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  • The outrageous £50m tax scheme that was KC-approved. Part 1: The Scheme.

    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. 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. 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:

    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:

    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. 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:

    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. 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.
    • 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. You can see the text that accompanied the original YouTube video here. ↩︎

    4. 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” ↩︎

    5. By which time the national insurance employment allowance had been increased from £3,000 to £5,000, making the schemes more lucrative ↩︎

    6. 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. ↩︎

    7. 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 ↩︎

  • “GDPR tax credits” – not tax planning, not tax avoidance, just plain fraud

    “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 pitch:

    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:

    An entity shall recognise a provision only when: (a) the entity has an obligation at the reporting date as a result of a past event; (b) it is probable (ie more likely than not) that the entity will be required to transfer economic benefits in settlement; and (c) the amount of the obligation can be estimated reliably.

    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..

    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:

    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 ↩︎

  • Citizenship-based taxation. Should all UK citizens pay tax in the UK, even if they live abroad?

    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) then you are “resident” in the UK, and subject to UK tax on all of your income and gains for that year.

    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. 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.

    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.

    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. ↩︎

  • 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.

    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 data 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.):

    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.

    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 taxpayers in the UK, only about a third (11 million people) are required to submit a self assessment income tax return.

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

    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. 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.

    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. 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 point. 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.

    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. 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 penalties. 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. ↩︎

  • The fintech company secretly enabling a £46m tax avoidance scheme

    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?

    How it Works • Companies advertise their service or product with B2B TradeCard on our platform. The platform is exclusive to thousands of directors and decision makers, all of whom are members. Advertising space is purchased, the company is invoiced accordingly. B2B TradeCard will issue the member with a pre-paid Visa. On this card the member gets 80% of their advertising spend back in loyalty points – B2Bpoints which can be spent anywhere that accepts Visapayments.* • 3% commission is paid to anyone who introduces a customer to B2B TradeCard on the grounds that they sign up and start spending on our advertising platform. Should the member be a monthly spender the introducer will get 3% on every spend the customer makes.

    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:

    B2B Trade Card We are pleased to inform you that we have partnered with the B2B Trade Card, which offers clients a great way of getting money out of your business without paying tax on it. To find out more about this, please contact Richard and we will send you more details of this.

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

    KEY FEATURES & BENEFITS - We can help you access 10% of your Company Turnover through our exclusive B2B Trade-Card platform ​ - We will reward 80% of all spend same day to your personal Pre-Paid Mastercard, 1 point = £1 ​ - Advertising attracts 19% Corporation Tax saving ​ - Net cost to your Company of just 1%, this to release up to 10% of your Company Turnover ​ - Dividend and Corporation Tax saving combined = 40%+

    So, whilst I’m sure much of what B2BTradeCard and their clients do is a standard loyalty card product, 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).
    • 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.. 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. The general view of our team is that this is probably all HMRC need to tax the £8,000.
    • 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?
    • 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.
    • 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.

    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 earnings
    • 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) 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 £2,700), 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.

    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.

    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, 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 forewarned 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:

    Our minimum invoice value is £500 + VAT. The average monthly customer spend is typically £2500-£3000 +VAT per month and average one off spend is usually £10-20K +VAT

    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:

    The Technicalities Payment for the advertising by the company is fully deductible against corporation tax, as advertising is wholly and exclusively for the purpose of trade. Corporation Tax Act 2009, s1290(4)(a) confirm this is not an employee benefit. If HMRC were to argue personal benefit, this is negated by the fact that anybody can join B2B TradeCard and get the same benefit; employment by company is not a necessary antecedent condition (the same as Avios / Air Miles etc) – HMRC EIM21618 is very clear. Not a “contrived scheme” (as per Scotts Atlantic 2015), as advertising is genuine and no duality of purpose – the advertising is genuine advertising to other business owners. HMRC’s EIM 21618 applies – can not be a tax scheme when employee loyalty points work in a way so unambiguously set out in HMRC’s own manual.

    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.
    • 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. 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.
    • 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.
    • 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.
    • 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 ↩︎

  • Global wealth taxes at June 2023​

    Global wealth taxes at June 2023​

  • CRS implementation as at June 2023​

    CRS implementation as at June 2023​

  • So you dislike the OECD global minimum corporate tax? Tough. The UK now has to implement it, or we’ll lose out.

    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.

    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”. They’ve almost 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.
    • 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).

    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:

    What few highlighted at the time was the imbalance in the OECD plan. Sovereign nations were to be banned from taxing larger international firms at a rate of less than 15 per cent – but no such restraint was proposed when it came to subsidies. The approach could be summarised as “tax-cuts bad, taxpayer-funded subsidies good.” This combination is dangerous for Britain. While this country can engineer competitive tax rates, the UK’s size relative to China and America means we can never hope to match them in a subsidy race. It is not going too far to say that the OECD’s radical plan threatens to tilt the world Left-wards, forever.

    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 rules. 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.
    • 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. ↩︎

  • Pillar Two implementation as at June 2023​

    Pillar Two implementation as at June 2023​

  • Don’t (for now) believe anything you read about the revenue impact of charging VAT on private schools

    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.

  • Eight reasons why the Post Office compensation scheme is a scandal

    Eight reasons why the Post Office compensation scheme is a scandal

    I keep going back to this Daily Mail story. And, in particular:

    Mr Duff, now a great-grandfather, had been a postmaster since 1981 and for two decades ran his post office without any problems until the Horizon computer system was installed in his post office shortly after the Millennium. Shortages of up to £400 appeared every week 'draining' his savings and forcing him to take out debt to pay, until he and his wife could borrow no more. The financial difficulties and stress led to the breakdown of his marriage, with Mr Duff's wife telling him she wanted a divorce because he was 'not man enough' to deal with the problems. He declared bankruptcy in 2001 and the post office was sold in a fire sale for £25,000 - a fifth of the asking price. Twenty years later he was offered £330,893 compensation, but a 30-page letter detailed how all but £8,000, awarded for the 'distress' and impact on his personal life, would be taken away.

    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 me 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 2017, 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 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 £32,000

    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:

    A. The Scheme operates on the presumption that a shortfall was caused by a previous version of Horizon or a breach of duty by Post Office, in the absence of evidence to the contrary. On that basis, Post Office is not placing a burden on postmasters to complete the claim form fully where he or she is unable to do so. The Scheme was designed to be straightforward for Postmasters to apply to and to avoid undue burden on them in doing so. Post Office recognises the difficulty for Postmasters and Post Office of availability of records in cases that are very old. Postmasters are not disadvantaged by incomplete applications and the claim is still progressed. If a Postmaster doesn’t complete all the application, for example because of lack of memory or records, there is opportunity, after completing the application, to provide more information they may later remember or find, and Post Office continues in any event to investigate using its own records. An important element of the Scheme is also the Panel’s ability to use a fairness discretion and to take into account any matters and testimony they consider will produce a fair result, as they have done on many occasions. The Scheme’s Guidance states (3.1.2) that: Where the Postmaster is unable to satisfy the burden of proof in relation to their claim, their claim may nonetheless be accepted in whole or in part if the Scheme considers it to be fair in all the circumstances. The process, in outline, for the scheme is: When received, claims are firstly assessed for eligibility, with necessary identity and verification checks carried out. Once an application is accepted either party may write to the other regarding further information. This is in the Scheme Terms of Reference (para 6). The outcome letter to applicants lists the contemporaneous evidence the Independent Advisory Panel assessed and copies of this are provided on request, along with Post Office investigation reports, legal case assessments and a record of Panel assessment and recommendation. If an offer is disputed, the first stage of the dispute resolution process is a good faith meeting, which is to explain the offer to the Postmaster, answer questions and give the Postmaster an opportunity to put forward any additional information or evidence for consideration by the Panel (including for example any losses they believe have not been identified and addressed). If, following the meeting and any reconsideration by Panel in light of further evidence, the Postmaster remains unhappy with the offer made, they can choose to move to a dispute escalation meeting with POL and, if that doesn't resolve matters, they can then elect to go to mediation. The dispute resolution process may result in re-assessment by the Independent Advisory Panel and revised offers being made - there are examples of this. The Scheme provides for interim payments and Postmasters who have received an offer but wish to dispute it are offered an interim payment of up to 80% of the offer. In relation to disputes which are not resolved at or as a result of any mediation the Scheme’s Terms of Reference provides the next steps (8.7 and 8.7.1) which include arbitration.

    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.

    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.

    A. The Scheme was designed so that it is straightforward to apply to (see above answer). There is a significant degree of expertise built into the Scheme - the Independent Advisory Panel consists of legal, forensic accounting and retail experts. Where the panel considers it requires expert assessment in order to make a recommendation it may recommend to Post Office that such assessment is obtained at Post Office’s cost (para 2 of the ToRs of the Independent Advisory Panel) and there are examples of it doing so. If the Postmaster has concerns about the settlement offer, the dispute resolution process provides the opportunity to raise these, the first stage being a good faith meeting. There are examples of revised offers being made as a result of the dispute resolution process and Post Office pays reasonable legal/accountancy and other professional fees for Postmasters. Each case is unique, and the facts, circumstances and size of claims varies significantly. As Post Office reported to the Inquiry last year the claims to the Scheme have ranged from £15.75 to several million pounds with a full range in between. More straightforward claims were naturally generally completed more quickly through the Scheme (because of the presumption in relation to Horizon shortfalls and Post Office breach of duty); other claims have involved more complex issues (as reported to the Inquiry on 27 April, of 2417 eligible applications there is a total of 63 cases in which bankruptcy is an issue for example).

    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.

    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:

    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.

    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:

    A. Post Office is committed to full, fair and final compensation. See above answers regarding the principle of fairness. As stated in the guidance and unlike civil litigation: Where the Postmaster is unable to satisfy the burden of proof in relation to their claim, their claim may nonetheless be accepted in whole or in part if the Scheme considers it to be fair in all the circumstances. For example, where there is clear evidence that a Postmaster was suspended or his/her contract ended for non-Horizon related reasons the Independent Advisory Panel may recommend against awarding damages for some elements of the claim but when the evidence is unclear the Panel can exercise its fairness principle and recommend the relevant compensation is paid.

    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).

    £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..

    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:

    A. The Department for Business and Trade provided background to the Inquiry at the 27 April hearing about the evolution of the Historical Shortfall Scheme and the tax issue (see below). At that hearing Post Office welcomed the Department’s indication that it will support Post Office with funding to make additional payments to Postmasters in the Scheme to ensure that their compensation is not unduly lost to tax. What we are seeking to achieve is that no Postmaster suffers as a result of the tax treatment, and we await formal advice from Government. From para 24 in the transcript, Mr Chapman for DBT: “ Now, at the time that the HSS was set up and, as you know and as we've discussed at previous compensation hearings, it was set up on the assumption, an assumption which turned out to be incorrect -- that a relatively small number of applications would be made and that that relatively small number of applications would be to a relatively small value. That has proved not to be the case, but that assumption has affected the way in which the taxation consequences were understood. Now, the Department recognises that, because of that, there is potential unfairness to those within the HSS of a non-exemption for tax and it has looked, together with HMRC and the Treasury, at the possibility of exempting payments within the HSS from tax, in the same way as the other scheme. The problem -- and that is a suggestion that you yourself made, sir, in a previous hearing the essential problem with that is that a number, a large number, of payments have already been made and in order to -- if those payments were retrospectively to be exempted from tax, it would make the -- or place the recipients of those payments in a substantially advantageous position, as compared to recipients of payments under the other schemes. As is clear, as I've made clear previously, and as I'll go on to make clear, one of the Department’s objectives is to ensure reasonable parity as between the different schemes.”

    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.

  • The terrible argument that won’t die: “inheritance tax is double taxation”

    The terrible argument that won’t die: “inheritance tax is double taxation”

    Here’s Jacob Rees-Mogg in Wednesday‘s Telegraph:

    Former business secretary Jacob Rees Mogg said inheritance tax raised only a “modest amount” for the Treasury and should be scrapped. The taxman collected £7.1bn in inheritance tax last year. He said: “Death duties are an inefficient form of taxation that is unfair and economically damaging. Unfair because it is a double tax on already taxed assets.

    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 assistant 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.

    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. 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 ↩︎

  • How the Post Office gagged postmasters with false confidentiality claims

    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.

    The intimidation

    90% of postmasters receiving HSS payments weren’t legally represented. 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:

    You will see that we have marked this letter "without prejudice". This means that the terms and details of the Offer are confidential and, unless we both agree, cannot be shown to a court or to others unless for a legitimate reason and on confidential terms - for example, you can take advice from a solicitor about this Offer and we can share it with our Associates.

    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.

    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 confidential, 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.

  • Widespread promotion of school fee tax avoidance schemes

    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. 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:. (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 gift 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 Board, 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 miss.

    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 ↩︎

  • The SNP’s new auditors are flogging a dodgy tax avoidance scheme, and may face a £1m HMRC penalty

    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, 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 kids. 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 Group promoted the scheme here, until the Guardian contacted them on Friday – that page has now mysteriously lost most of its content.. 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.

    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.

    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 ways:

    • Apply the specific anti-avoidance rules created for this kind of scenario. The “settlor interested trust” rules 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. 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.
    • 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:

    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.

    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. ↩︎

  • Why the Left struggles with tax policy

    Why the Left struggles with tax policy

    There’s a problem with a lot of Left-wing tax advocacy: it identifies a political challenge, and proposes a policy aimed at solving it. But the authors believe so strongly in the policy’s righteousness that all of their time and focus is spent on advocacy, and none on analysis. They don’t speak to outside experts, don’t think about incentives and consequences, and only look at data to find support for the proposal. It’s “policy-based evidence-making”… and ultimately it doesn’t help anybody.

    It would be invidious to pick on one example – but I’m going to do that anyway.

    Here’s a proposal out today from the European Greens..

    It’s a perfect illustration of my point, because of the way it jumps from identifying a political problem to a solution, without any attempt at considering how that solution would play out. And in reality, the proposal would be a disaster – in the very year the Greens pick as their exemplar, it would have cost governments billions of Euro in tax revenue.

    The policy challenge

    Here’s how the Greens start:

    GIVE THE BILLIONS TO THE MILLIONS THE EU URGENTLY NEEDS A TAX ON CAPITAL GAINS Capital gains are one of the main sources of inequality in our economy and they go largely untaxed. But what are they? Who makes them? And why is taxing them a key tool in the fight for economic justice? Hopefully in the next paragraphs we will be able to give you an insight into the topic and by the time you finish reading, you will be ready to join us in the fight for a tax on capital gains in Europe. So what are capital gains and why do they matter? A capital gain is the profit someone makes when the value of something they own increases in comparison to what they initially bought it for. There are realised and unrealised capital gains, this depends on whether you have sold your asset and got the money for the extra value (realised) or if you are still holding on to the asset while its value increases (unrealised). So, for example, someone who buys several houses and sees their value increase from the original price of €200,000 to €500,000 is experiencing an unrealised capital gain of €300,000. If and when they sell the houses for the new price, they will have a realised capital gain of €300,000 per house. The interesting thing about these capital gains is that they can be higher than someone’s yearly salary, and while a worker’s salary comes with an income tax that they pay every month, taxes on capital gains are much lower. So while a worker earning €30,000 as their yearly gross salary will pay on average 39% in taxes and social security, the person who made €300,000 in profit from selling a house will barely pay any taxes for that profit, on average 19% in the EU but with the exemptions and the loopholes, it could be as little as 0%.

    We can agree or disagree with this, but it’s undoubtedly a valid position to hold.

    The conventional policy answer would be: tax capital gains at a broadly equivalent rate to labour income. That’s justified on grounds of vertical equity (the rich should pay tax at the same rate as the poor), horizontal equity (rich people making capital gains should pay tax at the same rate as rich people receiving large bonuses), and anti-avoidance (because otherwise people convert income into capital gains to achieve a lower rate).

    But the Greens take a different approach.

    The proposal

    This is why as Greens/EFA we ask the European Commission to establish a real and minimum tax on capital gains in the EU. This tax would affect both the realised and unrealised capital gains of listed shares, meaning it would apply to the shares of publicly owned multinationals. We have said it time and time again, the richest households make the majority of their wealth out of the capital gains from financial assets like shares. Our proposal is simple and works on a basic rule of thumb. Labour cannot continue being taxed higher than capital. The 90% cannot be paying while the richest profit. We want to bring forward a minimum tax of 40% on capital gains.

    In other words: a 40% minimum tax on capital gains, and for listed shares it would be on gains whether realised or unrealised.

    To be clear, if I buy €1,000 of shares today, and sell them next year for €2,000, then that’s obviously a €1,000 capital gain on which I’d pay tax (at a minimum of 40%). But even if I don’t sell them next year, if they’re worth €2,000 then I’d pay capital gains tax on my unrealised €1,000 gain.

    There are very few countries that tax unrealised capital gains. Many people find the idea counterintuitive or unfair, but it’s supported by many economists on the basis that an unrealised gain is just as “real” as income or a realised gain. Tax specialists tend to be more cautious, worrying about the difficulty of valuing property, and the practical problems that will arise from paying out refunds when people have unrealised capital losses.

    Reasonable people can certainly differ, and the Greens are absolutely not being unreasonable in seeking to tax unrealised capital gains.

    Reasonable people can also disagree with a blanket 40% rate. Better to track the rate of tax on income (or, more sensibly, dividends). If capital gains is taxed at a higher rate than dividends then people will take dividends instead; if it’s lower (as is generally the case now), they’ll manufacture gains instead of taking dividends. The solution is surely to unify the rate, not to pick 40%.

    These are not my point. There are two much bigger issues.

    Fudging the data

    You’d expect any credible tax policy proposal to be accompanied by some figures – ideally an estimate of the revenue consequences.

    Here’s what the Greens give us:

    There are two massive problems with this.

    First, the detail is all wrong, because only a small percentage of the shareholders of these four companies will be taxed by the proposal:

    • any EU proposal is obviously only going to tax the capital gains of EU citizens. What percentage of these four companies’ shareholdings is held by EU citizens? I expect not much. Most of the shareholders will be outside the EU (certainly BP and Exxon, and probably also Shell).
    • The majority of the EU shareholders will be institutions rather than individuals. The OECD has estimated that only 18% of shareholdings in publicly listed companies are held by private companies and individuals.. I’m assuming the Greens are not proposing taxing pension funds and other institutional investors – pension funds are generally exempt from tax, and institutional investors will either be exempt from tax (e.g. OEICs) or taxed on a mark-to-market basis already (e.g. investment banks).

    So the true figure will probably be closer to $14bn.

    Second, the big picture: it’s extraordinarily selective to pick four companies who’ve had a good energy crisis. The proposal applies to all listed companies… so what was the total gain in market capitalisation of all listed European equities in 2022?

    It was negative.

    If this proposal had been adopted in 2022, it would have cost European governments money.

    The $140bn figure is embarrassing on every level.

    It’s the epitome of policy-based evidence-making. They’ve started with the idea they want to tax capital gains more heavily, and then gone hunting for some numbers that support the idea. Any neutral enquiry – “hmm, I wonder what the effect of the policy would have been in 2022” – would led to the conclusion that the policy would have cost governments €billions in 2022.

    Ignoring the incentives

    This isn’t a proposal to tax unrealised capital gains – it’s a proposal to tax unrealised capital gains of listed shares.

    That’s a huge problem – because it creates a powerful incentive for taxpayers (and particularly the very wealthy) to not hold listed shares.

    Some might create avoidance structures – e.g. establishing their own private SPV/fund in a non-EU country, and have that SPV/fund acquire listed equities. Others would simply reallocate investments to listed debt (e.g. high yield bonds), unlisted equities, real estate, private funds, and other asset classes. And you’d certainly see a decline in entrepreneurs listing their private companies.

    All of which means the tax yield would be much less than expected, with the potential for undesirable non-tax consequences too (I personally think we benefit from having successful companies listed rather than private).

    A good rule of thumb for tax policy is: don’t tax something in a way that depends upon a feature which has no economic reality, and can easily be changed. No baker in the UK puts chocolate on their gingerbread men covered in chocolate, other than two spots for eyes – because having more chocolate than that triggers 20% VAT. Whether a company is listed is, in many cases, about as economically relevant as chocolate eyes. It’s a terrible basis for taxing shareholders in the company.

    I’m unconvinced it’s a good idea to tax unrealised capital gains. But if you disagree, it’s imperative you tax all unrealised capital gains.

    How to do better

    Three simple suggestions:

    • All tax policy proposals should be “red teamed“. People who weren’t involved in the design of the proposal should sit down and think about how they, as a taxpayer, would react to it. What are their incentives? What are the loopholes?
    • Europe is blessed with thousands of tax academics and tax practitioners (in government and the private sector). It’s madness to propose a tax policy without speaking to some of them. I’m certain any tax academic or practitioner would immediately have identified the two problems above.
    • Finally, don’t confuse means with ends. The end result here should be fair taxation of capital gains, and the question should have been: how do we best achieve that? But I suspect that this project started with a desire to tax unrealised capital gains, and that led to everything else.

    Image by Stable Diffusion – “a calculator violently exploding in a massive fireball, dramatic, award winning, pop art, roy lichtenstein”

    Footnotes

    1. archive link here ↩︎

    2. If your response is “well, we won’t refund tax for capital losses”, then the policy is no longer a tax on capital gains, and instead a crude and rather random expropriation of property ↩︎

    3. See this document, the sixth bullet point on page 6 and Figure 2 on page 12 ↩︎

    4. I used the MSCI Europe index captures about 85% of European equities and is therefore a reasonable way to answer the question; there will be other approaches, but the answer will likely be the same… 2022 was a bad year for equities. Historical data from investing.com. ↩︎

  • The Post Office scandal – why the compensation scheme still has a tax problem

    The Post Office scandal – why the compensation scheme still has a tax problem

    I wrote in February about some serious tax problems with the way the Post Office was compensating the victims of the Post Office scandal. At the Post Office inquiry last Thursday, the Department for Business and Trade said that the problems have been resolved. I am concerned that is not correct.

    UPDATE: as of 19 June 2023, it looks very much like this has now been solved

    Between 2000 and 2013, the Post Office falsely accused thousands of managers of theft. Some went to prison. Many had their assets seized and their reputations shredded. Marriages and livelihoods were destroyed, and at least 59 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.

    Now, finally – ten years after the Post Office almost certainly knew that it had wronged these people, it is paying compensation. However, the way the compensation is being paid to 2,000 postmasters under the “historic shortfall scheme” (HSS) is creating serious tax problems for them.

    The key issues are:

    • Compensation is being paid for years of lost earnings. This is paid as a lump sum – often a very large lump sum – and so is taxed at a much higher rate than would have been applicable had the earnings been paid properly at the time. For example: a postmaster earning £30k would ordinarily have taken home about £25k after tax. But if that same postmaster receives compensation for ten years’ lost earnings in one payment, of that £300k they’ll take home not £250k, but £170k. The “compression” of many years of income into one year costs them £80k more tax. That’s an unjust result, and one that compensation would normally adjust for, by paying additional compensation so that the postmaster receives (on these figures) £250k after tax. The Post Office didn’t do that.
    • As the claimants’ loss was many years ago, a large amount of interest is often due. This is fully taxable. The Post Office has correctly deducted 20% tax from its interest payments, but then failed to give a clear warning to claimants that they would have additional self assessment liability, taking the overall tax rate on the interest up to 40% or 45%. The Post Office also failed to provide any tax support to postmasters, or pay for tax advice – so postmasters would unlikely to be aware of the tax liability, and could easily fall into default with HMRC.

    I suggested back in February that the solution was a statutory exemption for HSS claimants. Since then, an exemption has been created for postmasters claiming under the Overturned Historic Convictions (OHC) scheme and the Group Litigation Order (GLO) scheme. But nothing for the HSS scheme, despite a promising initial response from the responsible Minister.

    Tax on compensation payments was discussed at the Inquiry on Thursday 27 April, and we now have at least a partial explanation. The video is available in the link above, and the full transcript is available here.

    On the two remaining issues:

    Loss of earnings

    The Post Office’s explanation last Thursday was that the GLO and OHC schemes paid compensation for lost earnings on a hypothetical net basis. In other words, a GLO claimant in the same position as in my example above would have received £250k compensation from the Government. The Government paid that amount on the expectation that a tax exemption would be created, as indeed it was. So the claimant retained the £250k, and received the correct amount.

    But there’s an important caveat. Whilst that result is consistent with paragraph 4.2 of the GLO scheme, the postmasters I’ve spoken to aren’t clear that’s what happened in all cases. It would be helpful if the Inquiry requires the Government to confirm precisely how tax was treated in the GLO scheme payments.

    However, let’s assume for the moment that the Post Office is right on how the GLO and OHC payments dealt with tax. How do the HSS payments compare?

    • If the Post Office had treated HSS payments in the same way as GLO/OHC payments then my example postmaster would have received £250k.
    • But, inexplicably, the Post Office actually paid the postmaster £300k, so that after-tax she retains £170k (and often the Post Office operated PAYE).
    • That leaves the postmaster £80k out of pocket compared to their GLO equivalent.
    • But if the Government enacts an exemption for HSS payments then the postmaster will retain £300k, and be £50k better off than their GLO equivalent.

    So the Post Office has created a mess that is difficult to resolve. The Department for Business and Trade (DBT) reasonably want to achieve parity between claimants under the different schemes, and there is now no easy way to do that.

    What’s being proposed is that the Post Office will pay “top-up” amounts so that claimants end up with the right amount, after tax. Those top-up amounts are themselves taxable, so will have to be quite large. They will also have to take account of the particular tax position of the postmasters in each of the relevant years, which will not be easy.

    The alternative would be for HMRC to create a complicated special rule, which taxes claimants as if they’d received the funds in each of the years to which they relate. That is probably a worse option.

    It should go without saying that the Post Office should pay for claimants to receive tax advice, both at the point of settlement and when they subsequently file their tax return. To date they’ve paid almost nothing to cover tax advice, and that has to change.

    I’d conclude from this that DBT were correct to reassure the Inquiry that there is a solution for loss of earnings compensation, but proper thought does need to be given to how postmasters receive tax advice.

    Interest and other compensation payments

    As the harm suffered by the postmasters was some time ago, interest is due on their compensation – and for large settlements it will come to a large amount. This is fully taxable. They will also often receive other types of compensation (e.g. loss of reputation, stress, exemplary damages), and whilst that probably won’t be taxable, this won’t always be straightforward to determine.

    The new tax exemption for OHC and GLO claimants mean they don’t need to worry about these issues – they are just exempt from tax on interest and everything else. The Post Office doesn’t appear to have adjusted their payments to reflect the tax exemption. It hasn’t deducted tax from interest payments (see paragraph 4.2.4 of the GLO scheme terms). This seems the right result to me. Personal injury compensation and interest is tax-exempt, and it feels entirely appropriate that this is too.

    But, on the basis of DBT’s announcement at the Inquiry, HSS claimants will pay tax on interest, and potentially other compensation payments too (and will certainly have to obtain tax advice on the treatment of those other payments). Which means that this assurance from DBT to Sir Wyn was not correct…

    … as things stand, HSS applicants are not being treated in the same way as GLO claimants. The obvious solution is for the Government to enact a tax exemption for HSS claimants covering interest and other compensation amounts except loss of earnings (assuming the Post Office are right in what they say about GLO compensation payments).

    That exemption creates the parity between claimants that DBT are rightly seeking. It will also avoid the scenario that most concerns me – postmasters being misled by the wording in the Post Office’s settlement offer, not realising they have to self-assess tax on the interest, and falling into default with HMRC.

    I have provided a copy of this article to the Inquiry.

    Footnotes

    1. Although important people at the Post Office surely knew well before 2013, albeit that the details of “who knew what when” remain unclear ↩︎

    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.

  • New report: how Premier League Football clubs have avoided £470m of tax, and how to stop it

    New report: how Premier League Football clubs have avoided £470m of tax, and how to stop it

    Tax Policy Associates today reveals that Premier League football clubs are avoiding tax on an industrial scale, by artificially structuring their payments to football agents. We estimate it cost £250m in lost tax from 2019-2021, and £470m since 2015.

    In our view this is failed tax avoidance – it was never compliant with the law, and HMRC can and should require all the lost tax to be repaid.

    There’s extensive BBC Newsnight coverage and analysis here.

    Football clubs at all levels are using an artificial tax avoidance scheme to avoid VAT, income tax and national insurance/social security. In the Premier League alone we estimate that this has resulted in £250m of lost tax in the last three years, and £470m of lost tax since 2015:

    And here’s our estimate for each Premier League club’s tax avoidance in 2021:

    The purpose of the scheme is to avoid employment taxes and VAT on the large commissions paid to football agents. In reality, these agents act for players. But the scheme works by constructing artificial contracts where the agent acts for the club as well as the player – so-called “dual representation contracts”. Half the fees are then paid by the club – even though it is the player who is really benefiting from all (or almost all) of the agent’s work – and these fees escape income tax, national insurance and VAT.

    The defence of dual representation contracts by clubs is that “everybody does it”. That is true. But it’s our view that the arrangements are improper – they contravene both the letter and the spirit of the law. This isn’t “legal tax avoidance” – it’s a failure to comply with the law. HMRC should be aggressively challenging it (and we understand that, in least some cases, it already is).

    There are potentially serious consequences for football. If HMRC were able to recover all £470m then Premier League clubs would struggle to pay it – the Premier League’s total profits in 2022 were the largest for some time, but still only £479m.

    This report explains how the scheme is supposed to work, why it technically fails, and what should be done to stop it

    Football agents and fees

    Football agents usually act for players. Sometimes the agent is one individual who is close to a particular player and acts for them and nobody else. Sometimes the agent is a business which acts for multiple players. But the role is much the same in either case: connecting the player with clubs, managing contract negotiations, finding sponsorship, and generally advancing the player’s career.

    Agents (sometimes called “intermediaries”) are typically paid by receiving a percentage of their players’ remuneration. In the past this has sometimes led to extraordinarily high payments, with a FIFA report suggesting $3.5bn was paid to agents between 2011 and 2020, and another report estimating $500m in agent fees were paid in 2021 alone (a slight decline on the $650m paid in 2019, probably as a result of Covid).

    Of all the tasks undertaken by the agents, the contract negotiations are the most critical, given that the outcome of those negotiations drives remuneration for the player, and therefore the agent.

    New FIFA rules were approved in December 2022 capping agent fees at (for large amounts) broadly 6% of the remuneration paid to the player. Given the size of transfer payments, ­­that still equates to very large fees to agents but, whilst the rules are supposed to enter force in October 2023, it is unclear whether that will happen.

    The usual treatment of agent fees

    Everyone who is employed and working in the UK pays income tax and national insurance on their wages. When we hire someone to carry out a service (plumber, lawyer, estate agent, etc) we are not entitled to deduct that cost from our taxes. In other words, we pay almost all service providers on an after-tax basis. In addition, if the service provider is VAT registered, then we usually pay VAT on their fee.

    In some cases, it will be the employer who pays the cost of the service. For example, an employer may agree to cover an employee’s personal legal fees. That will usually be a “benefit in kind” with the employee taxed in exactly the same way as if he or she had received the cost of the legal fees as additional salary or bonus. The legal fees will also be subject to VAT, which the employer will not be able to recover (unlike the company’s own legal fees, which will often be recoverable).

    So whether an employee engages a service provider directly, or their company does so on their behalf, should make no difference to the tax result.

    How should agents and clubs be taxed on agent fees?

    The same principles should apply for clubs and football agents. The agents are hired by the player, represent the player in fee negotiations, and their loyalty is to the player. The player therefore shouldn’t be able to deduct the agent’s fees from his income tax bill, and the player should have to pay 20% VAT on the agent fees.

    And, as with the legal fee example above, none of this should change if the football club agrees to pay the agent’s fee – they’re doing so on behalf of the player, and so it’s a benefit in kind. The tax bill ends up the same – income tax, national insurance and VAT on the agent’s fee.

    This example shows how it should work, with £1m paid in agent fees. HMRC ends up receiving £612,000 of tax. It would be the same if the club was paying £1m in legal fees or estate agent fees.

    The tax avoidance scheme

    The scheme

    Historically, agents were hired by players, and either paid by players or paid by clubs (with the benefit-in-kind and VAT consequences discussed on the previous page). However, many years ago, some people in the football industry realised they could avoid a significant amount of tax if they wrote all the contracts so the agent purported to be the agent of the football club, not the player.

    This had two sizeable tax benefits. First, the club could now pay the agent fee without it being a taxable benefit for the player – saving (at current rates) 45% income tax, 2% employee national insurance, and 13.8% employer national insurance. Second, the club (unlike the player) could recover the 20% VAT the agent will charge on the fee. Add these up, and the total tax saving is equal to 80.8% of the agent fee.

    Over time, a degree of caution from advisers meant that this approach was replaced with “dual representation” – the agent supposedly acting for both the player and the club. By 2021, the fees were typically (and, we understand, almost universally) allocated 50-50 as between player and club. This reduced the total tax saving to (at current rates) 40.4% of the agent fee (i.e., half the benefit compared to if the agent was solely acting for the club).

    This second example shows what happens when the 50-50 dual representation avoidance scheme is used. As with the first example, £1m is paid in agent fees – but the effect of the scheme is that HMRC ends up receiving £311,000 less tax.:

    Why call this a “tax avoidance scheme”?

    A common characteristic of tax avoidance schemes is that an arrangement which would usually have one tax result is structured in a different and artificial way, and claimed therefore to have a different and more favourable tax result. That is exactly what is happening here.

    The “dual representation” arrangement is fundamentally artificial. Whatever the contract says, everybody knows the agent isn’t really the agent of the club. The agent is hired by the player, and their principal role is representing the player in negotiations with the club, to extract as a high a price as possible from the club for the player.

    There’s an obvious conflict of interest. The player wants to be paid as much as possible. The agent is paid a percentage of the player’s earnings, and so also wants the player to be paid as much as possible. On the other hand, the club wants to pay as little as it can get away with.

    It is often asserted that the agent does in fact provide real services for the club. For example, the agent may assist with work permits, and help the player get settled into their new home. However, there are two obvious responses to this. First, these services primarily benefit the player. Second, the value of the services is low, and can’t begin to justify half the fee being allocated to the club.

    Are joint representation contracts permitted by the Football Association and FIFA?

    The Football Association prohibits an agent from acting for both the player and the club – but with a remarkably wide exemption that in fact allows an agent to act for both the player and the club, provided the right boxes are ticked.

    FIFA was at one point proposing to end joint representation contracts, but the final version of the rules mirrors the Football Association in having an apparently clear prohibition followed by an extremely wide exception to the prohibition:

    A Football Agent may only perform Football Agent Services and Other Services for one party in a Transaction, subject to the sole exception in this article.

    a)        Permitted dual representation: a Football Agent may perform Football Agent Services and Other Services for an Individual and an Engaging Entity in the same Transaction, provided that prior explicit written consent is given by both Clients.

    So triple representation is prohibited, but dual representation has been given the green light.

    How much tax is being avoided?

    We estimate £470m of tax was avoided in the Premier League between 2015 and 2021:

    Looking at 2021 in detail, we estimate that the £81m of tax avoided was split between clubs as follows:

    And the £91m avoided in 2020 was split as follows:

    The biggest clubs pay the biggest fees, and so dominate the charts above. However, if we look at the proportion of transactions using the dual agent structure in 2021, it is clear that some clubs use the structure all the time; others are less consistent. Generally, the richest clubs are the most frequent users, but Burnley and Brentford are also heavy users:

    What are HMRC doing?

    In the 2010s, clubs convinced themselves that there was a “safe harbour” that meant HMRC wouldn’t challenge dual representation structures provided the split was no greater than 50-50. However we don’t believe that is correct – there never was a safe harbour, and HMRC never accepted these arrangements.

    HMRC became aware of the urban myth of a “safe harbour”, and issued particularly clear guidance in May 2021 refuting the claim. The guidance says that a 50-50 split cannot be the default position, and has to be carefully justified by reference to the work actually undertaken by the agent for the club, and with detailed records kept. This was in the context of an overall high level of HMRC scrutiny on football and football agents in particular.

    HMRC guidance is just an expression of HMRC’s opinion, and is not legally binding. Given the likelihood of a dispute, well-advised taxpayers typically are very cautious before ignoring HMRC guidance. However, it is not uncommon for some taxpayers (and advisers) to follow the letter of the guidance and ignore the spirit. That seems to have happened in this case; we understand from sources in the industry that most clubs still use a 50-50 split (albeit they are more careful to justify it, and create a supportive “paper trail” which purports to demonstrate value being provided to the club).

    Perhaps for this reason, there is no evidence of dual representation contracts declining in 2021 – 68% of relevant contracts were dual representation that year, the same as in 2020, and only slightly down on 2019 (when it was 70%)

    Part of the problem is the competitive dynamic between clubs – agents will play one off against another, and any club that’s too scrupulous in its tax planning can find itself losing out in the race to hire new talent. This is a common dynamic that drives tax avoidance in many industries, and the solution is public pressure, aggressive enforcement by HMRC, and a change in the law. We discuss this further below.

    Another problem is that we understand there is close collaboration between the tax teams at the Premier League clubs. That can create an atmosphere that their tax positions are “too big too fail” – for surely HMRC wouldn’t challenge everyone? In most industries, competition law concerns mean that tax teams in different companies do not coordinate their positions in this way. It is unclear why football is different.

    We understand there are several live HMRC enquiries into the use of dual representation structures by Premier League clubs, but the scale of HMRC’s work in this area is not clear.

    If HMRC does pursue the structures aggressively, and across several past years, there could be serious financial consequences for the clubs involved. In the worst-case scenario for the clubs, all the tax we identify as having been avoided could be repayable, plus interest and potentially penalties. Whilst there is certainly lots of money in the Premier League, there is very little spare cash available to fund unexpected tax liabilities – total Premier League profits for 2022 were only £479m.

    Our view – is the dual representation structure lawful?

    Dan Neidle worked as a tax lawyer for 25 years, and was head of UK tax for one of the world’s largest law firms. He had particular expertise advising clients who had previously entered into tax/VAT avoidance schemes, or who were exposed to risk as a result of other parties’ use of such schemes.

    Dan’s view of the dual representation scheme is as follows:

    “In my view it is clear that the dual representation schemes do not work. HMRC should challenge current and historic use of dual representation contracts, and in my view HMRC would win.

    In relation to income tax and national insurance, modern caselaw has established that these taxes apply realistically to the actual commercial transaction, and not to artfully constructed paperwork. Realistically, the agent is acting only for the player. The most economically valuable part of the agent’s role, and the basis on which agents are remunerated, is their negotiation of the player’s remuneration. When entering into these negotiations, the agent can only be acting for the payer, and not the club (as otherwise the agent would be negotiating against him or herself). The club may be making the payments, but this is a matter of convenience – the agent is not, in reality, acting for the club (other than for minor ancillary services). Hence, I expect a tribunal would simply apply the income tax and national insurance legislation on the basis that all, or almost all, the payments made by the club to the agent are made on behalf of the player, for services provided by the agent to the player.

    In some cases, where the agent in reality provides no services at all to the club, the contractual appointment of the agent by the club might be a sham.

    Different civil law-style “abuse” principles apply for VAT (see the Halifax decision), but in this case it is likely that those principles are not necessary, and the correct VAT result will simply follow from a proper analysis of the nature of the services that are actually being provided. In particular, a Tribunal is likely to readily conclude that the supplies by the agent are “made to” the player and not “made to” the club under Article 168 of the VAT Directive and section 24 of the Value Added Tax Act 1994 (and the fact the club is making the payment to the agent is irrelevant). That conclusion is consistent with the Supreme Court judgment in the Airtours case.

     

    The key question for clubs to answer is why they thought it was appropriate to say that half the value provided by agents was provided to clubs, when it’s the players who receive almost all the benefit.

    I expect the clubs will say that they have tax advice that the dual representation structures are appropriate. But I understand that advice is usually based upon a critical factual assumption that agents really provide value equal to half of their fees – an assumption that is plainly incorrect. If that’s right, then the advice is worthless, and the clubs should have known that. I would also query whether it was appropriate for advisers to advise on the basis of an assumption that, if they’d thought about, they would have realised was false.

    The clubs may have thought they were avoiding tax; but in fact they were simply failing to pay tax that was due, based upon factual assumptions they should have known were false. If they actually knew the assumptions were false, then it is possible that criminal offences were committed.”

    Recommendations

    We have three key recommendations:

    1. Parliament should enact specific income tax, national insurance and VAT anti-avoidance rules, to put beyond all doubt that the dual representation schemes do not work. Ministers have previously warned that employment tax avoidance can be countered by retrospective legislation, and that is something that should be considered in this instance. This would save the time and cost of litigating against dozens of clubs across the Premier League and Championships – the result of which is not realistically in doubt.
    2. Absent retrospective legislation, HMRC should aggressively challenge all the clubs which have historically used joint representation contracts. The starting point should be that little or none of agents’ fees should be allocated to the club – they act solely (or almost solely) for the players. The tax/VAT result should follow straightforwardly from that (with late payment interest also due). Where these contracts were constructed without a reasonable contemporaneous justification for the fees allocated to clubs, penalties should be charged.
    3. Unless full disclosure was provided to HMRC (including the amount of value provided by agents) then HMRC should be able to open a “discovery assessment” and challenge the previous four years of tax returns (and any earlier years which remain “open”). If a failure to provide full disclosure can be said to be “careless” (which is very plausible, particularly where there was not contemporaneous justification for the allocation), HMRC should be able to challenge six years of tax returns. The fictitious nature of the structure also creates the possibility that the 20 year time limit for deliberate loss of tax could apply.

    We understand that dual representation contracts are used elsewhere in Europe, and that – as with the UK – the principal purpose is tax avoidance. Other countries’ tax authorities and football associations may wish to consider taking similar steps to those recommended above.

    Methodology

    Sources of data

    In April 2015, FIFA required national football associations to publish statistics on agents (“intermediaries”). Originally it only published the total agent fees paid by each club, and limited data on transactions. However, from 2019, that data also includes whether agents were instructed on a sole or joint basis, which enables the analysis in this paper. The full data is here.

    The fee and transaction datasets are separate, so that it is not possible to ascertain the fees paid to any individual agent, or in respect of any individual player.

    Approach

    We can take the Football Association statistics for 2019, 2020 and 2021 (running from February in each year to the end of January in the next year) and estimate the total tax avoided, using the approach set out below. All the calculations are available in the spreadsheet here.

    1. For each year 2019-2021, take the FA transactions list and exclude duplicate entries (which we assume are errors). The lists are in the spreadsheet on the “transaction data” tabs for each year.
    2. Take the FA lists of total fee payments to agents. These are in column B on the “calculations” tab for each year.
    3. Include only permanent transfers in, loans in, updated contracts, and international loans in (as other transactions are not likely to give rise to material fee payments). These are the “in scope transactions” on the “assumptions” tab. Count the number of payments made by each club on “in scope” transactions – this is column C on the “calculations” tab.
    4. For each club, calculate the number of those payments which involve joint representations (i.e. where agents were acting for both the player and the club). This is column D on the “calculations” tab. This gives us the percentage of dual representation transactions – column E.
    5. Assume we can simply apply that percentage to the total agent fees paid by each club (probably resulting in too small a number, because joint representation is likely more common on larger transactions, where more tax is at stake). That gives us the “implied dual representation fees” in column G of the “calculations” tab (which excludes VAT).
    6. Assume that all the joint representations are 50-50 (the industry standard), and so multiply the total joint representation fees by 50%. The assumption is in cell C4 of the “assumptions” tab.
    7. Calculate the total rate of tax avoided on this VAT-exclusive agent fee. That will be VAT (20%) plus the top rate of tax (45%) plus the highest rate of employee national insurance (2%) plus the highest rate of employer national insurance (13.8%). That totals 80.8%. This total is in cell C8 on the “assumptions” tab.
    8. Multiply the VAT-exclusive agent fee allocated to the club (from step 5) by the 50% figure (step 6) by the rate of tax avoided (step 7). This gives the estimate for tax avoided for each club for each year 2019, 2020 and 2021 (column H of the “calculations” tab for each year).
    9. For the years before 2019, we have agent fee data but no data on the proportion of dual representation contracts. So we proceed on the assumption that the percentage of tax avoided (out of total agent fees) will be broadly the same as in the later years where we do have that data. So a simple pro-rata calculation provides the tax avoidance estimate for 2015 (where we only have the last quarter data), 2016, 2017 and 2018. This is a conservative assumption given that the industry settled on 50% as a supposed “safe harbour” – previously a higher percentage was used. The calculation here is in cells D6-D9 of the “calculation” tab.
    10. The total tax avoidance estimate sums to £469m (cell D14).

    The data also shows a smaller number of cases where the agent is solely acting for the club. Many of these appear to be cases where there are separate contracts between agent and player, and agent and club. We do not know if this is a legitimate arrangement which splits bona fide obligations and fees between player and club, or a tax avoidance arrangement which is effectively the same as a dual representation contract, but splits the contract into two halves. We are conservatively assuming it is the former, and not including any figures from these cases in our estimates of tax avoided.

    We are focussing on the Premier League, as its financial predominance means that the amount of tax avoided is disproportionately focussed here. However, “joint representation contracts” are also used in the Championship/lower divisions. Agent fees in the Championship are about 15% of those in the Premier League – so as a rough order of magnitude estimate, we’d expect Championship tax avoidance to be around £70m (i.e. simply calculating 15% of £470m).

    An important assumption in our analysis is that fees were allocated between players and clubs 50-50 on all “joint representation” contracts, and that this continued through to 2021 (despite the HMRC warning in the middle of that year). We understand from industry and HMRC sources that this is correct, and that clubs responded to the HMRC warning by being more careful about how they justified the 50-50 split, but not changing it.

    If Premier League clubs wish to dispute our use of the 50-50 figure, they can respond by disclosing what the actual dual representation figures are, and we will then immediately update this report.

    Response from Premier League clubs

    Until the BBC published its story, the Premier League clubs were entirely unresponsive. We contacted the press office of each club for comment late last year, and know that our messages were received – but not a single club replied. BBC Newsnight also contacted the Premier League clubs for comment more recently – again no response was received. Nor did the BBC get a response from the Association of Football Agents.

    It is highly unusual for a company which is credibly accused of tax avoidance to fail to provide even a short form response. It is even more unusual for an entire sector to refuse to respond to enquiries. The obvious inference is that the Premier League clubs collectively realise that their position is impossible to defend.

    Since the BBC published its report tomorrow, we finally do have a response. Of sorts.

    The Association of Football Agents now says it disputes our findings, saying we’re making “fundamental misunderstanding of how the football transfer market works”. Oddly they don’t bother saying what that misunderstanding is. They’ve had months to come up with something better.

    The Premier League also provides a non-answer: “We believe that the overall figure suggested here is based on assumptions that do not recognise the individual circumstances of each transaction”. What are those assumptions? How are they wrong? They don’t say. And, again, they’ve had months.

    Note what these responses don’t do. They don’t provide a principled justification for dual representation contracts existing at all. They don’t deny that the industry is using 50-50 across the board, despite HMRC guidance saying they shouldn’t.

    Acknowledgements

    Thanks to Mike Cowan, Ben Chu and the Newsnight team for helping to develop the story, and to all the tax professionals – solicitors, accountants, barristers and retired HMRC officers, who commented on early drafts of this paper. Particular thanks to Max Schofield for his invaluable comments on the VAT analysis, and to A, F and T for their equally valuable input on the income tax and national insurance analysis. And many thanks to the industry contacts who prompted this investigation, and provided background information on the historic and current use of dual representation contracts. Final thanks, as ever, to J.

    Image by DALL-E – “a soccer ball with cash exploding from it, on a grass football pitch, digital art”

    Footnotes

    1. The football industry currently prefers to use the term “intermediary”, but in our view it is both clearer and more accurate to use the traditional term “agent”, and that is the term we will use in this report.) ↩︎

    2. It is likely that agents will assert that there are competition law/anti-trust problems with the proposal and, whilst we have no expertise in competition law, that does not seem a frivolous objection. ↩︎

    3. Interestingly, the 50-50 split has now been formalised by FIFA in its new regulations (see Article 12(8)(a). Indeed, at first sight, the regulations seem to incentivise joint representation, because the cap on agent fees will be 3% (rather than 6%) if an agent is acting solely for a player. The reason for this is unclear, but we would speculate that agents and/or clubs lobbied for the rule to give cover to the dual representation tax avoidance scheme. ↩︎

    4. see section E of the FA guidance here: https://www.thefa.com/-/media/files/thefaportal/governance-docs/agents/intermediaries/the-fa-working-with-intermediaries-regulations-2020-21.ashx ↩︎

    5. See the new regulations, Article 12(8)(a) ↩︎

    6. See for example https://www.gov.uk/government/news/top-football-agent-scores-12-million-tax-avoidance-own-goal and https://www.mirror.co.uk/sport/football/news/taxman-probing-thousands-football-agents-16228503 ↩︎

    7. It is important to note that Dan never advised on the use of dual representation contracts, and so holds no client-confidential information relating to these schemes. ↩︎

    8. This is a common commercial problem that tax lawyers are asked to solve, for example where a bank is lending to a business that had might have entered into a tax avoidance scheme, or a company taking over a business in that position. In both cases, the lawyer’s client will want to understand the nature and risks of its counterparty’s tax planning, and whether and how that planning should be conceded and settled with HMRC. ↩︎

    9. There is an accessible summary of modern direct tax principles of interpretation in Barclays Mercantile Business Finance Limited (Respondents) v. Mawson (Her Majesty’s Inspector of Taxes (Appellant) – see paragraph 26 here. ↩︎

    10. The sham doctrine in Snook v London and West Riding Investments Ltd (available here) is narrow in scope, and requires that parties create a document which appears to HMRC (or other third parties) to do one thing, but actually intend and act in a different way. Hence a typical artificial tax avoidance scheme is not a sham, because the parties do intend to be bound by the documentation. In this case the divergence between reality and documentation means that the potential for a sham cannot be entirely excluded, although it will depend upon the precise facts. ↩︎

    11. The VAT Directive remains part of UK tax law post-Brexit – that was necessary to avoid the huge amount of uncertainty which would have resulted had it been repealed. ↩︎

    12. Penalties apply where, broadly speaking, a taxpayer has been “careless”. Allocating fees without a reasonable commercial justification in our view falls into that category. HMRC guidance on penalties is here: https://www.gov.uk/guidance/penalties-an-overview-for-agents-and-advisers ↩︎

    13. Meaning that an enquiry was opened on this or some unrelated matter for that year, and it has not been resolved ↩︎

  • Six things the Chancellor could and should do in today’s Budget

    Six things the Chancellor could and should do in today’s Budget

    Here are six things I think Jeremy Hunt should be doing. This isn’t my dream list if-some-idiot-made-me-Chancellor. They’re things which practically and ideologically a Conservative Chancellor could and should do right now.

    1. Prevent the tax system punishing the Post Office’s victims

    The Post Office wrongly accused thousands of postmasters and postmistresses of theft, and covered up the bugs in the computer system that triggered the false accusations. Some went to prison. Many had their assets seized, went into bankruptcy, and saw their reputations shredded. Marriages and livelihoods were destroyed, and at least 33 have now died, never receiving an apology or recompense.

    The Post Office’s victims are finally receiving compensation – but the Post Office’s incompetence means that many will see a good chunk of their compensation disappearing in tax. At this point, the only fair solution is a complete tax exemption. I’ve written more about the tax scandal within the Post Office scandal here.

    Governments from 1999 to 2013 share responsibility for the Post Office scandal. The fault lies solely with the Post Office, but Government could have seen what was happening and acted. Subsequent Governments share responsibility for allowing everything to drag on for another decade, with the Post Office (through incompetence or malice) failing, again and again, to put things right.

    This Government has the opportunity to do the right thing. Sadly early indications are that they’re not, and the Post Office’s victims will continue to have to fight for every inch of progress. I hope Mr Hunt proves me wrong.

    2. End 60%+ marginal rates

    Reasonable people can disagree whether the top marginal rate of income tax should be 40%, 45% or 50%, and at what income that rate should kick in. But surely nobody thinks that there should be a marginal rate of 68% for people earning £50-60k, or 62% for people earning £100-125k. These, however, are the marginal rates you’ll pay today, if you have three children:

    If you’re lucky/foolish enough to use the tax-free childcare scheme, your marginal rate can be so high that you lose money if your pay hits £100k:

    (I’m pretty confident that the more you stare at that chart, the more insane you’ll think it is)

    These are terrible features of any tax system. They discourage work, encourage evasion (not reporting income), and encourage [avoidance][sensible tax planning] such as salary sacrifice schemes/additional pension contributions. They also make people miserable. An obvious question: is the benefit to the Exchequer of the higher rates greater than the cost, in lost economic growth and lost tax?

    Jacob Rees-Mogg agreed with me that no Tory Chancellor should be presiding over 60%+ marginal rates. Hopefully Mr Hunt does too, and either scraps the clawback rules altogether, or at least makes the clawback gentler, reducing the marginal rates.

    But please, please, if the leaks about a new free childcare policy are correct, don’t claw any new benefits back with painful marginal rates once people hit a certain level of income.

    Our fully analysis of the marginal rate situation is here (although the charts above are more up-to-date, as they reflect the tweaks in the Autumn Statement).

    3. End the Chart of Small Business Doom

    This is the chart:

    It shows the number of businesses at each level of turnover.

    There’s no escaping the massive cliff-edge around £85k. By an extraordinary coincidence, businesses are required to register for VAT at £85k of turnover, and start charging 20% VAT on all sales.

    A cynic would say that people are hiding their income – criminal tax evasion. In this instance, there’s good evidence the cynic is wrong. Businesses are intentionally depressing their turnover – not expanding (e.g. not taking on an apprentice), turning away work, or even going on holiday for the rest of the tax year once they hit £85k.

    These feel like bad things for the economy. Small businesses are staying small – and small businesses are less productive than larger businesses.

    This is not a universal problem – the UK has the highest VAT threshold in the world:

    A truly courageous Chancellor would solve the problem by bringing the VAT threshold down to a level where everyone except hobby businesses has to register.

    A Chancellor who actually wants to keep his job probably can’t go that far. But he could announce that the VAT threshold will be gradually reduced in nominal terms (and so greatly reduced in real terms). And sweeten the pill by requiring HMRC to provide free apps to small businesses to minimise the compliance pain.

    I’ve written more about this here.

    4. Abolish stamp duty

    Stamp duty land tax and stamp duty reserve tax, the modern taxes on land and shares, have many problems. Taxing transactions is generally a Bad Thing – not least because it distorts decisions (for example putting people off moving house to follow employment elsewhere).

    That said, SDLT and SDRT are reasonable taxes from a technical standpoint. They work okay. They raise useful amounts of money, without much avoidance or evasion.

    By contrast, old-style stamp duty is a joke. The word “antiquated” doesn’t quite cut it for a tax designed 250 years ago. Horribly complicated. And realistically raises zero money. I’ve written more about it here.

    The Chancellor should abolish it.

    5. Introduce full expensing

    The UK regime for tax relief for business investment is a horrible mess – highly technical, full of arbitrary distinctions, and rife with uncertainty (for the good taxpayers) and avoidance and even evasion (for the bad). Worse still, it changes with bewildering frequency.

    All this means that it’s failing in its purpose of incentivising investment. Who plans a long term investment on the basis of a tax treatment which (a) nobody understands, and (b) will probably change several times before you strike earth?

    The answer is full expensing: a simple regime of giving 100% up-front tax relief for capital investment by companies. It could be expensive – £11bn/year. But some of the cost could be reduced by further restricting tax relief for interest – and if you don’t do this (as a Government consultation paper recently pointed out), you risk incentivising inefficient investment.

    One large caveat: is that there are only two years left of this Parliament. For full expensing to really work to incentivise long term investment, business would need to be confident that the next Government (of any political hue) wouldn’t scrap it. So, oddly, the success of a Conservative Government policy will plausibly depend on the actions of the Labour opposition. The right Labour response, in my view, would be to applaud full expensing and promise to maintain it through the whole of a Labour term of office.

    6. Tax carried interest in a fair and open way

    Private equity fund managers pay only 28% tax on their income – the “carried interest loophole”. This wasn’t created by legislation, but by an impressive piece of lobbying in 1987 which resulted in an agreement between the industry and HMRC.

    I recently published a peer-reviewed paper which concludes that technically the loophole shouldn’t exist, and it’s ultra vires (outside the power) of HMRC to stand by the 1987 agreement. There are increasing signs that the private equity industry recognises that the situation is unsustainable.

    So the Chancellor should do one of three things:

    • Maintain the favoured tax status for carried interest, with new legislation in the Finance Bill that ends all uncertainty, and clearly provides the private equity industry with favoured treatment.
    • Announce that the 1987 statement will be withdrawn, and HMRC will follow the law.
    • Legislate to end the favoured treatment of carried interest (but perhaps preserve capital gains treatment for fund managers who properly invest in their funds, with money genuinely at stake).

    Photo by Stable Diffusion: “statue of lady justice holding a (red-briefcase), photo, nikon 35mm, city street”

    Footnotes

    1. Delete according to your personal preference ↩︎

    2. And the Finance Bill should tidy up the consequences – it’s invidious for investors’ own tax position to be impacted by the technical tax treatment of a fund that they don’t control. ↩︎

  • The stupidest tax: complicated, costs businesses £m, and raises zero money. Let’s abolish stamp duty.

    The stupidest tax: complicated, costs businesses £m, and raises zero money. Let’s abolish stamp duty.

    Stamp duty was one of the triggers for the American Revolution. Somehow, 250 years later, we still have it. That makes no sense – it raises no money, is pointlessly complex, and creates cost and uncertainty for business. The Government should abolish it.

    Update: In March 2025, the Government announced the results of a consultation into stamp taxes; it looks very much like stamp duty will indeed be abolished.

    350 years ago, stamp duty made perfect sense. The State had limited power and resources, and collecting tax from people was hard. So some unknown genius had a brilliant idea. Impose a special duty on documents. No need to have an army of tax inspectors. But if you wanted the document to be used for any kind of official purpose, you’d have to pay to get it stamped. No official would accept an unstamped document, for fear of being thrown into jail. Beautiful simplicity – a tax that doesn’t need an enforcement agency.

    Stamp duty once applied to basically everything. Even tea – which helped spark the American Revolution. Over time, it’s shrunk and shrunk, and today it’s basically irrelevant. But still there, and still costing business millions in legal fees.

    At this point I should clarify that I’m talking about old-style stamp duty, the one that actually involves things being stamped. I’m not talking about the two modern taxes that emerged from stamp duty, but work in a sensible modern way: stamp duty reserve tax (SDRT – which applies to shares), and stamp duty land tax (SDLT). Both are often referred to as “stamp duty”, but they are separate taxes.

    What does old-style stamp duty actually cover?

    Given SDRT applies to securities, and SDLT applies to land, what does stamp duty do?

    Answering that question is surprisingly hard, and requires a level of nerdy detail not really suitable for a blog post or twitter thread. But it demonstrates the insanity of the tax, so I’ll do it anyway:

    • The principal charging clause is paragraph 1 of Schedule 13 to Finance Act 1999. This says that stamp duty is chargeable on a transfer on sale, and paragraph 7 extends that to some agreements for sale. So at this point we think: OMG stamp duty applies to everything.
    • But then section 125 Finance Act 2003 says that actually stamp duty is abolished on everything except instruments relating to “stock and marketable securities”. Whew – it only applies to some stuff.
    • But what kind of stuff? The definition of “stock and marketable securities” is in section 122 of the Stamp Act 1891, which reads pretty much like you’d expect from 150-year-old legislation:

    The expression “stock” includes any share in any stocks or funds transferable by the Registrar of Government Stock, any strip (within the meaning of section 47 of the Finance Act 1942) of any such stocks or funds, and any share in the stocks or funds of any foreign or colonial state or government, or in the capital stock or funded debt of any county council, corporation, company, or society in the United Kingdom, or of any foreign or colonial corporation, company, or society.

    The expression “marketable security” means a security of such a description as to be capable of being sold in any stock market in the United Kingdom

    • If you stop and squint at this long enough, you’ll probably conclude it means that stamp duty applies to shares and bonds.
    • But don’t stop there, because section 125 is partially undone by paragraph 31 of Schedule 15 to Finance Act 2003 which says that certain partnership transactions are also subject to stamp duty, if the partnership holds stock or marketable securities.
    • And we’re still not done, because the George Wimpey & Co case says that options can sometimes be subject to stamp duty, for reasons which don’t make a huge amount of sense, but there we go.
    • And where’s the rule actually saying you have to pay stamp duty? There isn’t one. Stamp duty’s “teeth” are found in section 14(4) Stamp Act 1891, which says that a document executed in the UK, or which relates to the UK, can’t be used for any purpose in the UK unless it is stamped. So, for example, a share registrar won’t recognise a transfer of shares unless you get the transfer stamped. And a court won’t accept a document as evidence if it is stampable, but hasn’t been stamped. In principle your multibillion £ deal could be unenforceable if stamp duty isn’t paid, which would be awkward.

    I should emphasise – this unholy mess just tells us what the tax applies to. How it’s calculated, how the timing works, the scope of the exemptions – they make the above look simple and rational, but are a subject for another day.

    So what does this mean in practice?

    There are two ways in which stamp duty is actually relevant.

    First, whenever shares in an unlisted UK company are bought/sold. People actually pay this, and get their documents stamped – because if they don’t, the transfer couldn’t be registered. But if stamp duty was abolished tomorrow, SDRT would apply instead. So in this scenario, stamp duty is payable but pointless..

    Second, there’s a whole universe of cases where stamp duty might apply if you were really unlucky, but in practice never does. Some examples:

    • Transactions in foreign securities. The UK has no business taxing these transactions, and SDRT (stamp duty’s sensible sister) certainly doesn’t. Stamp duty in theory does tax transactions in Upper Volta, if the transactions have a UK party or are signed in the UK (or otherwise “relate” to the UK, whatever that means). But people normally don’t care – the fact you can’t enforce such a transaction in a UK court doesn’t much matter if the securities are foreign (i.e. because you’d enforce in the relevant foreign court).
    • A document might be thought to contain an “option”, and so be technically stampable, even though it’s not realistically an option at all.
    • Sales of loans, for example where a bank is selling part of its business to someone else. In practice the loans will almost always be exempt, but establishing this to a level of legal certainty means reviewing each loan. If the purpose of a tax system is to ensure revenue for tax lawyers, then job done.

    I have never once seen stamp duty actually paid on any of this second class of transactions. But I’ve seen huge amount of time/money spent analysing the issues. Why? Because if a document is stampable but the duty isn’t paid, then it’s unenforceable. On a large commercial transaction that’s an unacceptable risk.

    So there we have it. Stamp duty applies to some transactions pointlessly, and applies to other transactions not at all.

    But all this complexity is an expensive business. During my 25 year career as a tax lawyer, I’m pretty confident I charged at least £2m in fees for stamp duty advice. I will modestly say it was excellent advice, and my clients were very happy with it – but multiply this across all the tax lawyers in the UK, and that’s a lot of wasted fees on a pointless tax.

    Full credit to The Office of Tax Simplification, who made this kind of argument five years ago (and were ignored).

    So what should the Government do?

    Abolish stamp duty. It’s an easy win: a tax-simplifying, pro-investment, pro-growth policy that costs nothing and has no downside.

    It’s not even technically difficult. Expand the SDRT payment/collection rules so SDRT more easily applies to paper transactions in unlisted UK shares. Tidy up the SDRT rules that rely upon stamp duty.. There’s even an IFS paper that goes into details on how to do this.

    Job done.

    Is this really the stupidest tax?

    No, I lied. It’s the second stupidest.

    The very stupidest is bearer instrument duty – a kind of a miniature clone of stamp duty for bearer instruments. In a world where SDRT exists, bearer instrument duty is completely irrelevant and I have never seen any actually paid. For added relevance, real bearer instruments basically don’t exist anymore. The tax is in Schedule 15 Finance Act 1999 and I have not the slightest clue why it still exists.

    Why haven’t both these taxes been abolished?

    Hard to say. Most bad tax rules exist because someone benefits from them – perhaps HMRC, perhaps a few deserving and/or loud taxpayers. But in this case there is literally no point to stamp duty. I can only assume the calculation for HMRC is: no downside for us in keeping it in place; work for us in repealing it.

    If so, that’s the wrong calculation. Stamp duty should join the old stamping machines in graceful retirement.

    Engraving of the Boston Tea Party by E. Newbury, 1789, photo by Cornischong

    Footnotes

    1. Technically this was the Townshend Act not the Stamp Act, but facts shouldn’t get in the way of a good engraving ↩︎

    2. Post-pandemic, it’s an electronic stamping rather than physical stamping – HMRC retired their beautiful old stamping machines. ↩︎

    3. By which I mean that, whilst not great taxes from a policy standpoint, they technically/practically work just fine. They were created because stamp duty just became too old, creaking, and easily avoided. They are “normal” taxes in that if you don’t pay them, you go to jail (maybe). ↩︎

    4. This was created as part of a rather half-hearted and very incomplete consolidation of legislation in 1999. Believe it or not, things used to be worse ↩︎

    5. But only “probably” – there’s a reason why I’ve have seen twenty-page opinions on at least four different words in the definition of “stock” ↩︎

    6. What exactly does Wimpey do following the partial abolition of stamp duty by s125 FA 2003? Good luck. ↩︎

    7. This has never, to my knowledge, happened to a large transaction, but it has created injustice on a small scale – see for example the recent Highscore case – thanks to
      Nicholas Ostrowski for alerting me of this in the comments below. ↩︎

    8. The interaction between stamp duty and SDRT is another deeply fascinating area ↩︎

    9. I am thinking something like – an average of at least £100k/year x 25 years. Obviously, it’s not money I personally received. ↩︎

    10. There are quite a few – SDRT doesn’t have many exemptions, so “hooks in” to stamp duty exemptions – these would have to be preserved ↩︎

    11. Because whether someone stamps a document or decided by the taxpayer – HMRC has zero compliance cost ↩︎

    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).