assumptions are highly questionable.

Implausible stated assumptions

The opinion is in some respects more questionable than the Goodfellow opinion, as it disposes of most of the analysis by accepting a far-fetched claim in the instructions that the structure is commercially motivated.

This is the key section:

This assumption is absolutely key: the structure was commercial because it “enables the agencies to de-risk the whole employment proposition”. That is gobbledegook. There is no purpose or benefit to the structure other than obtaining the employment allowance (and VAT flat rate scheme). Agencies liked it because they shared in some of the economic benefit of this tax avoidance.

The various explanations in paragraph 5 are window-dressing. Recruitment companies had operated for decades with numerous employees in one company. MUCs make management more difficult, not easier.

Essentially all the opinion analysis then follows from this assumption.

It would surely be improper to advise on the basis of instructions that a barrister knows are false. But the KC is an experienced barrister – why did he think these claims were credible?

Once opinions can be given on the basis of false instructions, tax opinions become a game. All difficulties can be assumed away. The opinion becomes of no technical value; it is merely window dressing that enables the parties to say they have a “KC opinion”, and provides a valuable potential defence against HMRC penalties and any attempt at a prosecution for tax evasion.

This was obviously a tax avoidance scheme, and a properly independent KC should have advised on that basis.

Implausible unstated assumptions

The Giles Goodfellow KC opinion had a lengthy analysis on whether the MUCs were under common control. This opinion disposes of the point in two paragraphs:

This evidences no independent thought by the KC. How did he think the companies would be coordinated? How did he think the shareholders/directors would be recruited and managed? We do not know if the KC was aware of the agent arrangement and director/shareholder portal. But he should have realised that the tax benefit of the structure for any one MUC was much too small to justify independent management activity. Indeed if the MUCs behaved independently then the structure would not work commercially.

The problem is that the coordination required for the structure to be commercially viable presents a “control” problem. Mr Goodfellow was aware of that (although we think his analysis was clearly wrong). This KC missed the point entirely, making an implicit assumption there would be no control as a matter of fact. He was wrong – and he should have known better.

Were there fraud “red flags”?

That is not clear. The opinion does not have several of the “red flag” elements present in the Goodfellow opinion:
- It is not clear from the opinion that the KC knew the plan was to appoint Philippine directors of the MUCs. Mr Goodfellow did know that. He also knew that an effect of this was to make it impossible in practice for HMRC to recover unpaid tax from those directors.
- Mr Goodfellow answered a series of questions about what happens if HMRC assess the MUCs for tax and it is not paid, and whether the tax can then be collected from those behind the structure. This KC does not appear to have been asked these questions.
- Mr Goodfellow advised that (in essence) the existence of his opinion provided a defence against any allegation of criminal tax evasion. This opinion contains no such advice.
- Mr Goodfellow knew that a bank account would be held for the benefit of a large number of companies with unknown Philippine individuals as directors, and he should have realised that the bank would not be informed.
We believe that Mr Goodfellow could and should have identified (from the information before him) that the structure would end up fraudulent. It is not clear to us that this KC could have done so.

We are therefore not naming this KC. Any authorities, barristers or researchers who wish to know his name, or have a copy of the original PDF opinion, should contact us; under the right circumstances, we will provide these details, subject to appropriate confidentiality agreements.

The problem with KC opinions

This opinion and the Goodfellow opinion had consequences. They enabled promoters to sell the scheme to people (read the comments of David Smith here). The schemes ended up fraudulent, costing the UK many tens of millions of pounds in lost tax. There are plausible estimates that, since 2014, all the various mini-umbrella schemes have cost the UK over £1bn.

However, there is currently no consequence for KCs issuing opinions based on highly dubious factual assumptions, and highly questionable legal theories – even when the KCs could and should have suspected fraud. In normal commercial transactions, lawyers have strong incentives to provide prudent and correct advice. In these tax avoidance schemes, they do not. That has to change – we need incentives and proper accountability.

Perhaps the Bar Standards Board will take action (and we will be referring both opinions). But we think the real answer is to create a statutory standard for tax advice.

Thanks to Simon Goodley at the Guardian for the original reporting on this, and Richard Smith, Gillian Schonrock and Graham Barrow for their amazing investigative work (again noting that they draw no legal conclusions; the legal conclusions are the sole responsibility of Tax Policy Associates Ltd).

Thanks to R, P, T, C, M and B for their help with our tax analysis, to K for assistance with the confidential information and privilege elements, to Michael Gomulka for a useful discussion of the barristers’ Code of Conduct, and to A for finding the reference to umbrella schemes in recent tax tribunal data. Thanks to JK for her insight on umbrella companies
6 July 2023
The outrageous £50m tax scheme that was KC-approved. Part 2: The Opinion.
Our report yesterday revealed the scheme: it used 10,000 UK companies, supposedly owned by 10,000 Philippine individuals, to claim at least £50m in tax incentives. A central player admits the scheme was fraudulent. Today we identify the KC who gave the scheme the green light, publish his opinion, and explain why we regard it as improper.

The KCs issuing these opinions do so knowing they face no downside, and no accountability – that has to change.

The opinion

The scheme was enabled and facilitated by an opinion from Giles Goodfellow KC, a well-known tax KC. We are publishing the opinion in full, with our commentary, here. At the time we wrote that commentary, we didn’t have Mr Goodfellow’s instructions. We now do, and the instructions are available here – they make clear that Mr Goodfellow knew exactly what was going on.

Our view is that the opinion was clearly wrong as a technical matter – no court would realistically have thought it succeeded in claiming the intended tax benefits. More seriously, the opinion ignored “red flags” that suggested those involved were not merely engaged in tax avoidance, but that criminal tax evasion/fraud was a likely outcome.

If you haven’t read Part 1 of our report, please do – but to recap: one business was split into 10,000 “mini umbrella companies” (MUCs), with 10,000 Filipino individuals recruited using social media to act as “directors” and “shareholders”. Those behind the scheme then claimed the 10,000 companies were independent, and each one claimed small business incentives – amounting to at least £50m in total. But, behind the scenes, the Filipino individuals were just clicking buttons on a web portal – they weren’t independent at all. The whole thing was a fraud.

We have no reason to believe Mr Goodfellow knew the implementation of the transaction would be fraudulent (and possibly was already fraudulent at the time of the implementation). But why didn’t he spot the obvious red flags? Why did his analysis fail to take into account any relevant caselaw? How did he conclude that the scheme worked, when almost every tax avoidance scheme the courts saw in the last twenty years had failed? And when this was perhaps more egregious than any scheme that had come before a court?

We are calling for the Bar Standards Board to investigate.

Why we believe the opinion was improper

We provide a detailed analysis in our commentary to the opinion. But, in short, our view is that:
- Mr Goodfellow did not raise a red flag at the proposal to create large numbers of UK companies with Philippine individuals as directors. Indeed Mr Goodfellow expressly notes that an effect of the structure is that HMRC would have difficulty recovering tax from the Philippine individuals (para 40.3). It is a reasonable inference that this is the sole purpose of appointing them in the first place – indeed we cannot see any other purpose. But that is an improper purpose. Why did Mr Goodfellow not say so?
- Mr Goodfellow may not have known quite how many MUCs would be created – at least 10,000. But he should have appreciated that the economics of the scheme required there to be a large number (i.e. given the small tax benefit from each one).
- Nor did Mr Goodfellow raise a red flag on being asked whether, if the structure failed technically, HMRC would be able to recover tax from participants in the structure (para 40) and prosecute them for tax evasion (para 41). Such questions are in our view highly unusual and suspicious. Why did Mr Goodfellow not identify this?
- Mr Goodfellow did not think there was anything improper in hiring Philippine individuals as directors solely on the basis they spoke English and had a mobile phone and email, and then leaving them with liability to HMRC if the structure did not work. He was surely aware that the individuals would not receive any legal or tax advice. Why did Mr Goodfellow not query this?
- The opinion proceeded on the basis of the unrealistic assumption that the Philippine directors of the companies would make independent decisions, so that they were not “controlled” by those behind the scheme. The terms of the arrangement should be “explained” to the Philippine shareholders/directors and “approved” by them (para 20). How did Mr Goodfellow think this could be done thousands of times, without turning the directors into mere glove puppets? For the structure to work commercially, the directors had to be coordinated on some automated basis, so that they did not depart from the plan. The assumption was, therefore, impossible in practice (and the reality can be seen here). But the entire opinion depended on it. How did Mr Goodfellow think it could work?
- The opinion also assumes that each Philippine individual would subscribe for shares in their companies from his or her own resources, and provide it with “sufficient working capital”. That was unrealistic, in terms of the likelihood of such individuals having sufficient resources, the attractiveness of the “offer” being made to them, and the practical difficulty of receiving payments from thousands of individual Filipinos. In reality, that didn’t happen – the directors were hired on the basis that “we will never ask you for a single centavo”. The funds came from a participant in the structure. That meant that the structure immediately failed, even on its own terms. Mr Goodfellow should have appreciated that was the inevitable outcome.
- Mr Goodfellow concludes that the “main purposes” and “main objects” of the arrangement do not include the avoidance of tax. He says that each participant in the structure only has an eye to its own commercial profits. This is unreal. Realistically, stepping back and looking at the artificial nature of the structure, its sole purpose is to avoid tax. Why did Mr Goodfellow not refer to a single case? Why did he think it appropriate to adopt an approach which implies the “main purpose/object” tests can never apply to special purpose vehicles?
- The opinion does not refer to a single case or other authority. It ignores common law anti-avoidance principles (which the courts have used to strike down almost every avoidance scheme in the last twenty years). It ignores the Halifax VAT anti-abuse principle. This would be puzzling for an opinion on an ordinary commercial structure. It is astonishing for an opinion on an aggressive tax avoidance structure. Why did Mr Goodfellow do this?
- The opinion doesn’t mention the general anti-abuse rule – the GAAR – enacted in 2013, and extended in 2014 to apply to national insurance. In our view, it would have nullified the transaction, even if the specific anti-avoidance rules did not. This is another startling omission. Why did Mr Goodfellow not mention the GAAR.
The job of a lawyer writing an opinion is to predict how a future court would behave: to put themself in the place of a judge, and ask what the judge would do. And that lawyer will be keenly aware of the dismal recent history of tax avoidance schemes when they come before tribunals and courts.

Mr Goodfellow never does this. He approaches each element of his analysis in isolation, never stepping back and considering the complete picture. That picture is an unedifying one: thousands of UK companies, with Philippine directors, each claiming to be independent when realistically they are not. In the words of a senior lawyer who reviewed the opinion, it’s like someone trying to describe a murder scene without mentioning the dead body, the kitchen knife, or the blood all over the floor.

The opinion has now been reviewed by a dozen senior tax professionals – KCs, tax accountants, retired HMRC officials and solicitors. The view is unanimous: no court would have found that the structure worked, and a competent and independent barrister should have known that. Furthermore, the “red flags” raised by several key elements of the structure should have been challenged by Mr Goodfellow, and/or he should have refused to act.

Why did Mr Goodfellow advise in the way that he did?

Why Mr Goodfellow’s opinion was important

KC opinions can give a very significant advantage to promoters and others engaging in aggressive tax avoidance. In practice, a KC opinion can make it impossible for HMRC to pursue a criminal prosecution against those involved

People entering into complicated commercial transactions will sometimes seek the opinion of a KC. They are typically doing so either because the KC is particularly expert in the area of law, or because the KC is as a practical matter more familiar than the solicitors with how courts assess questions of fact and law.

Tax avoidance scheme participants typically obtain KC opinions for three completely different reasons.
- First, as a marketing tool – to persuade other people (potentially retail “investors”) to enter into the scheme.
- Second, as a defence against HMRC penalties – if taxpayers took advice from a KC then it will be hard for HMRC to show that they were negligent/careless so that penalties apply. This was relevant here.
- Third, as a defence against prosecution for tax evasion/fraud. These offences require dishonesty and, even if the scheme fails, the existence of a KC opinion surely means the taxpayers were proceeding in good faith?
The first reason doesn’t seem to have been the case here – there was nobody to market to. The second and third reasons absolutely were the case.

And note the timing of the opinion: the MUCs started up in 2015, but the opinion was dated 2016, when HMRC started to wind some of the companies up. That is strange, because the opinion is written in the future tense. Why was this?

One potential answer is that the parties sought the opinion to provide a shield against prosecution. Perhaps HMRC had started to attack the structure, the promoters were getting worried about personal and criminal liability, and that’s why Mr Goodfellow was approached? Was Mr Goodfellow told of this background? Or was he lied to?

The consequence of Mr Goodfellow’s opinion

The structure continued until HMRC eventually wound it up. The cost to the taxpayer was at least £50m, and potentially much more.

It is possible (but we do not know) that the opinion prevented penalties being assessed on some of those responsible for the structure, and prosecutions being brought against them. That certainly appears to have been a significant motivation for commissioning the opinion.

At least one individual has faced serious legal consequences for his part in the scheme – David Smith, the director of Contrella:

Smith admits the scheme was a fraud, but cites the KC opinion as the reason for believing the structure to be legal at the time:

That is Mr Goodfellow’s responsibility.

Smith also gives another explanation – that they departed from the KC’s advice:

It’s interesting that the description of the structure as “highly aggressive and high risk tax avoidance scheme” is absent from Mr Goodfellow’s opinion. Was this a different opinion? Or was this a discussion that did not make it into the written opinion document?

We do not know the nature of the “decisions on how the model was run” that departed from the KC’s advice, or who was responsible. It is unclear if Mr Smith was prosecuted, and we are not aware of any other prosecutions. The big unanswered question is: were these “departures” in fact elements that we identify above, where it was, realistically, inevitable that the KC’s assumptions were incorrect, and his advice would not be followed?

Why there was no incentive for Mr Goodfellow to give a correct opinion

Lawyers normally have a strong incentive to give correct advice: if they do not, and their client loses out, they will face significant liability – potentially personal and professional ruin. Tax lawyers face particular risk here, given that they are often opining on very difficult points, with large amounts of clients’ money at stake. In our experience, they almost always do so responsibly – solicitors and barristers/KCs. Not because they are saints, but because of the powerful incentives.

But in this instance, what incentive did Mr Goodfellow have to provide correct advice?

The companies exposed to the failure or success of the tax planning were the MUCs, with their Philippine directors. But the MUCs, and the directors, were not advised by anyone. Mr Goodfellow was only advising Contrella, and he is careful to say at the start that the opinion is only for the benefit of Contrella and its directors.

Mr Goodfellow had a powerful incentive to say “yes” – otherwise he would presumably receive no further instructions from the promoter. He had an ongoing relationship with Aspire, having acted for its principal, Alan Nolan at an appeal tribunal in 2012 (where Nolan was found to have “sought to avoid telling the truth”). We understand that this relationship continues.

On the other hand, Mr Goodfellow had very little incentive to say “no”. His client would take a large benefit from the structure even if HMRC successfully challenged it – the MUCs would just be allowed to sink to the bottom of the proverbial harbour. And that is exactly what happened. Even when the director of Contrella admits a fraud, Mr Goodfellow can credibly say that it is because his advice was not followed.

The many recent mass-marketed tax avoidance schemes have evidenced a similar problem. The KC was the client of the designer of the scheme, not the ultimate taxpayers. Even when the scheme goes wrong, and the KC’s advice was on its face reckless, the taxpayers have no recourse. The Court of Appeal had no answer to this in the recent McClean v Thornhill case (excellent article about the case here).

We are sure Mr Goodfellow is a decent man, and that he did not set out to provide a wrong opinion. But all of us are driven, consciously and unconsciously, by our incentives. Did those incentives compromise Mr Goodfellow’s independence and competence? Why did he issue an opinion that (in our view) was wrong.

The key problem: if (as we believe) Mr Goodfellow issued an opinion that was wrong, and that caused loss to HMRC and others, that should have consequences for him. But it does not.

Jolyon Maugham wrote about the incentive problem almost ten years ago – nothing has changed.

How to end the incentive problem

One answer is regulation. But it’s unclear that would make a difference: after all, KCs are already regulated.

A better answer, simultaneously easier to implement and more ambitious, is to create a statutory standard on tax practitioners:- accountants, barristers, solicitors… everybody.

That standard would look something like the old IRS Circular 230 from the US:

A tax practitioner must base all written advice on reasonable factual and legal assumptions, and consider all relevant facts that the practitioner knows or should reasonably know.

In circumstances where the GAAR would apply (i.e. a structure so unreasonable that no reasonable person would have thought it a reasonable course of action), any practitioner who advised on the “unreasonable” elements of the structure, and departed from the statutory standard, would be jointly liable for the lost tax to HMRC and/or the ultimate taxpayer.

So that the statutory standard can be applied, the taxpayers and HMRC would need to be able to see the advice in question – currently, legal privilege means they often cannot. So the existing iniquity exception to legal privilege should be expanded to tax avoidance schemes that are subject to the GAAR.

This is based on Maugham’s original proposal, but with additional protection to ensure that only the most egregious schemes are subject to the rule – otherwise, fear of liability could drive good advisers out of the profession. But the important element is that, in those most egregious schemes, KCs and other advisers can no longer evade responsibility to HMRC and to taxpayers.

It’s time to change the incentives.

Why we are publishing the opinion

We would never normally name a barrister just because we disagreed with their advice. This is an exceptional case. We are publishing the opinion, and naming Mr Goodfellow, because we believe the scheme was outrageous, ended up costing HMRC at least £50m, and a central figure in the scheme has admitted fraud. We believe the opinion was improper, and that the fact such opinions are given raises an important matter of public interest.

We are strong supporters of the Tax Bar, the vast majority of whom prize their independence and are technically rigorous. However, there is a very small minority, of perhaps half a dozen individuals, who habitually issue opinions that facilitate tax avoidance schemes that realistically have no prospect of success. But those opinions enable the schemes to proceed, at society’s cost.

We see no prospect of changing the law unless the reality of these opinions becomes clear to policymakers – and the nature of the opinions is such that they are usually invisible. Now one, at least, is publicly available – and we think other tax practitioners will be as shocked by it as we were.

Mr Goodfellow’s response

Mr Goodfellow initially responded by suggesting he couldn’t comment because of his professional duty of confidentiality. He also cast doubt on whether the opinion existed, saying:

That was a surprising answer. Most lawyers would remember so unusual a structure, particularly if it had then been the subject of press coverage and the lawyer’s actual client had admitted it was a fraud.

Given the possibility that the opinion was a hoax, we subsequently sent Mr Goodfellow a copy of the opinion, together with detailed explanation of our criticisms. Mr Goodfellow has not confirmed that the document is indeed his, but neither has he denied it (and we expect that a barrister presented with a hoax opinion in his name would immediately say that it is a hoax).

Mr Goodfellow’s more significant response is that it is unfair for us to criticise him, because client confidentiality prevents him from responding. We are unconvinced that client confidentiality prevents any response at all: a technical response to a technical point does not breach client confidentiality. There is also the real possibility that Mr Goodfellow’s opinion was commissioned in the course of a fraud – the people instructing Mr Goodfellow had already put the structure in place, and knew for a fact that Mr Goodfellows assumptions were false. If that is right, the opinion may not be confidential at all.

However, even if Mr Goodfellow is indeed unable to comment, we cannot accept that this renders him immune from any public criticism. It does put a particular onus on us to act fairly, and we believe we have done so. The material in this report, and our previous summary of the structure, reflects careful consideration over several months, and input from a large team of legal and tax experts.

We will immediately correct any error that is brought to our attention.

Thanks to Simon Goodley at the Guardian for the original reporting on this, and Richard Smith, Gillian Schonrock and Graham Barrow for their amazing investigative work (again noting that they draw no legal conclusions; the legal conclusions are the sole responsibility of Tax Policy Associates Ltd).

Thanks to R, P, T, C, M and B for their help with our tax analysis, to K for assistance with the confidential information and privilege elements, to Michael Gomulka for a useful discussion of the barristers’ Code of Conduct, and to A for finding the reference to umbrella schemes in recent tax tribunal data. Thanks to JK for her insight on umbrella companies
4 July 2023
The outrageous £50m tax scheme that was KC-approved. Part 1: The Scheme.
Many “tax avoidance schemes” are in fact just tax fraud. We have been investigating one in detail, involving a company splitting its business between 10,000 companies, and using social media to hire 10,000 Filipino individuals who it can pretend are the shareholders/directors.

The scheme was facilitated by an opinion from a well-known tax KC, Giles Goodfellow. Mr Goodfellow was surely not aware the scheme would end up being a fraud, but he should have been. His opinion was in our view one that no reasonable tax lawyer should have given.

This is part 1 of our report – it introduces the scheme, how it worked, why it cost the UK at least £50m, and why we believe it should be described as fraud and not tax avoidance.

Part 2, with the KC opinion is here.

Part 3, with another KC’s opinion, is here.

The background

Elements of the scheme have been reported before, but we believe this is the first time the full picture has been put together.

Back in 2016 and 2017, Simon Goodley at the Guardian reported on a tax avoidance scheme involving the Anderson Group.¹ Simon’s articles are here, here and here, and File on Four later ran a programme on the schemes, summarised here. The scheme companies later went bust, leaving HMRC out of pocket. Our founder, Dan Neidle, said at the time that this looked more like criminal tax evasion than tax avoidance, and that is also HMRC’s view of these structures.

Seven years on, we now have much more information on the scheme and the people running it. We know that a director of a company involved faced serious legal consequences, and admits the scheme was a fraud. We also have a copy of the scheme opinion from a senior tax barrister/King’s Counsel (KC) – it’s been described by other KCs as “shocking”, “appalling”, “mind-blowing” and “deeply irresponsible”. But before we go through the KC opinion, we will set out the detail of the scheme:

The players

The usual kind of contracting arrangement looked like this:
- A contracting business employed thousands of agency workers using a company in its group (an “umbrella company” in the jargon of the trade, because it covered numerous contractors).
- When they signed up a worker, the worker became employees of the umbrella company.
- Another business needing temporary workers would pay the contracting business a daily rate for those workers. There would be 20% VAT on this.
- The contracting business would then pay the VAT to HMRC, retain some of the daily rate as its profit, and pay the rest to the umbrella company to enable it to pay the salary of the workers (after applying employer’s national insurance and deducting income tax and employee national insurance).
This was a sensible and entirely normal arrangement, which avoided no tax.

The scheme

At some point in 2016, unknown parties, including an outfit called the Aspire Business Partnership LLP, and another entity (“AA”) implemented this avoidance scheme:
- AA established a large number of new UK companies. The Guardian article said there were 2,000, but we now have good evidence there were at least 10,000.
- When AA signed up a worker, they would become an employee of one of these new companies, with one or two employees per company. So instead of one “umbrella company” there were many “mini umbrella companies”, or “MUCs”.
- Central to the scheme was a company called Contrella. It is unclear whether Contrella was the historic “umbrella company” or was new to the business.
- A business needing temporary workers still paid AA a daily rate. AA paid it to Contrella. But Contrella now in turn made payments to each MUC, and it was the MUC that paid the workers.
- The MUCs did nothing themselves. They appointed AA as their agent to manage everything to do with their operations
Then this astonishing and outrageous additional step:
- each of the 10,000 MUCs’ shares were acquired by a different individual living in the Philippines, and that individual also became the sole director.
It is hard to over-state just how bizarre and deeply suspicious that final step is. Our team of tax experts have worked on complicated structures for some of the largest and most complex businesses in the world. None of us have seen anything remotely like this.

Who was the end client for the scheme? The Guardian said it was the Anderson Group.² Anderson denies that, and the CEO of Anderson continues to deny that to us today, but the Guardian report had good evidence to the contrary, and see below for more details on the links between the companies and Anderson).

It’s important to note that there is plenty of other tax avoidance/evasion that goes on involving mini-umbrella companies, such as paying the MUCs’ employees via loans or other arrangements which supposedly don’t attract income tax and national insurance (but really do). Or simply just deducting tax/NI from payments to employees and then never accounting for it to HMRC. HMRC has warned about these issues here. We are not alleging that the MUCs involved in this scheme did any of this.

The “avoidance”

Small companies at the time benefited from two special government incentives: a flat rate VAT scheme (that in practice meant they got to keep about half the VAT that would normally be handed over to HMRC) and a national insurance employment allowance (worth about £3,000 at the time). AA and Contrella normally wouldn’t get either of these, because they weren’t small companies.

The intention of the scheme was that each of the 10,000 MUCs could claim the small companies’ VAT scheme and employment allowance.

We can estimate the minimum amount of tax avoided by the scheme if we assume each company has an employee for which it charges out £20,000 in fees (almost certainly it would be more than that). There is then a £3,000 tax benefit from the employment allowance, plus £2,000 from the VAT flat rate scheme (i.e. half the 20% VAT on £20,000). That’s a total of £5,000 per company, across 10,000 companies – i.e. £50m per year (and the companies ended up lasting about a year on average).

This is very much a minimum, because the VAT flat rate scheme qualification conditions go up to £150k per company, and so the theoretical maximum tax benefit avoided by the scheme would be if each company charged out £150,000 in fees – the total figure then is £180m.

And the 10,000 companies are the tip of the iceberg: Richard and Gillian have found more than 55,000 other companies that look to be part of similar schemes – most likely sold by Aspire (or other promoters) to other employment agencies. That implies a total loss to HMRC of at least £300m, even on our very cautious £5,000 per company estimate.

The Filippino “directors”

An obvious question is: how did they find 10,000 people in the Philippines willing to be shareholders and directors, and how did they coordinate them?

The amazing answer: by advertising on Facebook and YouTube to recruit Filippino directors:

https://www.youtube.com/watch?v=W1NxBYArKHM

The “director/shareholders” were paid £150 per year. In principle, they were acquiring the companies for £1 each (and that’s what the Companies House filings show). But in practice, they weren’t asked to pay anything (“We will never ask you for a single centavo”):

In return, the directors “managed” their company by clicking through to an online portal which prompted them to click an “authorise” button whenever the people managing the scheme wanted the company to do something:

https://www.youtube.com/watch?v=R9SzyPD5hHQ

The scare quotes around “directors” and “shareholders” is because the individuals were clearly not really directors or shareholders in more than name. The people running the scheme really owned the shares (were “beneficial owners” as a legal matter) and were the real directors (“shadow directors” from a company law perspective). But none of that was disclosed to HMRC when VAT/national insurance returns were made. And the Companies House “persons with significant control” entries failed to show who was really running the show.

The company mentioned in the videos, Compass Star, is connected to Alan Nolan, who founded Aspire, the company which appears to have promoted/arranged the scheme.³ The connection between Compass Star and Aspire/Nolan is clear in this BVI court judgment, and also in this video. Aspire seems to have established multiple schemes for different groups, but all appear to have been run the same way. Aspire were the “Instructing Agent” when the KC provided his opinion – which likely means they were the promoter.

Was this really avoidance – or criminal tax evasion?

HMRC say these schemes are tax evasion – which is a crime – and not tax avoidance. See here from 2021, and this very clear statement from a consultation document published on 7 June 2023:⁴

We agree that the schemes are likely fraud. Our reasoning is as follows:
- The trick of splitting your business into lots of little businesses is an obvious one, so there are rules to stop this, for both VAT and the employment allowance (plus common law and statutory anti-avoidance principles and rules). A year before this scheme was implemented, HMRC had published a Spotlight stating clearly that HMRC believe such schemes did not work.
- The KC’s opinion provided various arguments that the scheme worked despite all these rules. In our view, these arguments were very poor, and we’ll discuss them in our next report. However, the KC’s advice was on the key assumption that each company was to be organisationally independent and had as much autonomy over its business as practical. We think it was improper for him to make that assumption, but for the moment let’s put ourselves in the position of his client who (if we are being charitable) took his opinion, and the assumption, seriously.
- The way the companies were established completely disregarded that key assumption. The way directors were recruited, and the automated portal created for them to authorise documents, meant that there was zero independence and zero autonomy.
- Hence, even on the KC’s view, the flat rate VAT and employment allowance benefits were not available, because his fundamental assumption that the companies were independent/autonomous turned out to be very far from correct.
- In light of the arrangements put in place to coordinate the Filipino directors, we believe any competent tax adviser would have known that this scheme would fail (even without reading the KC opinion). Anyone (tax adviser or informed layperson) reading the KC opinion would have expected the scheme to fail.
- And it looks like no care was taken to prevent the same individuals acting as directors of multiple companies.⁵ This means that even if the directors genuinely had been independent of each other and Anderson/Aspire, and even if the KC’s opinion had been correct, the scheme still failed. Given we can find this after a few minutes of checking a spreadsheet, it’s curious that the promoter didn’t identify and stop duplication. The fact they didn’t check, or didn’t care to check, suggests a level of recklessness which may itself reach the point of criminality.
The fundamental difference between tax avoidance and tax evasion is that many people may disapprove of tax avoidance, but as long as it doesn’t involve dishonesty then it’s not a crime. If there’s dishonesty then it is a crime – criminal tax evasion. The modern test for dishonesty in a criminal trial looks at whether a person’s conduct is dishonest by the standards of “ordinary decent people”. Typically in a tax context that means hiding things from HMRC, or deceiving HMRC as to the true nature of things.

It is our view that either we are mistaken, misunderstanding some key aspect of what was going on, the people implementing this scheme were astonishingly incompetent (e.g. they forgot about the KC opinion), or they deliberately claimed tax benefits they had been advised would not be available. If the latter, then the scheme was tax evasion.

We do not know which individuals were responsible for the tax evasion, and hence cannot comment on where criminal liability might lie. We cannot believe the KC had any idea that implementation would be as described above, and hence there is no question of him attracting criminal liability.

We have written more about the distinction between tax evasion and tax avoidance here.

At least one person involved, the director of Contrella, has already faced serious legal consequences. He admits the scheme was a fraud, but his justification is interesting:

and:

So there are two different explanations here. One, that we can dismiss, is that the structure wasn’t fraud when it was put in place, but because fraud due to HMRC “changing its stance”. That is clearly not correct.

The other is that the QC advice was not followed – perhaps for the reasons we identify above.

There is of course a third possibility: that the scheme would always in practice have involved fraud, because an element of deception is essential to it – the claim that the companies are independent, when they cannot possibly be.

Can we really be sure there were 10,000 companies?

Some amazing work was done on this by Richard Smith, a freelance investigative journalist, and Gillian Schonrock, a fraud investigator. You can read about it in more detail, and work through the evidence yourself, on this website (the tongue-in-cheek presentation belies the seriousness of what it shows).

Richard and Gillian’s have identified 10,000 mini-umbrella companies associated with the Anderson Group, which they’ve very kindly shared with us. Graham Barrow, an expert in investigating Companies House abuse, very kindly spent time independently investigating the Anderson Group MUCs, and (with no prior communication as to the methods of the previous work) independently reached almost identical conclusions. Tax Policy Associates also independently verified the results of both sets of research.

Hence we are very confident that 10,000 is the correct figure. We should stress that the legal conclusions drawn in this article are ours and ours alone – Richard, Gillian and Graham are not lawyers and make no claims about the legality of the practices they have documented.

Richard and Gillian have kindly let us publish the full list of Anderson-affiliated companies here. Around 10,000, and all likely connected with the Anderson Group. You can click through to Companies House and check each one out yourself.

There are a few different signs that point to each of these companies being connected to Anderson:
1. Anderson Legal Services as a member. Controlled by Adam Fynn, who owns Anderson. Subsequently renamed to Varon Services Limited, then dissolved (company number 08274743).
2. Anderson Company Solutions Limited either as agent in the original incorporation documents (the first document filed with Companies House) or as a creditor. Adam Fynn was a director at the time. Renamed to Balance Professional Services Limited, and is in the process of being struck off (company number 08123110).
3. Alona Varon becoming a director to strike the companies off. She did this a lot – over 4,400 times. Varon was a director of Anderson Legal Services/Varon Services Limited.
4. Samantha Forbes appointed as company secretary. She also did this a lot (although Companies House doesn’t link her roles so they’re harder to find, but there again appear to be over 4,400). Forbes is a director of Fynn’s other business, the Drinks Experience Group.
So, for example, take Labour Supply PP380 Limited. Its incorporation documents show Anderson Company Solutions Limited as agent:

Initially there was one Filipino director, Pa Dii. Then another a few days later, Keizah Estrera. Then Alona Varon was appointed as director three months later to strike it off. So it’s reasonably clear it was part of the Anderson scheme.

Note that the “persons with significant control” entry solely shows Pa Dii: That cannot be right given that the promoters, or whatever other people were directing the website were, at the very least, exercising “significant influence” over the company – and that required them to be registered. The statutory BEIS guidance is clear:

This was an industrial-scale breach of the PSC rules, and action can and should be taken against those responsible.

What is HMRC doing about the scheme?

HMRC is subject to very strong duties of taxpayer confidentiality, and so can’t and won’t comment on what it’s doing about the Anderson Group and Aspire. There are, however, signs that they are actively pursuing those involved, and moving to close down these schemes. There is some evidence for this:
- The director of Contrella faced serious legal consequences, and admits the scheme was fraudulent.
- We know from Companies House filings that HMRC was actively involved in the liquidation of 1,796 of the companies in June 2016, claiming that it was owed £35m – actual cash recovered was only £700k. That implies a much higher overall loss from the 10,000 companies than the £50m we have estimated.⁶
- Most of the other companies have been dissolved too, either by a voluntary liquidation or by a striking off, but without apparent HMRC involvement – one possibility here is that it’s just not worth the time/cost for HMRC to pursue liquidators for scraps.
- We can speculate that HMRC are involved in litigation against the promoter, Aspire Business Partnership LLP, and/or associated people and companies. Aspire stopped trading in 2018 and applied for a voluntary striking-off in 2018, which it then voluntarily withdrew. Aspire continues to file accounts with Companies House, even though it has no trade and has zero assets and zor liabilities. It’s unusual for an entity to continue to exist and file in such circumstances: one explanation is that it is a party to litigation.
- Contrella entered a voluntary insolvency process in 2016.
- A court decision in the British Virgin Islands tells us that, in March 2018, HMRC used an international treaty to require the BVI tax authorities to obtain accounts and other details from Compass Star Limited. Compass Star spent four years trying to fight HMRC in the BVI courts, and eventually lost. We don’t know what HMRC did with the information that it presumably received.
- HMRC have published unusually strongly worded guidance around mini-umbrella companies, clearly stating that they view the attempt to claim the VAT flat rate and employment allowance as tax evasion.
- The flat rate VAT rules were changed in 2017, which greatly reduced the benefit from these schemes.
- There have been large-scale HMRC efforts to de-register MUCs from VAT, and block them from the employment allowance.
- HMRC is attempting to place responsibility for hiring fraudulent MUCs on the ultimate end-users (e.g. in the case of this scheme, the construction company that engages Contrella to provide subcontractors, and ends up hiring an employee of one of the MUCs). This can be very rough justice on that company, but does create an incentive on end-users to police their supply-chains.
- Research from Pinsent Mason found that an astonishing 700% increase in the number of cases awaiting tax tribunals was significantly caused by a large number of mini-umbrella company cases.
- Recent Tax Tribunal statistics show a decline in these cases, saying that this suggests “a possible winding down of the trend started in Q2 2021/22 when Treasury and HMRC increased action against umbrella companies employing potentially fraudulent VAT schemes”,
- HMRC, HM Treasury and the Department of Business and Trade called for evidence last year on the whole of the umbrella company market. It’s now published a summary of the responses received, and a consultation document with various proposals for change. These include a variety of tax proposals, including mandating due diligence, making end-users responsible for debts of umbrella companies, and even moving the entire PAYE responsibility to the end-user.
- The same document proposes other changes to nullify the tax benefit of the fraud, such as requiring a company benefiting from the national insurance employment allowance to have a UK director. The document also hints that the VAT flat rate scheme may be abolished.
- Here’s our response to the consultation:
Part 2

Part 2 of this report will look at the KC opinion, which other KCs have described as “shocking”, “appalling”, “mind-blowing” and “deeply irresponsible”. We’ll be proposing changes to prevent such opinions being issued without consequence.

Thanks to Simon Goodley at the Guardian for the original reporting on this, and Richard Smith, Gillian Schonrock and Graham Barrow for their amazing investigative work (again noting that they draw no legal conclusions; the legal conclusions are the sole responsibility of Tax Policy Associates Ltd).

Thanks to R, P, T, C, M and B for their help with our tax analysis, to K for assistance with the confidential information and privilege elements, to Michael Gomulka for a useful discussion of the barristers’ Code of Conduct, and to A for finding the reference to umbrella schemes in recent tax tribunal data. Thanks to JK for her insight on umbrella companies
Footnotes
1. Not to be confused with the Anderson Group that’s active in construction, or Andersen LLP/Andersen Tax – a well-respected accounting and tax firm ↩︎
2. Again, not to be confused with the unrelated construction group or the unrelated tax advisory group ↩︎
3. Nolan is an interesting character, who apparently worked for HMRC at one point. He was found by an appeal tribunal in 2012 to have “sought to avoid telling the truth” ↩︎
4. By which time the national insurance employment allowance had been increased from £3,000 to £5,000, making the schemes more lucrative ↩︎
5. A cursory check through the data reveals many duplications. Raquel is the director of over 300 companies. Manuel, 9. Lourdes, 8, and so on. Many of these companies carry clear signatures of being related to Anderson. ↩︎
6. See page 6 of this document. How can HMRC claim £35m from 1,796 companies, when we’ve estimated the total tax avoided from 10,000 companies was £50m? Very possibly our £20k/company fee estimate is too conservative, and the true figure is nearer out £180m top end estimate. Alternatively/in addition the companies didn’t account for VAT and PAYE/NI at all. Possibly HMRC is charging penalties for carelessness, wilful default and/or failure to disclose a tax avoidance scheme. Or perhaps some other factor ↩︎
3 July 2023
“GDPR tax credits” – not tax planning, not tax avoidance, just plain fraud
UPDATE: Computer Weekly coverage here

There are lots of small advisory firms pushing a fake GDPR tax reclaim “service” to SMEs, particularly IT companies.

Here’s an example of the pitch¹:

and then:

Or even more explicit:

There are small variations, but it boils down to this series of claims:
- GDPR is really hard for small businesses, and there’s a huge risk of fines and civil claims for non-compliance
- We’ll provide a team of experts to assess the risk your company is running
- We’ll then advise how much it’s prudent to reserve in your accounts.
- And this reserve should have been made years ago – we’ll help you restate your past accounts.
- The creation of the reserve was tax deductible! So every £1m you reserve gets you a refund of £190k off your old corporation tax bills.
- Once you get the £190k refund, we’ll charge you a 30% fee – £57k – leaving you with £133k of free money. And if you don’t get a refund, we’ll charge nothing. It’s risk-free!
What could go wrong?

What goes wrong

Probably something like this:
- You amend your historic corporation tax returns and get a refund. For the more recent past year, this is more-or-less automatic, as with most changes on HMRC’s online systems. You get your £190k refund and happily pay the advisors’ £57k fee.
- Sometime later, HMRC take a look through your tax returns and demand the £190k back, plus interest and penalties.
- You turn to the advisory firm for help, and a refund of your £57k. But they’ve disappeared.
- You’re out £57k plus the interest and penalties. Nightmare.
I haven’t seen a single example of a regulated law firm or accounting firm pushing the scheme – it’s always dubious-looking unregulated outfits.

Why it doesn’t work

In reality, there’s no such thing as a “GDPR tax credit”.

First, the accounting doesn’t work. You’re not entitled to just magic up a reserve.

Here’s FRS 102:

You need all three elements.

Very few firms, and probably no SMEs, will have any obligations at their reporting date which are “more likely than not” to result in GDPR fines or civil claims, and which can be estimated reliably.

“Probable” in (b) means a “letter before action” from a lawyer, threatening a claim – guesses don’t cut it. If you expected a claim but hadn’t had a letter before action, you might put a note in the accounts, but not a reserve.

“Estimated reliably” in (c) is not a small hurdle. HMRC guidance shows that HMRC are very focused on the accuracy of the estimate.

The rules are the same for very small businesses (“micro-entities”) under FRS 105.².

Second, and more fundamentally, the tax doesn’t work.

A GDPR fine or punitive damages claim is non-deductible for corporation tax purposes, even if it reached by way of settlement. Damages paid out in a civil claim that compensate for actual loss (as opposed to punitive damages) might be deductible, but such claims are unlikely (and the figures would for most companies be small).

So the whole idea is dead in the water.

Third, if it’s done to avoid tax, it doesn’t work

Even if somehow you manage to book a reserve and get a deduction, you still fail, because reserves created primarily for a tax benefit aren’t deductible anyway. A tax tribunal recently used that principle to deny a business a tax benefit from a reserve created for unfunded pension liabilities – which were much more real than these fictional GDPR liabilities. And all the marketing and (I expect) the communications with the adviser will reveal to HMRC that the whole thing was tax-motivated.

Finally, it’s not a credit

There are a few companies who genuinely could reserve for GDPR – say if they really receive a letter before action today that lets them accurately estimate they will be liable to pay compensatory damages of £x next year. They would of course get corporation tax relief next year, when they pay the damages – it’s a deductible expense like any other. If they can (legitimately) create a reserve now then that accelerates the tax relief to this year… but then there’s no tax relief next year (because you’ve already taken it). A reserve isn’t a “tax credit” – it just changes the timing. Unless of course you are making a reserve for an amount you never expect to pay – but that’s fraud.

A junior accountant would spot these issues in five minutes.

In fact, one did – thanks to Yisroel Sulzbacher for bringing this to our attention.

Any one of these problems would kill the scheme. The whole idea fails so badly that those pushing it are either guilty of incompetence or fraud. There’s no such thing as a “GDPR tax credit”.

Who is pushing the scheme?

There are a large number of firms marketing the scheme on the internet – just on the first page of a google search we see:
- GDPR Solutions Ltd (who appear to now be dissolved).
- Corporation Tax Rebates Ltd (who have the same address as GDPR Solutions Ltd)
- https://twitter.com/Max786/status/1622579617935622148?s=20
- NCP Business Solutions (their FAQ links to corporationtaxrebates.com, but it’s unclear if they’re connected, or just couldn’t be bothered to write their own website)
- reduceyourcorporationtax.com
- Guild of Master Craftsmen
- Buying Support Agency Ltd (now deleted from their website, but archived here).
- Tax Elite
- Tax Banana (really)
How to stop the schemes

HMRC should list the GDPR schemes in their “spotlight” of tax avoidance schemes that don’t work.

And HMRC needs to start prosecuting advisory firms that promote schemes that can’t possibly work. It’s not avoidance, it’s fraud. And if HMRC thinks a prosecution is too hard under current law, the law should change.

We have a whole panoply of rules to stop tax avoidance and people who promote it. Those rules generally work. But modern “tax avoidance” isn’t avoidance at all – it’s fraud – and civil law rules to stop avoidance clearly have little deterrent value. Only the prospect of criminal sanctions will change the incentives.

Thanks to Yisroel Sulzbacher for bringing this issue to our attention and for his original analysis, and to C for her technical accounting expertise; also to Martin McDonald for further comments. A firm called Forbes Dawson wrote an excellent article on this scheme, months before we became aware of it. It would, incidentally, be great to see more firms’ websites carrying articles about tax planning that should be avoided – it’s a public service and (in our experience) clients love it.
Footnotes
1. Now taken off their website, but archived here ↩︎
2. See paragraph 16.5 ↩︎
28 June 2023
Citizenship-based taxation. Should all UK citizens pay tax in the UK, even if they live abroad?
No. It’s a terrible idea. Here’s why.

How the UK system currently works

The UK taxes individuals based on their residence. If you live in the UK for 183 days in one tax year (or more than 90 days if you have a home here)¹ then you are “resident” in the UK, and subject to UK tax on all of your income and gains for that year.²

The problem with this from some people’s perspective is that it becomes remarkably easy to stop being subject to UK tax. Simply quit the UK. Plenty of wealthy people skip the UK to move to tax havens, often just before making large capital gains.³ You can be sure we’d see more of that if the UK was about to introduce a hefty wealth tax

Whether you call this “tax avoidance” and/or think it’s immoral is a personal question on which different people will have different views. But – as long as they are really spending 270 days abroad every year, and don’t come back within five, then leaving the UK is absolutely a proper, legal and 100% effective way to escape UK tax.

The US alternative

The US does things differently – it has “citizenship-based taxation”.

The way this works is that US citizens (and green card holders) are fully subject to US tax on their worldwide income and gains, no matter where they live. So you cannot escape US tax by moving to Panama. You can escape US tax by surrendering your citizenship – but that comes at the price of a hefty exit tax (which broadly eliminates all the immediate benefit of escaping US taxation).

Interestingly there is almost no other country that does this.⁴

But, on the face of it, if you want to stop billionaires from leaving the UK and escaping UK tax, this is the approach to adopt.

(You may, alternatively, regard such an approach as immoral, and think that no country has the right to tax people who want to leave – but I’m going to park such political questions and look at the practicalities)

Where citizenship-based taxation goes wrong

The problem is that you would be paying tax in two places. A Brit living in France would pay UK tax (because they are a British citizen) tax plus French tax (because they are resident in France).

On the face of it, this shouldn’t be a problem, because the UK has double tax treaties with France and most other countries which in principle stop you from being taxed twice on the same income. And certainty in a simple case where you have £100 of income then the US and UK won’t both apply their full rate of tax to that income. But the problems go beyond simple double taxation.

We can get a sense of the issues by looking at the difficulties currently faced by US citizens (subject to US worldwide taxation) resident in the UK (and subject to UK worldwide taxation).

Here’s how it goes:
- The US has the “foreign earned income exclusion” for the first $107,000 of income for citizens living abroad. But it doesn’t protect the self-employed, who still have to pay US self-employment tax on their income. If you’re a plumber or an IT contractor, you have to file two complete tax returns in two countries. Those tax returns have different rules for e.g. what is deductible and what isn’t. Nightmare.
- To make life more fun, those tax returns will often cover a different period – for example the UK tax year runs from April 6th, but the US tax return runs from January 1st. Even if you’re employed, and all your income is exempt in the US under the foreign earned income exclusion, you still have to file.
- Filing tax returns in two countries is complicated, because of the interactions between the two sets of returns. I know someone who had a $5k capital gain – filing US taxes for that year cost them $3k.
- Capital gains are a problem, because the US taxes you on your US dollar gains. For example: say you buy a house in the UK for £300k and sell it a few years later for the same price. No UK capital gain. But if Sterling appreciated over that period, so that the dollar purchase price was $380k but the dollar sale price was $450k, then you have a $70k US capital gain, but no cash proceeds to fund it. And the UK will do the same to your US assets.
- If you make a capital gain then the different filing and payment timetables mean that you’ll sometimes have to pay the full US tax, then the full UK tax, then claim a refund of the US tax.
- It’s a nightmare for the spouse. If a couple have a joint account, and one is a US citizen and the other is not, then the joint account becomes subject to U.S. tax. Married couples can normally not worry about the tax treatments of their family finances – but where one of the couple is a US citizen then even simple arrangements like joint accounts become very complicated.
- Many people in the UK have an ISA, where you can put cash or shares into an account and the return is exempt from tax. But it’s not exempt from U.S. tax. So a U.S. citizen living in the UK cannot use an ISA (or, to be more accurate, if they use an ISA they get no benefit from it). Some US advisers think it’s worse than that, and an ISA has a particularly awful US tax treatment: that’s a whole other class of problems that arises when one country’s tax system has to characterise the tax effect of another country’s legal and tax system.
- You always get the worst of both worlds. For example, the US and UK take the opposite approach to the taxation of your house. The UK gives you no tax relief on your mortgage payments, but exempts you from capital gain on the value of the house. The US gives you tax relief on mortgage payments, but then taxes the capital gain. Both are somewhat balanced results. A U.S. citizen living in the UK gets the worst of both worlds. They get no tax relief on the mortgage for their UK tax, but have to pay US capital gains when they sell. That’s an unbalanced result.
- It becomes impossible to buy investment funds. The UK has rules that in practice mean no UK residents can buy an investment fund unless it is either established in the UK, or foreign but an “approved offshore reporting fund”. The US has rules that in practise mean it is very disadvantageous for a US citizen to invest into a non-US fund (the PFIC rules). The poor U.S. citizen living in the UK is subject to both sets of rules, and therefore cannot realistically invest in any funds.
- There’s an obvious incentive for US citizens abroad to simply not declare or pay their US taxes. That’s a criminal offence, but historically it was very hard for the IRS to spot. A whole international reporting regime – FATCA – was introduced to stop this. But that imposes a significant admin burden on non-US financial institutions with US citizen clients and, as a result, some banks don’t allow US citizens to open accounts.
- I could go on. The impact on minors. “Accidental Americans”. Retirement account taxation. Inheritance/estate tax interaction. Complexity when couples divorce. Social security/national insurance interaction. You don’t need to be wealthy, or to have complex personal finances, to have a horrible time navigating the US and UK tax systems at the same time.
These are unfair outcomes for normal people, particularly people who can’t afford lots of tax advice. Billionaires can cope with it; doctors and IT workers, not so much.

So if the UK adopted citizenship-based taxation then you might regard that as a “win” for taxing the very wealthy. But it would hurt many ordinary people who choose to live abroad.

That’s why the US is the only developed country that taxes on the basis of citizenship. Why does it do that? Some combination of: changing the US tax system is very hard, US expats don’t have valuable votes and so the campaign to change the law gets nowhere, and the US is big enough and bad enough to get away with things that other countries can’t.

Surely there’s a way to do the good stuff and not the bad stuff?

One idea would be to keep citizenship-based taxation, but only for people who move to tax havens.

The problem with this is that there are many countries that behave exactly like tax havens for Brits who move there. Singapore, Israel, Portugal, even Italy, don’t tax, or barely tax, the income of a wealthy Brit who moves there. So our list of “tax havens” would have to either be very long, or full of holes.

And if the UK introduced a wealth tax, then almost every other country would be a “tax haven” from that wealth tax, because only a handful of countries these days impose a wealth tax.

So what’s the answer?

I think there are two.

One is to have no problem with people leaving the UK if they choose, and escaping UK tax. You can justify this on the principled grounds that everyone has a right to vote with their feet, or the pragmatic grounds that people may be less likely to come here, and entrepreneurs less likely to stay, if we hit them with a large tax bill when they leave.⁵

The other is to say that in some cases, where a person has accrued lots of untaxed capital gain during their time in the UK, the UK should have a right to tax it if they leave. I think that’s worth more thought, and will be writing more about it soon.

But citizenship-based taxation is unfair and unjust.

Photo by James Giddins on Unsplash
Footnotes
1. It’s a bit more complicated than that, but these days the rules are fairly clear and sensible ↩︎
2. Unless you are a “non-dom”, which is a whole other story ↩︎
3. It’s occasionally claimed that people don’t move in response to higher tax rates. Most of this is based on studies of people moving from relatively highly taxed US States to relatively lowly taxed states. It’s not applicable to the very wealthy moving to tax havens, which is hard to study statistically (too few people) but very easy to assess empirically (there’s no other reason a Brit would choose to live in Monaco ↩︎
4. People sometimes cite Eritrea, but that looks more like gangsterism than tax. ↩︎
5. The US doesn’t have an obvious problem with that, but this arguably goes back to the US being uniquely big and bad enough to have a citizenship-based taxation system. ↩︎
27 June 2023
Penalising the poor: 420,000 HMRC penalties charged to people who earned too little to pay tax. That’s 40% of all HMRC late filing penalties.
From 2018 to 2022, HMRC charged 420,000 penalties on people with incomes too low to owe any tax. They shouldn’t have needed to file a tax return, but for some reason they were – and because they didn’t file on time, they received a penalty of at least £100. In most cases, that’s more than half their weekly income.

Astonishingly, 40% of all late filing penalties charged by HMRC over these four years fall into this category.

We believe the law and HMRC practice should change. Nobody filing late should be required to pay a penalty that exceeds the tax they owe.

The Guardian’s coverage is here. The Times’ coverage is here

UPDATED 27 June 2023 with our thoughts on HMRC’s response

The data

Our new data¹ shows the percentage of taxpayers in each income decile who were charged a £100 fixed late filing penalty in 2020/21, the most recent year for which full data is available:

The green bars show where penalties were assessed but successfully appealed. The red bars show where the penalty was charged. The black vertical line shows the £12,570 personal allowance, below which nobody should have any tax liability.

We view every penalty issued to the left of that line as a policy failure. There were 184,000 in 2020/21.

The trend is the same for the other years we have data: 2018/19 through 2021/22 (although note that taxpayers are still filing for 2021/22 and so this data is incomplete.²):

Looking at the totals, across the four years, for each decile:

… we see a total of 660,000 penalties issued to taxpayers in the lowest three deciles, and we estimate that 600,000 of those penalties were issued to people who owed no tax (because their income was lower than the personal allowance; £12,570 for the most recent two years, and slightly lower for the two before that).

Important to note that this is 600,000 penalties, not 600,000 people – there will be people who received multiple penalties (which is in our view an even larger policy failure, given that HMRC by this point know that the individuals involved earned too little to pay tax).

Several years of penalties can add up to thousands of pounds – here’s a typical example that was sent to us (digits obscured to preserve privacy):

People are falling into debt, and in one case we’re away of, actually becoming homeless, as a result of HMRC penalties.

Even just the lowest penalty of £100 is a large proportion of the weekly income of someone on a low income (indeed over 100% of the weekly income for someone in the lowest income decile):

A respected retired tax tribunal judge has described the current UK penalties regime as the most punitive in the world for people on low incomes.³

Background

Self assessment

Most people in the UK aren’t required to submit a tax return. Where your only income is employment income and a modest amount of bank interest, then in most cases a tax return isn’t required.

For this reason, out of the 32 million individual taxpayers⁴ in the UK, only about a third (11 million people) are required to submit a self assessment income tax return.⁵

Tax returns must be filed online by 31 January, or three months earlier (31 October) for people submitting paper forms.⁶

Penalties

If HMRC has required a taxpayer to submit a tax return, but he or she misses the deadline (even by one day), then a £100 automatic late filing penalty is applied.

After three months past the deadline, the penalty can start increasing by £10 each day, for a maximum of 90 days (£900) After six months, a flat £300 additional penalty can be applied, and after twelve months another £300. By that point, total penalties can be £1,600.⁷ Unfortunately, we have no data on the distribution of different penalty amounts.

Until 2011, a late filing penalty would be cancelled if, once a tax return was filed, there was no tax to pay. However the law was changed, and now the penalty will remain even if it turns out the “taxpayer” has no taxable income, and no tax liability. At the time, the Low Incomes Tax Reform Group warned of the hardship this could create, but their advice was not followed.⁸

Advisers working with low income taxpayers now see this kind of situation all the time, and filing appeals for late payment penalties often makes up a significant amount of their work.

Appeals

Anyone receiving a late payment penalty who has a “reasonable excuse” for not paying can make an administrative appeal to HMRC, either using a form or an online service.⁹ If HMRC agree, then the penalty will be “cancelled”. If HMRC don’t agree, then a judicial appeal can be made to the First Tier Tribunal, but only a small proportion of late filing penalties reach this point¹⁰. All the “appeals” discussed in this report are administrative form-based appeals.

The human cost

Since publishing our initial report, we’ve been inundated with stories from people on low incomes affected by penalties when they had no tax to pay.

These are vulnerable people, at a low point in their lives – and the same difficulties which meant they missed the filing deadline mean they often won’t lodge an appeal, and may take months before they pay the penalties (racking up additional penalties in the meantime). A successful appeal is not a success – it means that someone with limited time and resources has had to navigate what is to many a complex and difficult administrative system.

Here are just some of the responses we received:

HMRC’s response

In the Times article, HMRC say:

This refers to a revamp of all the self assessment penalty rules which will apply to all taxpayers from 6 April 2025.¹¹

From that date, a one-off failure to file will not incur a penalty; rather it will result in a taxpayer incurring a “point”, and only after two points (for an annual filer) or four points (for a quarterly filer) will a penalty be issued.¹² We don’t know how long a delay will run up two points.

At the same time, the fixed penalty amount will increase to £200.

This might reduce the number of penalties imposed on low-earning taxpayers (for example where someone currently misses the filing deadline by a few days or weeks), but it could equally well worsen the position given the higher amount. We don’t know when the £200 penalty will kick in, and we don’t have data on how late low income self assessments typically are. It’s our hope that the issues highlighted in this report are considered when the details of the new regime are finalised.

Conclusions

We believe that the Government, HM Treasury and HMRC are acting in good faith, and until our report last year were unaware of the disproportionate impact that penalties have on the low-paid.

In light of the data revealed by this report, we have three recommendations:

1. Change in law

Late filing penalties should be automatically cancelled (and, if paid, refunded) if HMRC later determines that a taxpayer has no taxable income. Most likely that would be after a subsequent submission of a self assessment form; but no further application or appeal should be required.

Similarly, there should be an automatic abatement of penalties (by, say, 50%) if HMRC determines that a taxpayer has a taxable income but it is low (for example less than £15,000).

Whilst it is possible that some cancellations could be achieved under HMRC’s existing “care and management” powers, we expect that creating a general cancellation and abatement rule falls outside those powers, and therefore may require a change of law.

Alternatively, we could simply return to the pre-2011 position, with penalties automatically capped at the amount of a taxpayer’s tax liability.

In the meantime, HMRC should use its powers to cancel penalties on the low-paid as extensively as it can.

2. Monitoring

HMRC should start monitoring late submission penalties across income deciles, (using other sources of data, i.e. not limited to those provided to us) to provide a more complete picture of the impact on the low paid, including the level of penalties paid (i.e. not just the data on £100 penalties presented in this report).

Armed with that data, HMRC should aim to reduce the disparities identified in this report, and report annually on its progress.

3. Rework processes

The data reveals that there is a significant population of self assessment “taxpayers” who are being required to complete an income tax self assessment, are charged a late submission penalty, but turn out to have no tax to pay.

It is unclear why that is happening at so large a scale.

HMRC should analyse this population with a view to determining:
- how many of these are taxpayers who in retrospect should not have been required to submit a self assessment return at all,
- whether that could have been determined in advance, on the basis of the information HMRC possessed at the time,
- if it could be determined in advance, what additional processes should be put in place by HMRC to prevent such taxpayers being required to submit a self assessment in the future, and
- if there are small changes which could impact this population’s tax compliance, for example changing envelope labelling.
Methodology

Source of data

HMRC provided data to Tax Policy Associates following two Freedom of Information Act requests. The full methodology is set out below, with links to the original FOIA answers and our calculation spreadsheets.

All the raw data is available here and here. The data is visible in a more usable form in our GitHub repository, which also contains the Python scripts that drew the charts in this report.

The fact the lowest three deciles pay little tax is confirmed by the data on penalties issued for late payment (as opposed to late filing). The first three deciles pay almost no late payment penalties¹³. This obviously isn’t because they are more punctual at paying than they are at filing; it’s because they almost always have no tax to pay.

The lowest three income deciles are mostly below the personal allowance, currently £12,570, but the third decile is partly under and partly over that amount. We therefore estimated the number of penalties charge to people in the third decile but earning under the personal allowance using a simple pro-rata calculation.

Limitations

The most important limitation is that, whilst we had asked for income level to be computed by reference to previous self assessments filed by taxpayers, HMRC’s systems were unable to do this (at least within the limited budget available for responding to FOIA requests).

The data is therefore based upon the income level revealed when a taxpayer did eventually submit his or her return. That means, if a taxpayer did not submit a return at all for the relevant year, they do not appear in this data. In fact, the majority of taxpayers fall in this category, and that proportion will be even greater for the most recent year, 2021/22, where taxpayers are still filing and HMRC still processing returns.

We expect that the “never filing” taxpayers will disproportionately be low/no income taxpayers rather than higher income taxpayers, as they are more likely to lack the time/resources to file, and HMRC is less likely to pursue them. If that is right then the data we report is underestimating the impact of penalties on low-income taxpayers. However, this is speculation; further data is required.

Note that the income deciles are different from the usual national income deciles, as self assessment taxpayers have different (and, on average, lower) incomes than the population as a whole.

Many thanks to HMRC for their detailed and open response to our FOIA requests on penalties and income levels.

Thanks to all those who responded with their personal experiences of penalties, and to the tax professionals who provided technical input and insight (many of whom spend hours volunteering to help people in this position), particularly Andrew and Richard Thomas, the respected retired Tax Tribunal judge.

Finally, thanks to Rupert Neate at the Guardian.
Footnotes
1. This is an update of our report from last year, with two more years of data and further statistical analysis ↩︎
2. Because whilst HMRC knows the number of penalties issued for late filing, it doesn’t have tax returns for many of these taxpayers and so can’t assess their incomes. There will also be more appeals over time. We can therefore expect the final figures for 2021/22 to be closer to those for earlier years, with all the numbers around 40% higher. ↩︎
3. See Richard Thomas’ comments here ↩︎
4. See the projection for 2022 here: https://www.gov.uk/government/statistics/income-tax-liabilities-statistics-tax-year-2018-to-2019-to-tax-year-2021-to-2022/summary-statistics ↩︎
5. See HMRC figures at https://www.gov.uk/government/news/fascinating-facts-about-self assessment ↩︎
6. In response to the Covid pandemic, the filing deadline for 2020/21 was extended by one month. ↩︎
7. i.e., £100 + 90 x £10 + £300 + £300. Technically the £900 daily penalties are discretionary, but in practice they appear to be applied automatically. ↩︎
8. See paragraph 4.4.1 of their response to the 2008 HMRC consultation paper on penalties ↩︎
9. See https://www.gov.uk/government/publications/self assessment-appeal-against-penalties-for-late-filing-and-late-payment-sa370. Strictly the appeal should be made within 30 days of a penalty being notified, but in practice we believe HMRC rarely holds taxpayers to this deadline. ↩︎
10. The absolute numbers are still quite large; one FTT judge recalls personally hearing over 300 late filing appeals, and they make up a high proportion of overall FTT appeals. See Richard Thomas’ comments here. ↩︎
11. Possibly later – although this isn’t clear – see Rebecca Cave’s comments below ↩︎
12. See HMRC policy paper: https://www.gov.uk/government/publications/interest-harmonisation-and-penalties-for-late-submission-and-late-payment-of-tax/interest-harmonisation-and-penalties-for-late-payment-and-late-submission ↩︎
13. Although some of the late payment penalties applied to those on low income will have been held over from a previous, higher earning, year. Hence the proportion in the lowest three deciles with tax to pay will be lower than suggested by this chart; in principle it should be zero for the lowest two deciles. ↩︎
26 June 2023
The fintech company secretly enabling a £46m tax avoidance scheme
Fintech company B2BTradeCard has run a successful loyalty card business for eight years – sponsoring a local motorsport team, donating to a local air ambulance, and now a member of the Payments Association. But behind the scenes, they’re enabling a tax avoidance scheme which could cost the UK £46m each year, and might even enable criminal fraud. Here’s how.

UPDATE: 7 September 2023. B2BTradeCard appear to have shut down. The website is no longer public, and the employees’ LinkedIn profiles all show them leaving the company in July or August 2023. It could be that HMRC started an investigation, or it could be that those behind the company knew its days were numbered. Either way, we’d advise anyone who used the B2BTradeCard scheme to seek advice from a regulated tax professional (i.e. an CIOT/ATT qualified accountant or a solicitor).

UPDATE: 19 July 2024. B2BTradeCard has been added to HMRC’s list of named tax avoidance schemes. We expect HMRC will be opening enquiries and discovery assessments against the company’s clients. We would hope HMRC will also commence a criminal investigation.

The puzzle

You can’t tell what’s going on from the website or promotional video. Just looks like a peer-to-peer advertising platform and loyalty card scheme.

The first clue that something odd is going on comes from the promotional material they send to potential clients.

An 80% cashback. Huh?

Why would anyone spend £10,000 to advertise on an obscure website to get an £8,000 cashback? What’s going on?

And why do the LinkedIn profiles of the CEO and even junior staff boast about corporation tax savings? What’s that got to do with a loyalty card?

After we approached B2BTradeCard for comment, the reference to corporation tax disappeared from the headline in the profiles.. but “corporation tax” is listed as a key benefit of the product.

It’s puzzling.

The answer

There’s a small clue on an accounting firm’s website that this might be something about tax:

Another of B2B’s “business partners” gives the game away:¹

So, whilst I’m sure much of what B2BTradeCard and their clients do is a standard loyalty card product², it appears to also enable a tax avoidance scheme that looks like this:
- An SME pays B2BTradeCard £10,000 for “advertising” (on a website that only their 3,500 members will see).
- B2BTradeCard then gives the SME a pre-paid Visa card loaded with £8,000, which the SME hands to its director
- The director can use the card in much the same way as any other payment card (the only exception is that they can’t make a cash withdrawal).
- But the director isn’t taxed on the £8,000, and the company gets a £10,000 corporation tax deduction (because advertising is a deductible expense).³
- So the SME is paying £10,000 to get £8,000 to its director tax-free. That’s compared to the £4,400 of tax that would normally be due if a company used £8,000 of profits to pay a dividend to a director/shareholder.⁴. Which is where the “40%+” claim in the promotional material comes from.
- They say you can do this with up to 10% of your annual turnover – the rationale being that it’s common to spend 10% of your turnover on advertising. That looks very much like an attempt to hide what’s really going on.
What an amazing deal. Avoid £4,400 of tax for a £2,000 fee (i.e. the £10,000 of “advertising” less the £8,000 loaded onto the Visa card).

What could possibly go wrong?

What goes wrong

For many decades, employers have tried to find ways to pay their staff without tax. Fine wine, gold bars, platinum sponge, “loans” that never have to be repaid, trust interests, combinations of loans, trusts and gold. HMRC were able to challenge most of these schemes at the time, and subsequent legislation means that now it’s almost impossible that a company can give value to a director or employee and escape tax.

The upshot of those decades is that HMRC have plenty of ways to tax the £8,000:
- Most obviously, directors and other employees are taxed on all earnings they receive. There is an old House of Lords case where Christmas vouchers were taxed as “earnings”, and a much more recent Supreme Court case where cash that was redirected through a third party was taxed as earnings.⁵ The general view of our team is that this is probably all HMRC need to tax the £8,000.⁶
- Alternatively, the card is a “benefit in kind”. If your employer buys you a TV, it’s a taxable benefit. Why should it be any different if your employer loads up cash on a Visa card, which you can use to buy a TV?⁷
- After the most recent wave of attempts to avoid employment tax, the “disguised remuneration” rules were introduced. If you somehow escape being taxed as an earnings or benefit, but receive what is in substance a reward, via a third party, then you get taxed. These rules are intentionally extremely broad. We spoke to several remuneration tax specialists, and none saw any way in which B2BTradeCard could escape these rules.⁸
- And even if the scheme somehow escaped all of that, there is still the General Anti-Abuse Rule (GAAR), which would likely apply in a case such as this.⁹
So here’s what will actually happen once HMRC starts sniffing around a company that’s bought into B2BTradeCard:
- The company will be required to apply PAYE and account for employer’s national insurance, employee national insurance and income tax on the director’s earnings¹⁰
- Or, if the disguised remuneration rules apply, HMRC can collect the tax directly from the employee.
- The company may still get a corporation tax deduction for the £8,000 (as, after all, it was remunerating an employee)¹¹ but only gets a deduction for the £2,000 to the extent it was fair value for the advertising. Given the dubious value of that advertising, and the fact it’s easily viewed as a non-deductible payment for a tax avoidance scheme, possibly very little of the £2,000 is deductible.
- So a plausible result for the company is that they’ve paid £2,000 in non-deductible fees (which costs £2,700¹²), plus £4,200 of tax. Plus interest and very likely penalties. A much worse result than if they’d just paid their director in the usual way.¹³
HMRC has already listed a similar scheme in one of its Spotlights – these list avoidance schemes that in HMRC’s view don’t work, and that HMRC will challenge. It’s surely only a matter of time until B2BTradeCard’s scheme is listed too.

Interestingly, Amex ran a similar scheme on a much larger scale in the US. It did not end well.¹⁴

Worse than tax avoidance?

In practice, it’s easy to see how B2BTradeCard’s scheme could end up being worse than tax avoidance.

The way the product works means that it’s almost invisible – the only entry in the company’s accounts for my example above would be a £10,000 payment for advertising.

That opens up two concerning possibilities:
- Directors could buy into the scheme having been told that it doesn’t work technically,¹⁵ but expecting HMRC not to spot it. That would be criminal tax evasion. If any B2BTradeCard employee or agent (including the likes of Business Solutions) knowingly facilitated that evasion, then that employee/agent could also be criminally liable, and B2BTradeCard could itself be criminally liable as a corporate under the rules in the Criminal Finances Act 2017.
- Directors or employees could buy “advertising” with B2BTradeCard without having told shareholders/other employees what’s going on. Everyone else just sees £10,000 spent on advertising, and has no idea that Bob from Marketing has in fact stolen £8,000 from the company. In those circumstances you can be pretty sure Bob won’t have disclosed the arrangement to HMRC either.
We are absolutely not saying that B2BTradeCard intend either of these results, or are aware of them, but their scheme clearly facilitates the possibility.

That all makes it very hard for HMRC to spot the scheme – although now they are forewarned¹⁶ they should be able to obtain an order against B2BTradeCard requiring disclosure of all clients and transactions.

How much is this costing us in lost tax?

All Business Solutions, one of B2BTradeCard’s “partners”, says:

If that’s right, that means £2,500 x 12 months x 3,500 members x 44% tax avoided = £46m of tax avoided per year. And it seems B2BTradeCard has been going for at least eight years.

The total loss could be much more than this given that there seem to be other similar schemes around – we are investigating.

How do B2BTradeCard justify the scheme?

One possibility is that B2BTradeCard are running a straightforward loyalty card scheme, and it just happens to be abused by some third party accountants. That feels unlikely given the CEO’s touting of the corporation tax benefit. It’s more unlikely still when we see what they send to potential clients:

This is fairly clear that B2BTradeCard really do sell their product as giving a corporation tax deduction to the company, and tax-free income to the director/cardholder.

It’s also fairly clearly nonsense:
- They focus on whether the money loaded onto the Visa card is a taxable benefit. But that’s a sideshow – It’s probably just straightforwardly taxable as earnings. If neither earnings nor a benefit, it will be taxed under the disguised remuneration rules. Either way, they lose.
- Then they throw in some irrelevant technical references, perhaps to confuse non-specialists. Section 1290 is a specific corporation tax anti-avoidance rule, which has nothing to do with whether a payment is a taxable benefit.¹⁷
- The reference to HMRC guidance in EIM21618 is also irrelevant. This is a concession where HMRC say that Airmiles, credit card points and other very incidental benefits aren’t taxed.¹⁸ But those benefits are typically worth around 1% of the purchase price, and can only be used in a very limited way. Here the benefit is 80% of the purchase price, and is almost as good as cash.¹⁹
- Given how far removed B2BTradeCard is from the usual loyalty schemes, the idea that it “can not [sic] be a tax scheme when employee loyalty points work in a way so unambiguously set out in HMRC’s own manual” is not defensible.²⁰
- The reference to the Scotts Atlantic case is another irrelevance. The case concerns deductibility for employers and is irrelevant to the tax treatment of employees.²¹
- The idea this is not a “contrived scheme” is very doubtful given the astonishing 80% payback, the way the scheme is promoted behind the scenes, and those features of the scheme which seem designed to give a particular tax result. The “advertising” may be genuine, but plainly 80% of what is paid for the “advertising” is not payment for advertising.
B2BTradeCard’s response to our investigation

We wrote to B2BTradeCard putting to them our understanding of how the 80% cash rebate worked, and that we thought it was clearly taxable. They responded as follows:

In response to your communications on 8th and 12th June, we would like to make our position clear and address a few points that you have raised.

Firstly, as you would expect, we sought extensive expert advice prior to our business being established and this came from a firm of well-respected tax experts that you would know well. Secondly a number of the facts you have mentioned in your emails and assumptions you have made are fundamentally incorrect and materials you have referenced are out of date and not used by us.

It is impossible to discuss the matters you have raised in sufficient detail without divulging confidential elements of our commercial model and operations which we are not prepared to do with a third party. However, needless to say that we work with reputable and regulated companies in the provision of our services, all customers and suppliers are checked and vetted and we are fully audited in respect of this. We are in regular contact with industry peers in this space with regards to best practice and, alongside guidance from our independent tax advisors, we are fully confident in our position.

They have not denied that their product works as we have described. Their assertion that a leading firm has confirmed the tax position is in our view not credible for all the reasons set out above (although it is possible that a firm advised on the product’s use as a simple loyalty card, not appreciating its use as a tax avoidance scheme). “Confidentiality” is a pretty feeble reason to refuse to provide any comment at all. And the materials we quote are not out of date – the key “technicalities” document was created in June 2022.

The reference to “industry peers” is interesting – who else is doing this?

What should happen next?

Here are some suggestions:
- HMRC should publish a “Spotlight” making clear that the scheme doesn’t work, and that anyone participating should expect to be investigated.
- HMRC should open an investigation into B2BTradeCard and other companies offering similar products.
- In due course, HMRC should investigate the end-users of the product: SMEs and directors.
- B2BTradeCard’s debit card provider is Nium Fintech Limited. I’m confident Nium have no idea what’s going on. But they should have done – the financial services industry is well aware of the potential that pre-paid cards have for tax evasion and money laundering. Something has gone badly wrong with their due diligence procedures. We are writing to them.
- The Payments Association also presumably has no idea what B2BTradeCard is up to – but it might want to rethink the due diligence it undertakes before accepting a new member. We are also writing to them.
And if you are aware of any other schemes similar to B2BTradeCard, please do get in touch.

Finally, after this report went to press we became aware of an article on the same subject published in The Tax Journal at almost exactly the same time. It reaches the same conclusions as us. The author is Thomas Wallace, a former HMRC investigations specialist now in private practice. We’ll link to it when available.

Thanks to the remuneration tax guru who worked with us on this (he knows who he is), the KC who read the original draft, and the KC who provided the technical GAAR analysis. Thanks most of all to T for bringing the scheme to our attention, and M, B and R for providing further information. And finally thanks to all the advisers on Twitter and LinkedIn who responded to our initial bemused queries about B2BTradeCard, and the many others who wrote to us directly.
Footnotes
1. And here’s a third “business partner”, SCA Business Consultancy, saying much the same thing. And I have confirmation from multiple independent sources that this is also B2BTradeCard’s pitch to potential clients, although they’re careful not to put it in writing. ↩︎
2. Particularly the points you get for spending with other B2BTradeCard members – doesn’t immediately look like avoidance to me ↩︎
3. Although “advertising” is not a deductible expense. More on that below ↩︎
4. There would be £2,000 of corporation tax paid by the company on its profits, and then £2,400 of income tax paid by the director/shareholder on their dividends- a total of £4,400. You get a similar result if the cash was being paid to an employee, or a director who isn’t a shareholder. Out of the £8,000, £970 would go on employer national insurance, then the employee would pay £3,300 of income tax (at the highest marginal rate) – for a total of £4,270 ↩︎
5. The facts here seem worse than in Rangers, because at least they had the argument that a loan had a different character to earnings. Here they don’t even have that ↩︎
6. It looks like the promoters are trying to escape the “earnings” definition by making it impossible to directly convert the £ on the Visa card into cash. They can then argue it isn’t “money or money’s worth” and so not earnings. However, that seems wrong given that the £8,000 on a Visa card is so close in practice to £8,000 cash. Even if right, it doesn’t help you one jot with the BIK and disguised remuneration points. So all their carefully crafted restriction does is reveal that they were trying quite hard to achieve a tax avoidance result, and HMRC would be optimistic of finding lots of discoverable documentation demonstrating that. ↩︎
7. There are also special provisions for “credit-tokens” and “non-cash vouchers” which might apply if the usual earnings and BIK treatment does not apply. ↩︎
8. i.e. because the payment of the asset (the prepaid Visa card) is a “relevant step” within the DR rules under s554C(1)(b) ↩︎
9. Or, in the words of one eminent KC who kindly reviewed a draft of this paper: “Lol what about the GAAR” ↩︎
10. With slightly different results, and potentially very different compliance, if it’s not earnings but a benefit, a token/voucher, or the disguised remuneration rules apply ↩︎
11. But HMRC may argue that it was all non-deductible – ending up indirectly with an employee is enough for the employee to get taxed, but perhaps not enough for a corporation tax deduction. And, if it is deductible, there’s possibly a deferral until the point the cash on the card is spent. This point could become quite complicated. ↩︎
12. Because £2,700 of profits, after 25% corporation tax, leaves £2,000 ↩︎
13. We didn’t discuss the scheme with accounting (as opposed to tax) professionals before publication. Since then, one of our correspondents, L, has made the excellent point that there may be a question as to whether accounts showing £10k of advertising expenditure in these circumstances can be FRS102/CA2006 compliant as they seem not to give a ‘true and fair view’. ↩︎
14. Entertaining commentary on this from the brilliant Matt Levine here, including what happens when a product’s main benefit is pushed by sales personnel, but never put in writing. ↩︎
15. And we’ve spoken to a large number of advisers who did indeed tell their clients that B2BTradeCard didn’t work ↩︎
16. And not just by us – one adviser sent extensive information on the scheme to HMRC a couple of years ago ↩︎
17. They’re also wrong – it’s an exclusion “for anything given as consideration for goods or services provided in the course of a trade or profession”. But the £8,000 that goes straight back to the director is realistically not consideration for goods or services. ↩︎
18. The technical basis for the concession is a little dubious; probably this is just a sensible piece of pragmatism ↩︎
19. And the “B2Bpoints” are acquired because the employer has paid some money, not because the employee has bought something. In any case, you can’t rely on HMRC concessions if you’re trying to avoid tax. ↩︎
20. The use of “unambiguously” seems to be designed to fit into the “clear and unambiguous representation” case law on when you can rely on HMRC guidance, but B2BTradeCard is well outside EIM21618, and the guidance contains no clear or unambiguous representation – the last sentence in EIM21618 reads “It is important to remember that the exact tax treatment will depend on the facts of a particular case”. And, again, you can’t rely on HMRC guidance if you’re trying to avoid tax. ↩︎
21. See paragraph 147 of the FTT judgment, quoted at paragraph 61 of the UTT judgment ↩︎
22 June 2023
Global wealth taxes at June 2023

20 June 2023
CRS implementation as at June 2023

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20 June 2023
So you dislike the OECD global minimum corporate tax? Tough. The UK now has to implement it, or we’ll lose out.
The reason for this is simple:

There are 137 countries coloured on that map. Each has signed up to the OECD global minimum tax (sometimes referred to as GLoBE or “Pillar Two”).

Some are already implementing – including such free market stalwarts as Singapore. Others are discussing implementation details. And many others have signed but are yet to kick off implementation – international tax measures are always slow, and there have been distractions. There is an interactive version of our OECD globe here.¹

This means GLoBE is likely to have a critical mass of implementing countries. Its design renders that very important.

GLoBE’s design brilliance

There have been many other international tax proposals over the years to end, or at least reduce, “tax competition”². They’ve almost³ suffered from a fatal flaw – they reward countries that don’t follow the crowd. It’s a particular problem with the various unitary tax proposals where every country taxes companies on the basis of the same formula (which typically takes into account the location of sales, employees and assets). That creates a massive incentive on countries to apply a slightly different formula – tada, tax competition is back! And an obvious incentives for other countries to simply not sign up at all.

The OECD global minimum tax is much smarter than that. It has three main components:
- When a multinational group is headquartered in a country, that country gets to apply a “top-up” tax if the multinational has subsidiaries in a country where it pays a less than 15% effective rate of tax.
- So if a UK-headquartered widget-making multinational makes £100m of profit in its French subsidiary, which pays £20m in French tax, then the UK charges no top-up. But if it also has a Cayman Islands subsidiary which makes £100m of profit, on which it pays £0 of tax, then the UK applies a top-up tax of 15% x £100m = £15m. Naturally, the details are a bit more involved than this.⁴
- Countries have the option of applying a domestic 15% minimum tax themselves. So, in the above example, the Cayman Islands might think it’s just leaving money on the table. The multinational is going to pay £15m on its Cayman Islands profit, but will be paying it to the UK. If the Cayman Islands instead collects the £15m itself then it makes no difference to the multinational, but it makes £15m difference to the Cayman Islands. And the UK doesn’t get to collect the £15m. It remains to be seen if countries like the Cayman Islands will do this. But plenty of other countries will – including the UK.
- So we can expect a multinational to pay some 15% minimum tax in the countries where it has subsidiaries, and then a bit more in its headquarters jurisdiction (topping up to 15% the tax on the profit it makes at home, and adding on additional top-ups for the subsidiary countries that don’t have domestic minimum taxes).
- What if the headquarter country in fact doesn’t implement the minimum tax? On the face of it, that makes it a wonderfully attractive headquarters country for any multinational who wants to continue to keep the benefit of tax havens (because their 0% tax would never be topped up). And indeed it would be a fantastic option for a tax haven that wants to attract multinationals’ headquarters. But. At this point, we see the brilliance of the OECD’s design (for which successive British Conservative Governments should take some of the credit). The top-up tax which the headquarter country should collect, but doesn’t, is instead collected by all the countries where it has subsidiaries under the “under-taxed payments rule” (UTPR).⁵
So here’s what happens if the UK doesn’t implement the global minimum tax:
- The UK loses the ability to apply a “domestic minimum tax” to the profits of foreign multinationals operating in the UK. Those multinationals still pay the tax, but they pay it (most likely) in their headquarters jurisdiction. The UK leaves tax on the table.
- The UK loses the ability to apply the global minimum tax to the profits of UK-headquartered multinationals. Those multinationals will still pay the tax, but they’ll pay it in little chunks in all the countries where they operate over the world. The UK leaves more tax on the table.
- Those little chunks are extremely complicated chunks. The UK multinationals will consider this a bad result – they’d much rather pay the tax in one go in the UK, rather than have to go through a set of rules in each subsidiary country (and they’re rules that the countries won’t be very used to operating, and very plausibly will work out a bit of a mess).
There is no upside here. Failing to implement is worse for both HMG and UK plc.

And this is why even countries that you might expect to duck GLoBE are in fact adopting it. Singapore and Switzerland, for example – with the Swiss even voting for it in a public referendum.

The arguments against implementing GLoBE

Priti Patel says that GLoBE is “permanent worldwide socialism”, and says in her Telegraph piece:

There are several responses to this.

The first is that, no matter how bad she thinks GLoBE is, I’m afraid she’s just too late. This is an argument Patel could have made in 2021, when the UK could probably have derailed the whole process on its own. But GLoBE has reached critical mass and the only rational course of action is to join the party.

The second is to wonder why, if GLoBE is “permanent worldwide socialism”, Patel’s own government, when she was Home Secretary, was instrumental in creating it.

The third (and least important) response is that this isn’t a very good argument. It’s true that the new OECD rules mean that the UK and other countries have a minimum 15% corporate tax rate. It’s also true that some forms of subsidies are permitted under the OECD tax rules⁶. But the UK is in exactly the same position here as everyone else. A pound spent on tax cuts is the same as a pound spent on subsidies. If we could afford to dish out £ in tax cuts and special tax reliefs, we could equally afford to pay out the same amount in GLoBE-compliant subsidies.

In any event, the idea that the UK would ever have had a corporation tax rate below than 15% is fanciful – no mainstream politician has ever argued for reducing it below 17%. There’s plenty of scope for tax competition or (if you prefer to put it differently) changing aspects of the UK tax system which plausibly hold back growth. Here are some ideas:
- Repeal ancient taxes which raise no money but cost business ££££ in administration.
- Abolish the “cliff edges” which impose high marginal rates on people earning relatively modest sums, and incentivise small businesses to stop growing.
- Review hideously complicated tax legislation which nobody understands, and impose costs on large business. The EU legislated the OECD hybrid mismatch rules in a few pages of principles; the UK has 22 pages of dense legislation and 484 pages of guidance.⁷
- Stop changing key aspects of corporation tax – particularly the rate and investment reliefs – every year. Business needs certainty more than almost anything else.
- Replace the non-dom rules with something that’s much easier for normal people to apply. Depending on your political preferences, you could keep the ability for long-term UK residents to benefit from the rules; or you could restrict/abolish it. But, either way, surely we can make it more workable, and end the incentive to keep assets/cash outside the UK?
When I was in practice, I often advised multinationals looking for a headquarters location, and undecided between half a dozen different countries. They weighed every factor you can think of: transport links, trade agreements, telecommunications, education system, cost of living, culture, personal tax and corporate tax. Of these, corporate tax wasn’t near the top of the list, and when it was considered, certainty (or lack of) was perceived as a much more important factor than the rate.

By contrast, corporate tax is an absolutely key element in attracting profit-shifting special purpose vehicles, with the rate being less important than the base (i.e. if you can offset almost all your profits with magic payments to Bermuda then the rate of tax on the remaining profit becomes of academic interest). GLoBE definitely stops that, at least for MNEs, but it’s not a game the UK has much need to play.

Good arguments against implementing GLoBE

Here are two much better arguments.

Everything above assumes that other countries are going to implement? What if they don’t?

A fair point. The UK implemented the last set of OECD tax proposals years before the EU and most other countries. I don’t think it’s wise to repeat that, and HM Treasury should make regulations that allow it to defer implementation until a critical mass of countries are themselves about to implement.

Hang on, the US hasn’t implemented this. There is no critical mass!

It’s certainly true that the US is the obvious blank space on the rotating globe above.

The Trump Administration in many ways inspired and enabled the global minimum tax with its GILTI rules, which are similar but more limited to the OECD minimum tax. The Biden Administration now probably wishes it could sign up to the OECD rules – but passing tax legislation through Congress is always challenging, and in recent times close to impossible.

So that means US-headquartered multinationals will be subject to the UTPR, which is highly unpopular with some Republican congresspeople. Whether they can do anything about it is another question. If 2024 sees a Republican President elected then things could become very complicated, with a tax/trade war not out of the question. But absent that, the US’s non-participation is unlikely to have any implications for the rest of us.

GILTI and other features of the US tax system make it an unattractive headquarters destination, and UTPR will be a problem for its multinationals for some time to come. The US’s absence won’t stop GLoBE from achieving critical mass.
Footnotes
1. And the code is on our GitHub here ↩︎
2. Views differ on what precisely “tax competition” is, whether there has been a “race to the bottom”, and whether it is a good thing, bad thing or both. This post isn’t about that – it’s about the narrow question of how Pillar Two works, and the incentives it creates ↩︎
3. The big exception is the Destination-Based Cash Flow Tax, which I will write more about in the future ↩︎
4. Okay, it’s horribly complicated, with 70 pages of rules, 111 pages of administrative guidance, and 228 pages of commentary. Anyone who thinks they have a pet solution to international tax which wouldn’t involve hundreds of pages of rules is welcome to write their proposal down in detail, and see how they do. ↩︎
5. Again I am simplifying a very complex rule. I rather expect the main “top-up” rule will mostly work smoothly in practice, even if in theory it has lots of elements which are difficult to apply. By contrast, the fact the UTPR is a backstop means that many countries won’t be used to applying it, and practice is likely to be less consistent both within countries and between different countries. ↩︎
6. “Qualified Refundable Tax Credits” – and, again, this gets very complicated very quickly ↩︎
7. There’s an argument that this drafting approach creates more certainty and ease of application. Anyone who’s advised on the UK hybrid mismatch rules will not agree. ↩︎
20 June 2023
Pillar Two implementation as at June 2023

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19 June 2023
Don’t (for now) believe anything you read about the revenue impact of charging VAT on private schools
We’ve been asked a few times to analyse the revenue impact of imposing 20% VAT on private schools. We’ve declined, because it’s a complicated piece of work which probably requires a large team with economic and educational expertise – the actual tax element is relatively small and straightforward.

UPDATE 11 July 2023: this article is now out of date – the IFS has published a serious piece of research on the subject

UPDATE 17 March 2024: the Adam Smith Institute has published a paper. Sadly it uses the 25% figure I discuss below, which looks extremely unreliable.

A think tank, EDSK, published a paper today looking at this point. Unfortunately, they have not actually undertaken their own analysis, just made some simple calculations based upon previously published figures. The problem is that those figures are, in our view are highly questionable, and perhaps useless. Hence this is a case of “garbage in, garbage out”, and we would caution against taking any figures in the report seriously.

For the same reason, we would caution against taking any of the various figures floating around seriously, unless and until a full analysis is undertaken.

Credit to EDSK – their paper readily admits its own flaws, right at the end – key effects were not taken into account. But these are significant issues which can’t just be ignored:

The questionable figures

Any estimate of the revenue impact rests upon a key question: what percentage of children would leave private schools if VAT was imposed? The paper uses two previous estimates: 5% and 25%. It treats them as higher and lower upper bound estimates:

But the 5% and 25% figures shouldn’t be treated so seriously.

The 5% figure comes from the 2019 Labour Party manifesto. It took a price elasticity estimate from an IFS analysis which looked at the impact of changes in school fees on the rate of children going to private schools. Then the Labour Party simply applied the elasticity to a 20% price increase.

This was not a good approach. The IFS paper looks like a serious piece of work, but it looked at much smaller prices than 20%, and occurring over a long period. So it is likely incorrect to assume the IFS elasticity holds for an immediate 20% VAT increase, and this error surely means that the Labour Party figure was understated. On the other hand, the IFS found price sensitivity only at entry points – ages 7, 11, 13, and so it’s not correct to simply apply this elasticity to all private school pupils. That would tend to over-state the effect. Taken together, these effects render the 5% estimate of limited and perhaps no use.

The 25% figure comes from a slightly mysterious survey of heads and parents at 21 schools by a consultancy engaged by the Independent Schools Council. The mystery being that details of the methodology are scant and, even in principle, surveying parents and headteachers in a mere 21 schools seems unlikely to reveal much about what would actually happen across the country if school fees increased. The likelihood of conscious and unconscious bias is obvious:

Exactly how the calculations were carried out is not revealed in the paper, but there is no evidence of any statistical analysis, and results are presented to two decimal points without any discussion of statistical error (or indeed even a single mention of any statistical tools).

Hence we would regard the 25% figure as meaningless. We don’t think EDSK should have taken them as upper/lower bound estimates, or even used them at all.

How would an actual analysis be undertaken?

Having spoken to a variety of economic and education policy experts, we believe a proper analysis would look something like this:
- Dividing independent schools into different size/wealth/location categories. Then for each, analyse sample accounts & model the extent to which private school will absorb additional costs, reducing profit (for for-profit schools), cutting back on capital expenditure, etc.
- Where the VAT leads to increased fees for a category of school, model the effect on different categories of parents – different income levels, overseas vs local etc. Simple uniform elasticity calculations don’t really cut it, because there are so many different types of schools and children/parents. One would also need to model parents switching from more expensive to less expensive private schools. This would all be very challenging, and none of the experts we spoke to were sure how it would be done (albeit these were brief conversations).
- To complicate things further, Some schools may increase bursaries/i.e. cross-subsidise from wealthier parents to poorer. So impact may be greatest on “middle income” parents (relatively speaking). And/or some schools may scrap bursaries, making the impact greatest on lower income parents. Predicting the outcome here may not be straightforward.
- That gives the response for different types of parent in different types of school. But then it’s necessary to adjust for a significant time factor. Expect a small immediate effect (i.e. few parents would pull their children out mid-year). Then a somewhat larger effect for pupils moving into next academic year but, per the IFS paper, by far the greatest impact on new pupils starting at the school at 7, 11, 13. There would plausibly be an initial time-lag to reflect the fact that parents may have missed the deadline to start in the state sector.
- Then model how the schools would respond to the pupils leaving. This would be a sudden shock for the sector, and we could see dramatic reactions. Some schools could become uneconomic after losing just a few pupils, and shut down. Other schools could change their model to enable them to reduce fees. In the longer term, new schools could start up operating a lower-cost model. It’s often said that, in the 1970s, Eton had contingency plans to move to Ireland – that must be another possibility, although query if the schools most able to afford so dramatic a move would economically need to?
- Then find the cost for educating each category of pupil that leaves and joins the state system. The EDSK paper does this by pulling out a calculator and dividing (1) the total cost of state education system by (2) number of pupils:
- That’s not reflective of the actual cost. The extent to which local state schools have capacity to absorb leaving pupils with/without significant additional expenditure will vary hugely area-to-area and school-to-school. One plausible story: the incremental costs of absorbing a few pupils are very small, particularly given long-term demographic trends (fewer young people). Another plausible story: private schools thrive in areas with less choice of state school, and those schools are already packed, so there simply isn’t space to absorb the influx of new pupils, and new buildings/capital expenditure would be required. Then the costs would be large. Which is it? Or is it something else? Without actually undertaking a detailed analysis of private schools, state schools and demographics, this is just more guesswork.
- Then, in case the above is insufficiently challenging, there are the wider third and fourth order effects:
  - What do people who leave the private sector do with the saved £? Spend it on tutors? on holidays? Save it? Reduce debt? Perhaps this enhances the tax yield, because parents now buy more VATable stuff. Or perhaps not?
  - What happens to teachers who leave private schools? How long are they economically inactive? How much does that take out of the economy and income tax revenues?
So the figures in this paper are just guesses multiplied by guesses. The difficult and uncertain analysis that is omitted is where the truth actually lies. To be fair, the paper really admits that at the end.

How much would the 20% VAT be offset by recovering VATable expenses?

Something the report gets right is that the cost for a private school of imposing 20% VAT would not be 20%.

At present, private schools suffer VAT on their expenses (“input VAT”) but, unlike a normal VATable business, they recover little or none of this.

In other words, a normal business buys a £1,000 computer. They pay £1,000 plus £200 VAT, but can recover the VAT. Net cost: £1,000. But for a private school, the net cost would be £1,200 (or almost £1,200).

Once school fees become VATable then the private school would be treated in the same way as a normal business. That computer would cost £1,000 net.

The extent of this effect depends on the proportion of a school’s costs that are currently VATable. The majority of the costs will be staff wages, and there’s no VAT on that. The Independent Schools Association estimated the net impact would be 15% – we haven’t seen underlying data supporting this, and so the figure should be used with caution. But it feels in the right ballpark.

What about the technical VAT concerns raised in the paper?

Here we are able to comment fairly definitively. The concerns raised are weak and in some cases incorrect.

This section suggests that there is doubt as to how “closely related” supplies such as boarding accommodation will be taxed.

But that’s straightforwardly wrong. If education becomes VATable then closely related supplies will too. No further legislation would be required.

Then the report suggests there are obvious ways schools could escape the tax:

Trying to avoid the VAT by pushing boarding into a charity would be (naive) VAT avoidance, with no realistic prospect of success.

The paper mentions other potential complications, like the capital goods scheme and people paying years of fees up-front. But these are obvious points that I’d expect any legislation to deal with.

Our conclusion

Technically it is straightforward to impose VAT on private schools. Things only get difficult if it’s done in such a way as to create arbitrary boundaries. For example, imposing VAT on schools charging (say) £8k/year or more would create a powerful incentive for a school currently charging (e.g.) £10k to reduce its fees to £7,999 and then pile on a series of individual charges for books, trips, etc.

Fortunately, politicians never create VAT rules with arbitrary boundaries, so there is nothing to worry about here.

However at present we simply do not know what the revenue impact would be. We don’t know how schools would respond, and the extent to which the tax would be passed-on. We don’t know how parents would respond, and the extent to which pupils would leave the private sector. We don’t know how the State sector would absorb those pupils who would leave the private sector.

We’d therefore suggest disregarding the figures in the EDSK report, and the other figures sometimes referred to. At least until someone actually does the difficult job of undertaking a proper analysis.

More generally, when there’s limited or bad data, the temptation is to use it anyway, because it’s “all we have”. That temptation should be resisted. Garbage in, garbage out.
7 June 2023
Eight reasons why the Post Office compensation scheme is a scandal
I keep going back to this Daily Mail story. And, in particular:

How could that happen? How did Mr Duff end up with only £8,000? Indeed how come one postmaster applied for only £15.75 compensation? I didn’t forget to add “thousand” or “million” – the Post Office revealed to me¹ that they received one application for £15.75 compensation. That indicates a very serious problem with the application process.

This article answers that question. Our conclusion: the Post Office has adopted a strategy to minimise compensation for the worst miscarriage of justice in British history. It does that by minimising the initial claim postmasters are making. The Post Office can then point to all the procedures in place to ensure claims are handled fairly – but the unfairness happened right at the start.

Here’s how.

The background

Between 2000 and 2017², the Post Office falsely accused thousands of postmasters of theft. Some went to prison. Many had their assets seized and their reputations shredded. Marriages and livelihoods were destroyed, and at least 61 have now died, never receiving an apology or recompense. These prosecutions were on the basis of financial discrepancies reported by a computer accounting system called Horizon. The Post Office knew from the start that there were serious problems with the Horizon system, but covered it up, and proceeded with aggressive prosecutions based on unreliable data. It’s beyond shocking, and there should be criminal prosecutions of those responsible.

The Post Office then spent years fighting compensation claims in the courts, using every trick in the book to draw things out as long as possible – even a completely meritless application for a judge to recuse himself on the basis he was biased, which the Court of Appeal described as “without substance”, “fatally flawed” and “absurd”.

Now, finally – ten years after the Post Office almost certainly knew ³ that it had wronged these people, it is paying compensation – but in a way that guarantees the wronged postmasters receive derisory sums. This article focuses on the “historical shortfall scheme” (HSS), which compensates postmasters who were not actually convicted of theft, but who were accused of theft, lost their jobs, threatened with prosecution, and forced to repay cash “shortfalls” which in fact were entirely fictitious. There are about 2,500 HSS claims. The average settlement payment so far is only £32,000⁴

The Post Office say this about the HSS claim process:

I would invite anyone to read the below and then return to this paragraph, and decide for themselves how “simple and user friendly” the scheme is, and how fair and reasonable it is for the Post Office to not cover the legal costs of applying.

There are eight elements of the HSS scheme that in my view amount to a strategy to minimise the initial HSS claims. In other circumstances, I would willingly accept that this was a series of good faith mistakes; but given the history here, I don’t think we can assume good faith.

Here are the eight:

1. Force postmasters (mostly in their 70s and 80s) to go through a complex legal process.

The Post Office could have proactively investigated what had happened, identified and interviewed the people it wronged, and proposed full and fair compensation. After all, it’s the Post Office that required postmasters to repay the phoney “shortfalls” – it surely has at least some data that it could be using to estimate the compensation due, and “pre-complete” forms for postmasters.

But instead, the postmasters are required to complete a lengthy and very legal form, with the Post Office providing absolutely nothing in the way of information or assistance. Even where the Post Office writes to a postmaster saying they identified an issue that may have caused a shortfall, they make no attempt to pre-populate the form with that issue.

I have heard (but do not know for sure) that the Post Office’s systems and recordkeeping were such a disaster that it in fact has little useful data. If so, it is outrageous that the Post Office expects elderly postmasters to have better recordkeeping than a large corporate, and – if they don’t – that this reduces the compensation they receive.

I put this point to the Post Office. Their reply is as follows:

This is all irrelevant, as it’s about the process after postmasters send in claims. None of it is about the claims themselves. The forms are lengthy and complex, and the key elements (dates, amounts of “shortfalls” repaid) should be in the possession of the Post Office. The onus should not be on the memory of elderly postmasters. The fact it is ensures that claims are for far less than they should be. Nothing in the later processes can fix that initial injustice.

2. Ensure the postmasters don’t receive legal advice when they complete the form

The HSS claim form is in reality a complicated legal claim, and nobody should be completing it without detailed legal advice.

The form itself is fourteen pages, plus eligibility criteria, terms of reference, explanatory notes to the terms of reference, seven pages of consequential loss guidance, and six pages of Q&A. I was a senior partner in one of the largest law firms in the world, and I personally wouldn’t complete the form myself – specialist advice is essential.

That legal advice will need to consider all the facts specific to the individual’s treatment by the Post Office, and the financial, health and reputational consequences over the subsequent years/decades. I understand from discussions with experienced lawyers that, for all but the simplest cases, this would require at least a week’s work by a couple of experienced claimant lawyers, so ballpark fees of £10,000.

Few postmasters could afford anything like that. So how much is the Post Office covering?

Zero.

The Post Office provides no cover for legal costs in completing the form. None. It doesn’t even suggest they should obtain legal advice.

Postmasters are being asked to assert their legal rights, and their legal claims for compensation, without legal advice. The intention was that this would be an informal process for which legal advice would not be necessary. However, that is not remotely how it has worked out.

After the Post Office receives the form, it will send the postmaster a settlement offer. At that point the Post Office will cover some legal costs. But it’s too late – the offer has been framed by the form, and the postmaster received no legal advice in completing the form. And only 10% of postmasters took legal advice even at that late point.⁵

So aged and vulnerable postmasters applying for compensation are required to complete lengthy and complex legal documentation without legal advice.

Here is the Post Office’s response. They say that applying for the scheme is straightforward. Postmasters disagree, and I think most people (lawyers or laypeople) would share that view.

If I was the Post Office, and someone had submitted a claim for £15.75, I would have thought something was very seriously wrong with the claims process.

All of this amounts to conduct by the Post Office’s lawyers which took unfair advantage of unrepresented individuals, contrary to Solicitors Regulation Authority guidance. I will be referring it to the SRA tomorrow.

3. Write the form to prevent claims for damage to reputation

That complicated form seems designed to limit compensation to financial loss – principally loss of earnings, and the fake accounting “shortfalls” which postmasters were required to repay the Post Office if they wanted to avoid prosecution.

Any lawyer – I think any right-minded person – would say that financial loss is the least of it. Stress, suffering, damage to reputation – all of these should be compensated for. But the form goes out of its way to stop this.

Claimants are surely entitled to compensation for damage to their reputation. In many cases that was significant – everyone in the village where they lived and worked became convinced that the postmaster was a thief, with many postmasters forced to move.

But the design of the form means that claimants are unlikely to realise they can claim for this. Here’s the relevant box:

A lawyer would know this is referring to consequential loss, and would think (amongst other things) about damage to reputation. I doubt many 80-year-old postmasters would do that.

But I suppose a particularly assiduous postmaster might go into the detail of Appendix 1, where we see an acknowledgement that damage to reputation can be included…

… but only where it causes financial loss – which is notoriously hard to quantify.

I paused when I read this, as I wasn’t aware of a legal principle that a person could recover for damage to reputation only where it causes financial loss. I called a few much-more-qualified lawyer contacts. Their answer: there is no such legal principle. The Post Office invented it, to minimise compensation claims.⁶

I put this point to the Post Office. Their response:

But that is absolutely not what the Post Office’s own guidance says. It says: “Where a postmaster has incurred a financial loss as a result of damage to their reputation, they may be able to claim… The Postmaster would need to explain… why the damage to the postmaster’s reputation caused financial loss”. This is a statement that damage to reputation can only be claimed where a financial loss is incurred, and that is absolutely a misrepresentation of the legal position.

So even if a layperson goes deep into the small print, they won’t realise that they are entitled to compensation for damage to reputation which goes beyond mere financial loss. They have been misled by the Post Office, and that will mean they end up claiming for much less than they should.

Of course, this issue would be spotted by a competent lawyer, but the Post Office ensured that the form would always be completed by an unadvised layperson. So a postmaster would, almost inevitably, claim less compensation than he or she is due.

This is, therefore, conduct by the Post Office’s lawyers which failed to uphold the rule of law, took (once more) unfair advantage of unrepresented individuals and was misleading, contrary to Principle 1 and paragraphs 1.2 and 1.4 of the Code of Conduct for Solicitors. I will be including this in my SRA referral tomorrow.

4. Write the form to prevent exemplary damages claims

When a wrongdoer causes harm intentionally, recklessly, or with gross negligence, then a court can award “punitive” or “exemplary” damages. This seems a model case where such damages would be awarded – so where on the HSS form is the box for a claimant to assert exemplary damages? Where is that mentioned in the Appendix?

Nowhere.

Both of these omissions would be spotted by a competent lawyer; but are unlikely to be spotted by a layperson. And the Post Office ensured that the form would always be completed by an unadvised layperson. So a postmaster would, almost inevitably, claim less compensation than he or she is due.

This is how the Post Office responded:

Again, this doesn’t address the point – the Post Office’s own form, and (lack of) guidance means that unrepresented postmasters will not make these claims.

And the Post Office appear to be saying that punitive damages have only been offered in malicious prosecution cases, and perhaps not even all of those. That cannot be right.

I would suggest exemplary damages should be the rule, not the exception. It seems beyond doubt that the Post Office did act either intentionally, recklessly or with gross negligence (even if at this point we cannot be sure which of these it was).

This is again conduct by the Post Office’s lawyers which failed to uphold the rule of law, took unfair advantage of unrepresented individuals and was misleading – and I’ll be referring it to the SRA.

5. Intimidate postmasters into silence, to stop them discussing their settlement offers with each other, friends, family, or the media

As already reported by us and The Times, each postmaster receiving an HSS offer was warned by the Post Office that legally they were not permitted to mention the compensation terms to anyone. This had consequences. They weren’t able to compare compensation terms with each other. They weren’t able to speak to family or friends (who might have suggested they speak to a lawyer). And they weren’t able to go public about the way they were being treated.

This was the key paragraph in each of the offers:

It’s not true. Postmasters were completely free to show their offers to friends, family and the media. We’ve written more about this here, and referred the Post Office’s legal team to the Solicitors Regulation Authority.

The Post Office refused to respond to this point, saying:

This was, yet again, conduct which took advantage of unrepresented individuals. It was also contrary to specific SRA guidance on Conduct in Disputes and the linked Warning Notice on SLAPPs, regarding sending correspondence with restrictive labels where there are no good legal grounds for doing so. I have already referred it to the SRA.

6. Run every possible argument to minimise payouts

The Post Office’s litigation strategy in the 2010s was described by the Court of Appeal as evidencing a “desire to take every point, regardless of quality or consequences”. The Post Office has never apologised for that approach – and seems to be continuing it.

What I’m hearing from postmasters is that the Post Office is running every possible argument to minimise its payouts:
- responding to claims for loss of earnings by arguing that the Post Office would have shut down the Post Office in question under its “transformation programme”, so compensation is limited to the 26 week notice the Post Office typically gives. In strict legal terms that it is a legitimate argument, but (1) it is inconsistent with the informal approach the Post Office should be taking, (2) the Post Office is not running a proper counter-factual but simply asserting the argument, even in cases where the transformation programme would not have applied.
- minimising all payouts for non-financial loss – for example offering £15k to a postmaster who had a stroke as a result of the stress of the Post Office’s false allegations. Indeed it seems that payouts for stress and inconvenience under the HSS rarely, and perhaps never, exceed £15,000.
- responded to postmasters who entered bankruptcy by arguing that the bankruptcy was caused by other factors (whilst providing no evidence of what those other factors might be)
The Post Office appears to be completely ignoring Sir Wyn’s initial finding that “normal negotiating tactics often found in hard-fought litigation in the courts should have no place in the administration of any of the schemes for compensation”.

The Post Office’s response to me does not address the key point here – that the Post Office is running aggressive arguments to minimise payouts:

Where it runs these arguments against unrepresented postmasters – and, remember, 90% of postmasters are unrepresented, the Post Office is in my view taking advantage of unrepresented individuals. I will be drawing the SRA’s attention to this as well.

7. Provide a token amount to cover a lawyer reviewing the settlement

Once the postmaster sends the form to the Post Office, the Post Office responds with a draft settlement agreement, and the postmaster is invited to sign it. At that point, the Post Office will pay for the postmaster to engage a lawyer.

It’s too late. The advice should have been right at the start, to enable the postmaster to construct their claim in a sensible manner, and work out how much tax is due.

And the Post Office is paying an amount which won’t begin to pay for a lawyer actually looking at the fundamentals of the claim. In a Freedom of Information Act response, the Post Office confirmed to me they have paid 1,924 HSS settlements totalling £62m, but in only 198 cases did they cover legal fees, amounting to £217k (i.e. an average of £1,100 each).⁷

£1,200 of legal advice (for the few people receiving it) would realistically cover a “sense check” of whether the settlement terms themselves are reasonable. It will not cover an assessment of whether the right amount of compensation is being paid.

So this is a fig leaf which enables the Post Office to tell the world it is paying postmasters to receive legal advice, without taking the consequences of postmasters actually receiving legal advice (i.e. having to pay out the compensation that it realistically should be paying).

Back in August 2022, Sir Wyn’s initial report said that reasonable legal fees should be paid where the Post Office’s initial HSS offer was rejected by a postmaster. The evidence suggests that didn’t happen between August 2022 and April 2023, when a large number of settlements were agreed.

8. Make no attempt to compensate the claimants for tax

UPDATE: as of 19 June 2023, it looks very much like this has now been solved. But the question remains: why did the Post Office put the postmasters in this position?

The Post Office made no attempt to assist the postmasters’ tax position, and didn’t adjust the compensation upwards to reflect tax. So postmasters have ended up losing far too much of their compensation in tax – in some cases up to half. And I fear some will end up falling into default with HMRC.

Many people åssumed this mess must have been because the Post Office didn’t receive proper tax advice on the impact of compensation on postmasters. But the Post Office has now confirmed to me, in another Freedom of Information Act response, that they themselves did receive tax advice from a law firm on the tax position of HSS claimants.⁸.

These problems could have been avoided if the Post Office had paid for claimants to receive tax advice, covering the terms of the settlement, its consequences, and completion of their subsequent self assessment forms. They didn’t. Out of 1,920 settlements, the Post Office paid for postmasters to receive tax advice on precisely two, and a miserly £500 apiece.

The Government is committed to fixing this – but may be unable to avoid complexity for HMRC and postmasters. All of which is down to the Post Office’s failure. I asked the Post Office why this happened, and why they still weren’t funding tax advice for postmasters – they gave me an irrelevant answer, which dodges both these questions:

If the Post Office did indeed receive tax legal advice which indicated that the Postmasters were being put in an unfortunate position, and it did not relay that to unrepresented Postmasters when making them an offer, then that again is a serious breach of SRA Rules and Principles.

What should happen now?

The HSS compensation scheme isn’t fit for purpose, and has become just one more entry in the sordid list of Post Office failures and obfuscations.

Ideally, it would be replaced, but it’s too late for that – out of 2,400 original applications only 23 are awaiting offers, and 200-300 have pending offers. Time is running out for many of the postmasters, and we can’t have more months and years of delay.

So I would let the scheme let it run its course, but establish a quango empowered to review every single Post Office compensation payment, from all the different schemes/settlements, and make whatever additional payments to the postmasters as it thinks is fair and just under all the circumstances. The usual paradigm of legal claims would be replaced with an informal inquisitorial process. It would, of course, be funded by the Post Office (although the Post Office is insolvent, and so ultimately every £ would come from the Government).

And what about the individuals responsible?

It remains to be seen whether individuals will be held to account for having destroyed thousands of lives.

When Sir Wyn’s Inquiry is complete, and his findings published, I hope prosecutions follow against key individuals for perjury and/or perverting the course of justice.

I also hope we see Solicitors Regulation Authority proceedings against the Post Office’s internal and external lawyers. That means the lawyers involved in the original prosecutions, and the lawyers involved in sustaining meritless litigation for years (including those making a hopeless recusal application which they must have known would fail, and was no more than a cynical delaying tactic).

It should also mean SRA proceedings against those lawyers who constructed a compensation process which has the effect of taking advantage of vulnerable people who the Post Office knew were not legally advised.

The compensation process itself is a scandal, and there should be consequences for those involved.

Thanks to Anthony Armitage for his expertise on the SRA Standards, to P and F for their input on the tort law elements of the above, and all the postmasters who have contacted me with their practical experience of the HSS process. And thanks to Tom Witherow and the Daily Mail for their original story which inspired/infuriated me to look into the Post Office scandal in more detail. Finally to the Times, for ensuring that the continuing horrors of the Post Office scandal are making regular headlines.
Footnotes
1. See below, and the Post Office’s response to allegation number 2 ↩︎
2. I have previously written that this was between 2000 and 2013, but I have now spoken to postmasters who faced false allegations of theft as late as 2017 ↩︎
3. Although important people at the Post Office surely knew well before 2013, albeit that the details of “who knew what when” remain unclear ↩︎
4. The HSS scheme doesn’t cover the postmasters who were wrongly convicted, or the 555 postmasters who claimed under the group litigation order (GLO) – these two groups overlap, but there are likely others who haven’t claimed under any scheme. So the total number of affected postmasters is unknown, but certainly over 3,000 ↩︎
5. The source for this is that, as of 4 April, 1,924 settlements had been entered into, of which the Post Office had covered legal fees of only 198 (see our FOIA correspondence, linked here). Given the age and limited resources of most of the postmasters, it is reasonable to take from these figures that around 90% of the postmasters had no legal representation. ↩︎
6. See the helpful summary set out by Warby J in Barron v Vines, paragraph 21. ↩︎
7. Apparently the Post Office pays £400 for small claims and £1,200 for larger claims. ↩︎
8. They’re refusing to provide me with that advice; given the overriding public interest, I will be appealing ↩︎
Comment Policy

This website has benefited from some amazingly insightful comments, some of which have materially advanced our work. Comments are open, but we are really looking for comments which advance the debate – e.g. by specific criticisms, additions, or comments on the article (particularly technical tax comments, or comments from people with practical experience in the area). I love reading emails thanking us for our work, but I will delete those when they’re comments – it’s better if the discussion is focussed on the key technical and policy issues. I will also delete comments which are purely political in nature.
3 June 2023
The terrible argument that won’t die: “inheritance tax is double taxation”
Here’s Jacob Rees-Mogg in Wednesda y ‘s Telegraph:

We hear this a lot. But it’s a terrible argument:

We pay tax on already-taxed assets all the time

Literally every day:
- I just bought a kebab. 20% VAT. I paid for it out of taxed income. Double tax. And this applies to almost everything I spend money on.
- I bought petrol yesterday out of taxed income. I paid fuel duty, and VAT on the fuel duty. Triple tax.
- Same with alcohol – VAT is paid on top of the alcohol duty. Triple tax again.
- I pay the salary for my assistant¹ out of my own taxed income. He buys petrol for his car. My income tax, his income tax, his fuel duty, VAT. Quadruple tax.
And so on and so on.²

The point is: there is no principle that we don’t pay tax on already-taxed assets. There never could be such a principle.

In practice, most of the time, the main inherited asset hasn’t been taxed at all

House price growth over the last 40 years means that most of the wealth of the “boomer” generation is in inflated house prices – and that rise in house prices was mostly untaxed.

That’s the same generation whose estates (if over £1m) are going to be paying most of the inheritance tax for the next 20 years.

So likely a majority of the estate value subject to inheritance tax will never have been taxed before. No double tax.

Dead people don’t pay tax

Let’s accept two unlikely premises for the moment. It’s unfair to pay tax twice, and the assets subject to inheritance tax were already taxed.

But the critical point: they were taxed in the hands of someone who just died. The burden of inheritance tax isn’t paid by a dead person – how could it be? – but by whoever is inheriting.³ They get the asset for free, and most certainly didn’t pay tax on the asset before.

So there is no double tax at all, even conceptually.

Tentative conclusion

We double and triple tax all the time. This isn’t an example of double taxation. This is a terrible argument. Please stop making it.
Footnotes
1. Who does not exist ↩︎
2. I’d be grateful to anyone who can find an example of quadruple tax involving only one person ↩︎
3. The estate legally pays, but who legally pays is economically almost irrelevant. The question is: who economically carries the cost of the tax? It can’t be the dead person, because they are dead. The tax reduces the inheritance for the beneficiaries. So obviously it is the beneficiaries, the inheritors of the estate, who bear the economic cost of the tax ↩︎
3 June 2023
How the Post Office gagged postmasters with false confidentiality claims
The Post Office is finally paying compensation to the thousands of postmasters who it falsely accused of theft in the 2000s. 90% of these postmasters don’t have legal representation, and many believe they were pushed into accepting settlement offers that were insultingly low.

We can reveal that the Post Office falsely asserted that its settlement offers were confidential. They weren’t. But that falsehood intimidated postmasters into not comparing offers with each other, not speaking to friends and family, and not going public. 90% never even spoke to a lawyer.

The Times has the story here.

UPDATE: 30 March 2024 – after pressure from the SRA, the Post Office has now stopped this practice, but it’s too late. See our report here.

The background

Between 2000 and 2013, the Post Office falsely accused thousands of postmasters of theft. Some went to prison. Many had their assets seized and their reputations shredded. Marriages and livelihoods were destroyed, and at least 61 have now died, never receiving an apology or recompense.

The Post Office is finally paying compensation to its victims. Under the “Historic Shortfall Scheme” (HSS) it’s paying compensation to about 2,500 postmasters.¹

The intimidation

90% of postmasters receiving HSS payments weren’t legally represented.² Many were unhappy with the compensation they were offered. I couldn’t understand how this had happened – why didn’t more postmasters obtain legal advice? Why weren’t there more press stories about the derisory compensation they were receiving?

The shocking answer is that each postmaster receiving an HSS offer was warned by the Post Office not to mention the compensation terms to anyone. This had consequences. They weren’t able to compare compensation terms with each other. They weren’t able to speak to family or friends (who might have suggested they speak to a lawyer). And they weren’t able to go public about the way they were being treated.

This was the key paragraph in each of the offers:

The assertion of confidentiality is false and misleading as a matter of law. “Without prejudice” is a common law doctrine that prevents statements made in settlement discussions from being adduced as evidence in court. It’s a form of legal privilege, and not a rule of confidentiality.³

It’s very unusual for a defendant to a claim of this kind to attempt to unilaterally impose confidentiality on claimants. Settlement offers aren’t usually stated to be confidential at all. Final settlements, on the other hand, often are confidential⁴, but that is typically achieved by a separately negotiated confidentiality agreement, not just an assertion by one party. There would usually be a list of people to whom disclosure could be made (such as family members, lawyers and insurers). Two experienced defendant tort barristers have told they would personally be uncomfortable negotiating a confidentiality agreement if the claimant was unrepresented. So the behaviour of the Post Office is as unusual as it is troubling.

In reality, there was never anything to stop recipients of the HSS offers from sharing them with other postmasters, friends, or journalists, and nothing to stop the journalists then publishing the terms (although it would be advisable to redact identifying details, to prevent any future court from seeing publication as an attempt to circumvent the “without prejudice” rule). The Post Office’s lawyers should have known this.

The attempt by the Post Office to intimidate postmasters into silence was shameful. It’s also a breach of professional ethics by the lawyers involved – the in-house lawyers at the Post Office, and also their external lawyers, Herbert Smith, if they were involved (it’s not clear if they were). That breach is all the more serious given that the lawyers knew that the vast majority of the recipients of these letters would be unrepresented.

The Post Office’s response

I put the above to the Post Office and received this response:

“Whilst we do not agree with your conclusions, we do not believe it’s appropriate to enter into legal argument exchanges in responses for an article.”

I am not sure what this means. I pressed the Post Office to specifically confirm if they still thought the offer letters had been confidential, and that they had acted appropriately. I wasn’t able to obtain an answer.

I also wrote to Herbert Smith; they acknowledged my email but have not responded.

What happens next?

The Post Office should immediately write to everyone who’s received an offer in these terms, correcting their false statement, and making clear that postmasters are free to disclose the terms of the offer and, where they’ve reached one, their settlement.

Given that the false statement disadvantaged the postmasters, all HSS settlements should be reopened.

In the meantime, I’ve written to the Solicitors Regulation Authority asking them to investigate the Post Office’s in-house legal team, and look into whether its external lawyers, Herbert Smith, were involved. My letter is here.

Many thanks to Christopher Head and the other postmasters who’ve spoken to me, and shared details of their experiences. Thanks also to B and K for their assistance on the law of confidence and the nature of “without prejudice”, and C and X for their comments on the usual approach to confidentiality in settlements of this kind. And thanks to Tom Witherow at The Times.

Photo by Kristina Flour on Unsplash
Footnotes
1. The HSS scheme doesn’t cover the postmasters who were wrongly convicted, or the 555 postmasters who claimed under the group litigation order (GLO) – these two groups overlap, but there are likely others who haven’t claimed under any scheme. So the total number of affected postmasters is unknown, but certainly over 3,000 ↩︎
2. As of 4 April, 1,924 settlements had been entered into. The Post Office agrees to cover limited legal fees for postmasters receiving offers, but as of that date the Post Office had covered legal fees of only 198 (see our FOIA correspondence, linked here). Given the age and limited resources of most of the postmasters, it is reasonable to take from these figures that around 90% of the postmasters had no legal representation. ↩︎
3. This is somewhat reminiscent of my experience of receiving threats of dire consequences if I published “without prejudice” correspondence. In my case the correspondence wasn’t even properly “without prejudice”; in this case, it is. But what both cases have in common is an abuse of the “without prejudice doctrine” in order to silence somebody. ↩︎
4. sometimes improperly ↩︎
Comment Policy

This website has benefited from some amazingly insightful comments, some of which have materially advanced our work. Comments are open, but we are really looking for comments which advance the debate – e.g. by specific criticisms, additions, or comments on the article (particularly technical comments, or comments from people with practical experience in the area). I love reading emails thanking us for our work, but I will delete those when they’re comments – it’s better if the discussion is focussed on the key technical and policy issues. I will also delete comments which are political in nature.
30 May 2023
Widespread promotion of school fee tax avoidance schemes
We wrote last week about a school fee tax avoidance scheme, promoted by Signature Tax (the tax boutique owned by the SNP’s new auditors). We’ve since been deluged with reports of other promoters pushing the same scheme. We’ve reported Signature and three other firms to their regulators. More below about who the promoters are, and how they can be stopped.

UPDATE: HMRC have now issued a “Spotlight” stating that HMRC also believe the schemes don’t work, and warning people off them

The rule they’re trying to avoid

An obvious wheeze is for wealthy parents to gift a valuable asset (say, shares) to their children. Then dividends on the shares are taxed at the children’s much lower tax rate – potentially saving ££££. Parents with three children at an expensive private school could save more than £60k of tax per year.

The wheeze is so obvious that there’s a rule stopping it. It’s worth stepping through the legislation, because I think it demonstrates to non-specialists just how straightforward the point is:

“relevant child” is defined to mean a child under 18:

And “settlement” and settlor are defined extremely widely:

Looking at the legislation, here are some things that are fine:
- Grandparent or Aunt gives valuable shares to a child. The child pays tax on the dividends at a much lower rate, and there’s a big tax saving. Permitted by the rules and entirely proper.
- Rather than giving the shares to the child, Grandad/Auntie declares a trust. They may in fact need to do this, because minors can’t hold shares. Permitted by the rules and entirely proper, and if it’s a simple or “bare” trust then the tax result is the same as if the child owned the shares.
- The grandparents have their own company. They issue shares to the children (via a trust) to fund their education. Now you might think this shouldn’t be permitted, but it is – and realistically it’s the same as the previous two examples, just using the grandparents’ own company.
And here are some things that don’t work:
- Parents give valuable shares to their children. That’s a settlement within s620, and the parent is taxed on the income.
- Parents give valuable shares to Granny, and Granny gives the shares to the children. That’s an “indirect” settlement within s620(3)(a) and/or a “reciprocal arrangement” within s620(3)(c). The parent is still taxed on the income. And if those involved hide the connection between the gift to Granny, and her gift to the children, it’s not just failed tax planning – it’s criminal tax evasion.
- Parents have their own company. It issues valuable shares to Granny/Uncle/whoever for free (or almost free), and Granny/whoever declares a trust in favour of the children. Well, that’s exactly the same as the previous example. It doesn’t work, and if it’s hidden from HMRC then we’re getting into criminal territory. But that’s the structure that some promoters are pushing.
I think most people (specialists or laypeople) reading the legislation above would see immediately that the scheme doesn’t work. There’s even HMRC guidance almost directly on point:

The Signature scheme

Here’s a presentation kindly provided by an outfit called Fortus, in a webinar on their website ¹. It’s the same as the Signature scheme. It’s also almost exactly the same as the one that HMRC guidance, and common sense, says doesn’t work:². (I’m going to call this the “Signature scheme” just because I came across Signature first.)

So how on earth do Fortus/Signature think the scheme works? Here are a few possibilities:
- It’s completely kosher, because the grandparents/trust is paying full value for the B shares, and so there is no “indirect” settlement by the parents. The problem is that this isn’t plausible. If the grandparents had the necessary £££ to hand, they’d just be making a gift³ directly to the children, and wouldn’t need to involve the parents or their company. It would also be a highly inefficient structure, because instead of the grandparents paying £100k/year, they’d be paying a lump sum equal to the present value of many years’ worth of £100k – approaching a seven-figure sum. I don’t think anyone would do that.
- They don’t bother. The nature of the B shares is never disclosed to HMRC, and they’re just chancing HMRC doesn’t spot what’s going on. Probably they’ll get away with it… but make no mistake, that’s criminal tax fraud.
- They claim the B shares are a genuine investment, with the grandparents/trust paying a few £k. They skate over the fact that the actual value is much higher than that. Again, this feels more like tax fraud.
- They run a series of crap valuation arguments, saying that the limited rights attached to the B shares mean their value is low. That is belied by the fact that they expect the B shares to pay enough dividends to cover school fees. However if everything is fully disclosed to HMRC, and the valuation argument presented, then even though if it’s wrong it’s unlikely to reach the level of criminality.
- The trust/grandparents provide full value for the shares, but it’s funded by the parents in the background. Clearly doesn’t work – and if hidden then again we’re in criminal tax fraud territory.
- There is no dishonesty here – the promoters are just clueless.
I asked Signature and Fortus to comment; neither have responded. I’m making a formal complaint about Signature to the Taxation Disciplinary Board⁴, and to both Signature and Fortus to the Institute of Chartered Accountants in England and Wales (ICAEW).

What are other advisers up to?

Some advisers are promoting arrangements where grandparents gift property, or shares in a family business, to their grandchildren. We can think this is a good or bad thing from a policy perspective. but it’s clearly within the rules. See, for example, theprivateoffice.com, The Money Panel, and RDG Accounting, Henderson Logie and PD Tax Consultants. Each makes clear that it can’t be the parents gifting the property.

But there are other advisers who appear to be either ignorant of the rules, or trying to circumvent the legislation.

Accotax fail badly:

… as they appear to be entirely unaware that parents can’t get a tax benefit from gifting shares in their company to their child.

By contrast, TaxQube are aware of the issue, but say they have a “special structure” to fix it:

When I suggested that sounded like the Signature scheme, they responded by amending their website…

… and then making incoherent legal threats, but weirdly failing to explain what their “special structure” was. Absent an explanation, it’s reasonable to assume that their reference to a “special structure” was to the Signature scheme, or something like it.

Walji & Co propose something…

… that looks like the Signature scheme.

SFIA Wealth Management seems even worse than Signature…

… they’re either ignorant of the “indirect” rule or promoting tax evasion.

I understand from a source that SFIA charges £1,000 to taxpayers just to provide a report proposing their structure (which I assume is going to be similar to Fortus/Signature), then £7,000 for implementation. Apparently SFIA aren’t too keen on clients taking independent advice – I’d suggest it’s fairly obvious why.

I’ve referred Accotax and Walji & Co to the ICAEW, and will be referring Tax Qube to the ACCA, and SFIA Wealth Management to the FCA. I’ll refer more promoters as further reports come in.

The cost of the schemes

These schemes have two massive costs:
- First, to taxpayers who get caught up in them, and end up being challenged by HMRC, and paying the tax back, plus interest and very possibly penalties.
- Second, to all of us, as tax revenue is lost to the schemes that (inevitably) HMRC miss⁵.
So its in all of our interests that the schemes are stopped.

Stopping the schemes

I’m referring the advisers involved to HMRC, but this is just scratching the surface. Safe to assume that for every adviser foolish enough to explain their duff scheme on the internet, there are dozens who promote schemes in the shadows.

Ultimately only HMRC can stop this, by publicly calling out the schemes, saying they don’t work, and using its array of new powers to challenge the people who promote them.

Will they?
Footnotes
1. (c) Fortus, but there is an obvious public interest and fair dealing justification in making a copy publicly available ↩︎
2. Actually the scheme in HMRC’s example is less terrible, because the company is new and so there is at least an argument the shares have no value when granted. The Fortus and Signature schemes involve pre-existing companies where the shares are clearly valuable ↩︎
3. or declare a trust ↩︎
4. Because Signature promote themselves as a member of the Chartered Institute of Taxation ↩︎
5. Why do they miss schemes? In part because no bureaucracy is perfect. In part because some of the schemes involve non-disclosure to HMRC of key elements, and whilst that doesn’t help the technical analysis – and creates jeopardy of criminal tax evasion – it means that HMRC may not spot what’s going on ↩︎
21 May 2023
The SNP’s new auditors are flogging a dodgy tax avoidance scheme, and may face a £1m HMRC penalty
The Scottish National Party just appointed AMS Accounting as their auditors. AMS have a tax boutique, Signature, as part of their corporate group, providing “education and school fees planning”. This “planning” turns out to be a tax avoidance scheme for parents paying school fees.

Signature‘s marketing suggests a “huge annual saving”, and we reckon a family with three children could avoid £60k of tax per year. However, we’ve analysed the scheme, and believe it to be technically hopeless – HMRC will inevitably challenge it, and likely win, leaving Signature’s clients in a disastrous tax position. Worse still, Signature appears to have unlawfully failed to disclose the scheme to HMRC, which could trigger a £1m penalty

This short report summarises the Signature scheme, how it’s supposed to work, why it fails, and the wider implications. The Guardian is covering the story here.

FURTHER UPDATE: HMRC have published a “Spotlight” confirming that they believe these schemes don’t work. Hopefully that’s the end of them.

UPDATE: I’m hearing that the scheme is being widely promoted. One such promoter, Fortus, took down the relevant page off their website earlier today, but left a copy of their webinar, which we have archived here ¹, with some nice slides demonstrating what looks like exactly the same structure:

How the scheme works

The basic scenario is this:
- I’m a successful businessman, running my business through a company and receiving most of my income through dividends on ordinary shares, on which I’m taxed at 39.35%.
- I send my three children to an expensive independent school. This costs about £100k a year for the three kids². But, naturally, I pay it out of my post-tax income – so I have to extract £164k of dividends to be able to afford the school fees. Frankly I’d rather save that £64k and pay the fees out of my pre-tax income.
- So I get my brother (or grandparent) to subscribe for some shares in the company – not ordinary shares, but rather strange “B” shares. He pays say £1,000. The B shares don’t get a normal dividend in the way my ordinary shares do. And the B shares only have one voting right – to vote a special dividend on the B shares, capped at £106,000 per year.
- The brother then immediately declares a trust over the B shares in favour of my three children.
- When school fees fall due, my kind brother votes for a B share dividend. The trust gets £106k.
- As the beneficiaries of the trust, my kids have to pay tax on the B share dividends. How much? Assuming they have no other income, they each have a £12,570 personal allowance, a £1,000 dividend allowance, and pay basic rate dividend tax at 8.75% on the rest. So each of the three kids pays just under £2k in tax, and the trust uses the remaining £100k to pay the school fees.
- And as if by magic, the school fees no longer cost me £164k in ordinary share dividends, but just £106k in B share dividends. Almost £60k of tax avoided, by magically shifting income from me (who pays a high tax rate) to my kids (who don’t).
The Signature Group³ promoted the scheme here, until the Guardian contacted them on Friday – that page has now mysteriously lost most of its content.⁴. Some of the summary above is taken from these pages, and some is from a reliable source who is familiar with the scheme. Notably, Signature’s website gives the impression that the brother/grandparent is making a real investment into the company – but (for reasons below) that investment will in reality always be a token sum (£1,000 in my example), and out of all proportion to the school fees that will be paid.

How the scheme fails

Connoisseurs of tax planning will spot that, conceptually, the structure is similar to the Zahawi scheme. A person (the parent/Zahawi) is claiming that valuable shares were acquired by someone else (the brother/Zahawi’s father) who pays no/low tax, when in reality it’s the parent/Zahawi who still benefits from the shares, and the brother/father paid little/nothing for them.

It’s not a coincidence. There are really only a handful of different ways to avoid tax, and this one is “pretend that someone else holds something valuable you don’t want to be taxed on, but then still actually own it”.

Like the Zahawi scheme, it doesn’t work – and for the same fundamental reason: there’s a lie at its heart – the shares are acquired for much less than their true value. The B shares are worth a lot of money – broadly the present value of all the future school fees (which could approach a seven-figure sum). But my brother is acquiring them for £1,000.⁵

When things are done for horribly wrong valuations then, as a rule, the tax will go horribly wrong.

But hang on – am I being unfair? How am I so confident that the uncle isn’t really paying full value for the B shares? Because, if he could really afford to pay all the school fees, then he’d just pay the school fees (or, if he’s that way inclined, create a trust to pay the school fees). The whole palaver with the B shares is required because he can’t. It would be madness for my brother to actually pay the £1m (or whatever) for the B shares up-front, and I don’t think anyone would do that.⁶

The undervalue is both essential to the structure and what dooms the structure.

How exactly would HMRC attack the arrangement? Let me count some of the ways⁷:
- Apply the specific anti-avoidance rules created for this kind of scenario. The “settlor interested trust” rules ⁸ apply if someone establishes a trust for which they (the “settlor”), their spouse, or their minor children benefit. The effect is that the trust income is taxable in the hands of the settlor (so back to 39.35% tax). The Signature structure attempts to circumvent this by saying that the trust was established by the brother and not the parent, and that the parent has no control over the trust property.⁹ The answer to that is: come off it. The true “settlor” is the parent, because in permitting the issuance of the B shares, he is causing a large amount of value to move from his company to his children – i.e. because his ordinary shares are worth less than they were. And the legislation expressly covers scenarios where settlements are made indirectly.
- Use common sense (or “common law anti-avoidance doctrines“, if you prefer). Realistically the overall effect of the arrangement is that I, the parent, am paying the school fees. Nothing has changed. There is no tax benefit.
- If (as is likely) the parent masterminding the scheme is a director of the company issuing the B shares, then the “securities with artificially enhanced value” rules may apply (see the “alphabet soup” example here – and the fact the uncle isn’t himself an employee won’t stop the rules applying).
- The “value shifting” rules may apply, given that value is being artificially shifted from the parent’s company to the uncle/children.
- The “transactions in securities” rules might possibly apply.¹⁰
- There may also be legal/implementation problems with the structure, depending on how precisely it is carried out. Who is legally paying the school fees here? Does the uncle sign the contract with the school in his capacity as trustee, so that the fees become an expense of the trust? If so, that means 100% of the trust’s assets are applied for expenses, and none going to the beneficiaries – and that may call into question its nature as a bare trust. Or, alternatively, is the trustee paying the fees on behalf of the children? But I rather doubt they sign the contract with the school. Many tax avoidance schemes fall apart on this kind of point, with no need to even consider the underlying tax issues.
- If implementation is really shoddy, the arrangement might be regarded as a “sham”. The definition of the term is much narrower than a non-tax specialist might expect, but the worst tax avoidance schemes do sometimes fall within it.
- HMRC may not bother actually arguing any of these points before a Tribunal, and instead apply the General Anti-Abuse Rule. The GAAR only applies to the most heinous structures – ones which “cannot reasonably be regarded as a reasonable course of action”. There is a good chance this structure falls into that category – in which case all the technicalities are irrelevant, and the structure just fails. Given the potential 60% penalty when a structure is GAAR’d, a wise taxpayer would probably fold the second HMRC start muttering about approaching the GAAR Advisory Panel.
- And a potential bonus for HMRC: if they can successfully argue the trust is a settlement for inheritance tax purposes, and not a bare trust, then they get to collect up-front IHT equal to 20% of the value of the property put into trust (after the nil rate band) – in addition to denying the original tax benefit. That could be a significant sum. If you play stupid games with the tax system, you can’t complain if you end up with a stupidly unfair result.
- And the kicker – the scheme ultimately falls apart because the uncle is paying tuppence for shares that are very valuable. If tax returns are submitted on the basis that the shares are really worth tuppence, then we could be approaching tax fraud territory.
In short, the scheme is technically hopeless. I don’t think any reasonable adviser would disagree with that conclusion – the acquisition of the B shares at an undervalue is a fatal flaw. The biggest challenge for HMRC would be working out which of the 57 potential lines of attack they would run.

That would leave the parents in a fairly awful tax position, facing an HMRC investigation, and almost certainly having to repay the tax, plus possibly additional random taxes, plus interest and likely penalties.

And if any school was foolish enough to facilitate the structure, they could well be an enabling participant, potentially liable for a penalty equal to 100% of the fees received from the structure.

To be clear, we’re not talking about technical flaws in the scheme – it’s improper. Signature and AMS should be ashamed.

Signature’s defence

The Guardian approached AMS for comment, setting out what we thought their scheme was, and telling them that Tax Policy Associates thought it didn’t work. AMS responded with this:

Signature Group is an award-winning mid-market advisory firm. The tax division (Signature Tax) has been recognised as providing excellent service in the sector and boasts an exceptional team of chartered tax advisers, lawyers and chartered accountants.

Signature Tax has a strict tax compliance and risk policy which refrains from any form of aggressive tax planning that could be deemed ‘disclosable’ to HMRC or construed as a ‘tax avoidance scheme’. The tax division has been trading successfully for over a decade and has built a fantastic reputation in the market.

We continue to build on our reputation and presence in the mid-market and continue to deliver exceptional growth year-on-year. Our most recent acquisitions include one of the largest teams of HMRC Dispute and Investigations specialists in the UK, which continually helps us to build on our existing fantastic relationship with HMRC.

At about the same time they put out this statement, they updated their website to remove the obvious “avoidancy” elements from the scheme. Here’s the before and after, and my markup showing the changes:¹¹

I take two things from all this. First, they’re not denying that we have the details of the scheme correct, they’re just running away from it. Second, they’ve accidentally admitted they’ve broken the law, and potentially face a £1m penalty.

The accidental admission

Most tax avoidance schemes are required to be disclosed to HMRC under the “DOTAS” rules. The idea is that a promoter who comes up with a scheme has to disclose it to HMRC. HMRC will then give them a “scheme reference number”, which they have to give to clients, and those clients have to put on their tax return. It’s the tax equivalent of putting a “kick me” sign on your back, because the inevitable HMRC response will be to challenge the scheme and pursue the taxpayers for the tax.

In this case, my opinion, and that of other leading barristers, solicitors and tax accountants I’ve spoken to, is that the scheme is clearly disclosable. It gives the parent a tax advantage; that’s the main benefit of the scheme (indeed the only benefit); and it has the “hallmark” of using a “financial product” (the shares) which have unusual terms that only exist because of the tax advantage.¹²

However, AMS’s statement above amounts to a confession that they did not disclose.

So, from the information I have, and from their own statement, it’s my opinion that Signature have probably broken the law and unlawfully failed to disclose the scheme to HMRC. That can result in a penalty of up to £1m, and that’s a power which HMRC have started to use.

The role of tax KCs

At some point I expect Signature will say they’ve a KC opinion that the structure works, and that it wasn’t disclosable. If so, I’d bet that (1) they approached several KCs before finding one silly enough to provide an opinion, and (2) the opinion is based on factual assumptions that are evidently false (such as the brother acquiring his shares for market value), and/or (3) the opinion is based on a fringe view of the definition of “tax avoidance” that no court has ever accepted.

I’ll be writing more about dodgy KC opinions soon. It’s almost ten years since an obscure barrister called Jolyon Maugham wrote perceptively about this problem – sadly nothing has changed. Something needs to be done – and I’ve a few suggestions.

What should HMRC be doing?

Three things:
- Put out a Spotlight notice confirming that the scheme is a non-starter, which probably ends all prospect of marketing it.
- Send Signature a formal notice giving them 30 days to demonstrate that the scheme isn’t notifiable under DOTAS.
- Take a closer look at Signature. Chances are, this isn’t the only tax avoidance scheme they’re promoting. Tax avoidance is a bit like adultery – very few people only do it once.
What should taxpayers do?

Don’t do “tax mitigation” schemes other than those promoted by Government, e.g. ISAs and pensions (which aren’t tax avoidance at all).

Unless, perhaps, you have an adviser you deeply trust, who is giving advice specific to you, and they tell you the arrangement doesn’t just work under the letter of the law, but will be accepted as kosher by HMRC (and not tax avoidance) and so won’t be challenged. Failing that, be ready to accept the consequences when/if it all goes wrong.

How should advisers respond to these schemes?

I speak to many accountants who are frustrated that their clients are lured into schemes by promoters. Often they’re able to dissuade their clients from entering into the schemes. Sometimes they’re not. If you’re an adviser and you come across a dubious scheme, please do send it to me – naturally in complete confidence.

Mass-marketed tax avoidance is dead, and the people still flogging the schemes are knaves or fools. The tax profession has a duty to weed these people out.

Many thanks to W for bringing this to my attention, to M and M for their invaluable trust and ERS input, and to Pippa Crerar at the Guardian.
Footnotes
1. (c) Fortus, but there is an obvious public interest and fair dealing justification in making a copy publicly available ↩︎
2. I’m frugal – if the kids were boarding the cost could hit £150k ↩︎
3. Looking at Signature’s Companies House filings, the precise relationship between AMS and Signature appears to have changed over time. AMS describe Signature as part of their group, but legally Signature appears to be some form of joint venture between AMS and Signature’s founder, Ebrahim Sidat. Sidat holds 75 “A” shares and AMS holds 25 “B” shares. Possibly there was a mistake drafting the memorandum and articles, because the A and B shares are defined at the start of the document, but the terms are never used subsequently. So the precise nature of the joint venture is not clear. ↩︎
4. See also the PDF brochure here (still up, but archived here just in case). This reveals some more features of the scheme but hides others ↩︎
5. I gather that in practice the B shares may be split between B1 shares, carrying the dividend right, and B2 shares, carrying the right to vote the dividend. I’m unsure why anyone thinks this makes a difference – perhaps an argument that the B1 shares have no value because they can’t control the dividend, and the B2 shares have no value because they have no economics? The best way to describe such an argument is “courageous”. ↩︎
6. One rubbish solution, which I wouldn’t put past promoters, would be for the uncle to pay the £1m, funded by me making a secret transfer behind the scenes. That clearly wouldn’t work and, if not disclosed to HMRC, is edging over the line into criminal tax fraud. ↩︎
7. This is not a complete list – it’s informed by discussions with three experienced tax advisers with differing backgrounds, and is in rough order of attractiveness for HMRC, but there will almost certainly be other arguments HMRC could run, perhaps many others ↩︎
8. Could be sections 624 or 629 ITTOIA ↩︎
9. Possibly they also try to argue that, because the trust is a “bare trust”, it isn’t a settlement and these rules can’t apply. But the definition of “settlement” for this purpose is much wider than for normal income tax purposes, and will apply to a bare trust. Alternatively, the bare trust may be there to prevent an up-front inheritance tax liability. And the trust may end up not being bare – see below. ↩︎
10. The analysis is quite difficult and a bit of a stretch, but if HMRC were going to throw in the kitchen sink then this probably belongs somewhere at the bottom of the sink. ↩︎
11. Gone are the references to the parent’s net income, the “huge annual saving”, to uncles/aunts, to the parent’s company and, most importantly, to “limited rights” in the shares ensuring “no dilution” for the parent (the key dodgy share value point). So Signature are helpfully drawing our attention to the features of their scheme they regard as most problematic. ↩︎
12. The “standardised tax product” hallmark may also apply, but one is enough. ↩︎
6 May 2023