The general election tax debate has been irrelevant. The few £bn being discussed is dwarfed by the actual tax UK tax increases over the last few years, and the further tax increases we’ll almost certainly see in the future.
Here’s what happens if we add on the Conservative Party’s extremely debateable claim that Labour will increase household taxes by £2,000 over four years – that’s about £10bn in total:2
£10bn is just an irrelevance in the context of almost a trillion pounds of total tax receipts. And it vanishes into statistical noise when we remember that OBR tax receipt forecasts are lucky to get within £30bn of the true figure.3
And here’s Labour’s actually announced tax increases:4:
Also an irrelevance.
By contrast, here’s the OBR’s projections for the overall increase in taxation as a % of GDP from 2023/24 to 2028/29:5
The bigger picture
The current level of taxation follows a few years of significant increases in tax.
Here’s how much of the 2023/24 tax burden reflects an increase since 2010:6
And here’s the OBR’s expected overall increase in taxation from 2010 through to 2028/2029:7
The difference is massive – more than the total UK VAT and corporation tax receipts.
The tax debate I’d like to see
So my plea to everyone is: stop discussing irrelevant amounts of tax as if it matters.
Here are three honest positions politicians could take:10
Accept the status quo, and that the UK will, by 2028/29, pay about £100bn more tax than it did in 2010/11 (in 2023/24 money). Make changes at the margins but acknowledge that’s all they are. The question then is: where will this burden fall? And what will the consequences of that be?
Advocate for significantly lower taxes, and (assuming you don’t want to crash the markets) explain which public services you’ll cut to fund the tax cuts, and the consequences of this for households and the wider economy.
Advocate for a significantly higher level of state spending, comparable with the European or even French figures. Again assuming you don’t want to crash the markets, explain what taxes you’d increase, and the consequences of that for households and the wider economy. And expect everyone to be sceptical if you claim only the rich would pay, because that’s not what happens in any of the countries that actually do have significantly higher spending than the UK.
And let’s please try to be careful not to fall for simple stories about political parties and levels of tax. If we take tax as a % of GDP over the last eighty years, and shade in periods of Labour government (red) and Conservative11 government (blue), it’s reasonably clear that the economic cycle has been much more important than the political cycle:
Finding answers is hard – but let’s at least try to ask the right questions.
The source is the receipts figures from the OBR’s public finances databank. The tax increase is calculated by simply taking the difference between tax receipts as a % of GDP in 2023/24 vs 2028/29 (1.2%), and multiplying this by the UK GDP figure used in that same dataset. This results in £30bn. We’d of course get a much larger number if we looked at the real terms difference between cash tax receipts over that period – £114bn – but it’s a fairer comparison to calculate by reference to GDP. ↩︎
Same OBR source. The tax increase is calculated by simply taking the difference between tax receipts as a % of GDP in 2023/24 vs 2010/11 (2.7%), and multiplying this by the UK GDP figure used in that same dataset. This results in £70bn. We’d of course get a larger number if we looked at the real terms difference between cash tax receipts over that period – £216bn – but it’s a fairer comparison to calculate by reference to GDP. ↩︎
Same methodology but looking at the 2028/29 OBR receipts figures and forecast. The increase in tax as a % of GDP over this period is 3.9% which equates into £100bn in 2023/24 money. If we look at the real terms difference between cash tax receipts over this period we’d get £330bn. ↩︎
Source is Eurostat – average 2023/24 figure is 41.9%, equating to £152bn more tax if we apply to UK GDP for 2023/24. We aren’t aware of projections for 2028/29, but we assume the figure will be materially higher. So the fair comparison isn’t with the 2028/29 chart immediately above, but the 2023/24 chart before that. ↩︎
Source again is Eurostat – the French figure for 2023/24 is 49%, equating to £334bn more tax if we apply to UK GDP for 2023/24. One would assume the figure will be higher for 2028/29 but it’s not clear how high it can realistically go. But again the fair comparison is with the UK 2023/24 chart not the 2028/29 chart. ↩︎
In principle there is an alternative; boost productivity and grow the economy. It was economic growth that enabled significant rises in public spending in the 2000s without significant tax rises. But even if this could be achieved, it’s not going to move the dial much in the next few years. ↩︎
And from 2010-2015, Conservative/Lib Dem coalition ↩︎
Some people on social media are convinced that Jeremy Hunt avoided tax when he bought seven flats through a company in 2018. We’ve analysed the transaction and believe it’s clear that he didn’t.
The basic accusation is that Jeremy Hunt “exploited a Tory loophole“ when he bought, through his company, seven flats in Ocean Village in Southampton.
These are different from the false claims that Hunt avoided tax when he sold his education business – we wrote about these back in 2022.
Hunt’s transaction
In 7 February 2018 Hunt’s company, Mare Pond Properties Limited, acquired seven apartments. We can see the price paid data on the land registry or from various other online sources:
i.e. a total price of £3,568,400.
How much stamp duty land tax (SDLT) was payable on that?
The actual SDLT result
SDLT rates are very different for residential and commercial property.
Residential property is taxed at escalating rates from (in 2018) 0% to 12%, with an additional 3% if you were acquiring a second (or further) residential property.2 Commercial property, on the other hand, is taxed at much lower rates, which only reach 5%.
So was this a residential or commercial purchase?
One might expect the answer to be obvious: it’s residential, because these were flats that people would live in – and therefore there’s SDLT of around £450k.
This is the 6+ rule. If you buy six or more dwellings, then it’s treated as a purchase of non-residential property. So you get lower rates, and no 3% additional tax. The rule was included in the original SDLT legislation back in 2003.
And those were the facts here. Hunt’s company was buying seven dwellings from the same seller on the same day in a single transaction.
This means that, instead of £450k, the SDLT due would be £167,920. We can be reasonably sure this is what happened, because it’s consistent with the fixed assets reported in Mare Pond Properties Ltd’s accounts.3
The Mirror and the social media posters therefore all understate the benefit to Hunt of the 6+ rule. He didn’t save £100,0004 – he saved almost £300,000.5
But the critical point is that this wasn’t a choice – s116(7) applies automatically. Hunt didn’t “claim” the 6+ rule – the way the rule works made this inevitable. It wasn’t actually possible for Hunt to pay £450k SDLT.
The alternative SDLT result
Whilst it’s not possible to opt out of s116(7), Hunt’s company could have obtained a different SDLT result if it had claimed “multiple dwellings relief” (MDR).6
MDR means that, when you buy multiple properties at once, instead of applying SDLT to the overall purchase price, you can opt to pay the average SDLT for each property.7 That will usually result in less tax, because the average property will be in a lower band than if the full purchase price was taxed.
An example:
Say you are buying one £2m property (as a second home) plus one £20k property.
On the face of it (using 2018 rates, including the 3% surcharge), SDLT on the overall £2,020,000 transaction is £217k.
But if you claim MDR then you instead work out SDLT on the average property price of £1,010,000. That would be £75k.
MDR gives a result of 2 x £75k, i.e. £150k
MDR has saved you £67k.
This might be a straightforward transaction, but it could also be avoidance, where the £20k property is an artifice created to reduce the stamp duty. Here are some examples HMRC has seen:
The average price paid for his seven properties: £510k
SDLT on a £510k property would have been £31k
MDR therefore gives a result of 7 x £31k = £215k.
So if Hunt had claimed MDR, his company would have paid £48k more tax.
Why in this case does MDR give a worse result? Because the 6+ rule converts residential properties to non-residential, and that’s more valuable than the MDR effect of applying lower bands.
Did Jeremy Hunt avoid tax?
We would say clearly not.
He bought seven flats and paid the SDLT on that transaction. He didn’t make any kind of claim or election.8 The fact he benefited from the 6+ rule is a natural consequence of how the tax system works. It’s not just the legal outcome, it’s the fair outcome – whether or not you think the 6+ rule is itself fair.9
Now if he’d bought five flats plus one teensy-tiny property just to get within the 6+ rule, then it would be fair to say he avoided tax. But he didn’t.
The fact Jeremy Hunt could have paid more tax by claiming MDR is hardly relevant. There are often things one can do voluntarily to trigger more tax; the failure to do that isn’t tax avoidance.10
There is no single definition of tax avoidance, but we’ve written an FAQ explaining the conventional view is that tax avoidance is using “loopholes” or other features of the tax system to save tax (“obtain a tax advantage”) in a way that wasn’t intended by Parliament. The 6+ rule was absolutely intended by Parliament.
Some people will disagree with that. But we can’t see any coherent definition of “tax avoidance” that includes Jeremy Hunt. He literally did nothing.
Many thanks to S, who researched and wrote almost all of this article (but the views expressed are the views of Tax Policy Associates).
We very often look at claims that businesses or politicians avoid tax. Sometimes this follows queries from journalists; sometimes tips from professionals or the public. The great majority of the time we conclude there is no avoidance. Where the accusation hasn’t been publicised, we don’t generally publish our conclusion that there is no avoidance. Where the accusation is published or, as here, gaining traction on social media, we generally do. ↩︎
When a company acquires, in some cases there can be a 15% flat rate but not, as here, when it is acquiring to lease out the properties. ↩︎
The accounts show “fixed assets” of £3,751,666 for 2018. Accounting rules require assets to booked in their historic costs – meaning that this figure will reflect the purchase price, stamp duty and other costs. £3,751,666 = £3,568,400 + £167,920 + £15,346. Suggesting that we have the correct figure for stamp duty, and Hunt’s other costs (legal etc) were £15k, which is in the right ballpark. ↩︎
The £100k is the figure from escaping the additional 3% SDLT, but the 6+ rule also saves the higher residential rates. ↩︎
i.e. compared to the standard SDLT result, with no 6+ rule and no MDR. ↩︎
A tweet I posted last week suggested Hunt had used MDR. That was incorrect. ↩︎
Subject to a minimum SDLT amount of 1% of the overall purchase price – that’s relevant if the average falls below the threshold at which SDLT starts to apply. ↩︎
As an aside, he also didn’t properly declare his interest in the flats in his Parliamentary disclosure, or to Companies House. ↩︎
The likely intended purpose of the 6+ rule, in conjunction with the 3% surcharge, was to continue the Osborne policy of encouraging large-scale professional/institutional landlords, and discouraging small-scale/”accidental” landlords. However there certainly is an argument that the 6+ rule is an unjustifiable relief for landlords. ↩︎
Indeed if he had claimed MDR we would have been suspicious that there was something untoward happening; going out of one’s way to pay more tax is a red flag. ↩︎
The Independent Schools Council received a survey on parents’ responses to VAT on private school fees. It was statistically meaningless, and the authors of the report say this was clear in the report. The ISC then gave the survey results to the Daily Mail without this vital context, and the result was a highly misleading headline suggesting that 40% of children would leave private schools. The ISC should be ashamed.
UPDATE 5 June 2024: Baines Cutler have published a statement saying that their research was misused and wasn’t representative of the sector, and distancing themselves from the 42% figure.Coverage in ipaper here.
If you tried to find the report in question, from education consultancy Baines Cutler, you won’t have succeeded – it’s not published anywhere.
The methodology
Baines Cutler kindly provided us with background on the report. They sent a full copy to the Independent Schools Council1, who sent the Mail a short summary and these two charts:
We should immediately be sceptical of this result. Would a 15% fee increase2 really cause 40% of private school pupils to leave, when significant historic increases haven’t had measurable effects? And how reliable a guide is this kind of question to what people will actually do?3 And doesn’t the second chart contradict the first?
But the more fundamental issue is that the survey was not statistically representative. Here’s what Baines Cutler told me about their methodology:
“The data is from parental surveys which represent 30,000 parents and 35,000 pupils.”
In other words, they sent a survey to parents, and then just collated the responses and published the results. Baines Cutler applied no statistical controls of any kind. It’s no more reliable than a Twitter poll.
The problem is that, whether for systematic reasons4 or sheer chance, those responding to surveys will usually be unrepresentative of those who don’t respond. There are two ways of dealing with this.
Traditional opinion polling surveys a random sample of the population (e.g. by calling randomly selected numbers).
The newer approach, pioneered by YouGov and others, has a panel of registered users, and then sends surveys to a statistically representative sample of that panel.
In both cases, the results are statistically adjusted (“weighted”) so they are representative of the population.
The fallacy that a large survey will be accurate was most famously illustrated by the Literary Digest, who surveyed 2,376,523 readers for their poll of the 1936 US Presidential election, and got it spectacularly wrong.5
I have studied advanced statistics, and am reasonably proficient – but I would never claim to be an expert. Matt Singh of Number Cruncher Politics very much is. Here’s his take on the presentation of the Baines Cutler report:
Dan Neidle of Tax Policy Associates drew my attention to a report in the Daily Mail claiming that 4 in 10 private school pupils could be “driven out” by VAT on fees. Dan dug into the background to this research and the consultancy that did it, and was told only that it had an impressive sounding sample size and response rate.
Regular readers will know that those things are, on their own, meaningless– the sample has to be scientific for you to generalise to people that haven’t taken part from those that have. And based on the information provided, this survey appears to be unscientific, not being a quota or random sample, and therefore cannot be generalised.
Additionally, even with a representative sample, this would still be difficult to poll. For one thing, people are not good at predicting their behaviour in the future, and for another, people may “preference signal” by exaggerating their likelihood of taking an action, in order to emphasise their view (in this case on charging VAT).
I doubt this will be the last time something like this pops up during the campaign. My advice to all is to be on your toes and exercise appropriate scepticism.
“The full report makes it clear that 30,000 parents is not statistically representative of the entire sector “
and:
“The entire point of this data in our report was to give schools “something to model” – because there is such lack of clarity from Labour’s actual plans.
It was never designed to be grossed up to the entire population of pupils like the Daily Mail have done, and the 224k number has never been published anywhere in our reports and is in our eyes too high for many reasons.”
This is pretty astonishing, because it implies that the ISC received a report that said it wasn’t representative, but then press-released a summary without this caveat.
I asked the Independent Schools Council if this was true. They denied that the report said it was unrepresentative but refused to go into more detail. I put to them that anyone with any knowledge of statistics would know a survey of this kind was meaningless – they didn’t respond.
There are really only two possible conclusions here.
If we believe Baines Cutler, then the ISC cynically presented their report as meaningful when they knew it was not.
If we believe the ISC, then they didn’t know what they were doing, and would fail GCSE maths.
Either way, it seems clear that nobody should trust any statistics from the ISC. And private schools should speak to their Year 11 maths classes before they use any of this data themselves.
What’s the correct figure?
I have no view on this question, as it requires expertise in econometrics and education policy which we do not have.
We wrote about the difficulties of coming up with an estimate here. The only serious attempt to come up with an estimate is this from the IFS. The analysis is, as the authors note, subject to numerous uncertainties, but it takes a rigorous approach.
There’s also a report from the Adam Smith Institute. It contains some valid criticisms of the IFS approach, but is then fatally undermined by using Baines Cutler figures employing the same worthless methodology as those discussed above.
Many thanks to polling expert Matt Singh for his comments. And a quick plug for How to Lie with Statistics, which is brilliant.
The original version of this article said that the ISC commissioned the report. The ISC tells me that is not correct. ↩︎
It’s generally agreed, by the ISC and individual schools, that VAT recovery means the net cost of VAT will be 15% not 20%. Baines Cutler surveyed the effect of a 20% increase and then reduced that by 1/4 to reflect the expected 15% increase. ↩︎
As the pollster Matt Singh put it to us, “people are not good at predicting their behaviour in the future… and may “preference signal” by exaggerating their likelihood of taking an action, in order to emphasise their view”. ↩︎
Most obviously: more engaged people, not representative of the population, are more likely to return the survey ↩︎
Many thanks to Matt Singh for this. A mistake in the first draft read “Readers Digest” – that was my error, and (again) shows the danger of writing anything from memory without checking it first. ↩︎
The “tax gap” is HMRC’s estimate of the difference between the tax it should collect, if all taxpayers behaved perfectly, and the amount HMRC actually collect.1 HMRC’s total tax gap estimate is £36bn.2
The obvious first question is: who causes the tax gap? And the answer is not quite what we’d expect:3
The next question: what kind of behaviour causes the tax gap? Again, it’s a bit surprising:
So most of the tax gap isn’t the wealthy, or multinationals… it’s us. Most of it is small businesses receiving payment in cash and not filing properly (accidentally or deliberately). This is not a very politically convenient answer, but it is nevertheless the truth.
Now these figures are estimates, subject to numerous uncertainties, and shouldn’t be taken as absolutes; but they are also unlikely to be very far off the mark.45
So we can say with some confidence that neither Labour or the Conservatives can raise £6bn from clamping down on tax avoidance, because there probably isn’t £6bn of tax avoidance. But that’s not the end of the story.
So how can the tax gap be reduced?
Here’s a short agenda for closing the tax gap:
More resourcing
There is now a widespread view, amongst individual taxpayers, business6 and the tax profession, that HMRC is seriously under-resourced. That is highly inconvenient for taxpayers (and sometimes much more serious than that). But it also means that some tax is not being paid: taxpayers are making mistakes, and HMRC is not helping them.
It’s not merely that HMRC funding has failed to keep pace with inflation; its most experienced personnel have been moved onto other projects, particularly Brexit and the pandemic.7 This was probably sensible, but is having long term consequences.
It is therefore in our view, and that of most other professionals we’ve spoken to (inside and outside HMRC) that providing more resources to HMRC is very likely to yield more8 than it costs, provided the funds are employed with care. So, for example, expanding helpline teams, compliance teams and creating special investigation units would seem likely to result in a positive return. Expanding internal and bureaucratic functions, less so. And, as in all organisations, it is likely that there would be pressure from internal stakeholders to expand internal and bureaucratic functions. Considerable care and skill may be necessary to avoid this trap.
There will also be important benefits to individuals and businesses.9 This is not a zero sum game.
Treating “tax avoidance” as criminality
There is an increasing amount of “tax avoidance” that is marketed to small businesses and individuals of relatively modest means, but that isn’t really avoidance at all. It’s a sorry mixture of incompetenceandcriminality.
Attacking tax avoidance, broadly defined, could bring down those “failure to take reasonable care” and “evasion” figures.
The vast majority of this “avoidance” isn’t promoted by the Big Four – it’s sold by dodgy outfits, some onshore, some offshore (particularly the Isle of Man). Their response to an HMRC challenge is often to walk away, leaving HMRC with nothing.
The answer in our view is new powers enabling HMRC to pursue directors and shareholders of tax avoidance scheme promoters.
We’ll be writing more about this soon.
Investigating tax avoidance and evasion more proactively
Giving HMRC additional powers isn’t enough – HMRC need to be smarter and more proactive investigating tax avoidance and evasion.
HMRC appears to be constantly playing catch-up with tax avoidance, only belatedly attacking structures that have been well publicised for years. HMRC once had special investigation teams that proactively uncovered and investigated avoidance; it no longer does. We receive many reports of avoidance schemes and tax scams from tax professionals across the country; we can investigate some, but sadly only a small proportion. This is something HMRC could do much more systematically and effectively.
And, when HMRC does begin an enquiry/investigation, it does so in what often looks like slow motion, taking months to send out correspondence. This is, once more, highly inconvenient for taxpayers, but also risks losses for HMRC (both because limitation periods can run out, and because changes of personnel over time mean HMRC can, and does, drop the ball).
In our view the loan scheme/loan charge affair was greatly exacerbated, and perhaps even caused, by HMRC not realising how prevalent loan avoidance schemes had become. By the time they realised, the situation was out of control. The same may be happening now with other forms of remuneration avoidance.
Closing “loopholes”
The tax avoidance tax gap figure excludes arrangements that many people would call “tax avoidance” but isn’t strictly that at all, because it reflects intentional Government policy rather than a “loophole”.
It remains unclear why these “loopholes”10 continue.
Simplification
Many of the “errors” and “failures to take reasonable care” reflect the complexity of the tax system, and the difficulties that ordinary taxpayers and small businesses can encounter from reasonably straightforward arrangements. Some of this complexity is inevitable, but some is not. We have entire taxes that have no reason to exist.
£4bn lost to “legal interpretation” is an admission of policy failure. If there are areas where the law is unclear, those areas should be clarified (one way or another). £4bn of technically disputed tax each year represents a grotesque waste of HMRC and taxpayer resources.
These measures would, we believe, reduce the tax gap, but probably not result in increased revenue (or decreased revenue). They would, however, benefit both the tax system and the country as a whole. Again, tax change is not a zero-sum game.
So are the claims that large sums could be raised plausible?
Yes – the claim is credible… but with the big caveat that simply increasing HMRC’s budget is unlikely to be effective to raise these sums. Careful targeting and management is required.
How do the Parties claims compare?
The three main parties have provided three very different sets of claims for how much revenue they could raise:
The Labour Party plan is in their “Plan to Close the Tax Gap” document. The Conservatives included a plan as part of their National Service press release. This doesn’t appear to be publicly available; we’re publishing it here. The Conservative figures weren’t in that press release, but are in their manifesto costings document.
The origin of the £6bn figure common to Labour and the Conservatives appears to be the head of the National Audit Office, who said earlier this year that £6bn could be raised by cracking down on avoidance and evasion. But he didn’t say how, or how much it would cost.
The Lib Dems just present the £7.2bn figure as 2028/29 funding in their manifesto costings document. They don’t give figures for earlier years. There is no published plan. I asked them about this, and their press office told me:
“We will invest an additional £1 billion a year in HMRC to tackle tax avoidance and evasion – more than Labour or the Conservatives. We are confident that this would enable us to raise an extra £8.23 billion a year by 2028-29 – an achievable and realistic figure. Jim Harra, Managing Director of HMRC, told the Public Accounts Committee that every £1 invested in cracking down on tax avoidance and evasion raises between £9 and £18. That would mean net revenue of £7.23 billion a year in 2028-29.”
Both Labour and the Conservatives also cite figures for historic ninefold returns from compliance expenditure (and, as above, the Lib Dems cite even higher numbers). However these figures are derived from historic targeted compliance measures which were relatively small. We are a little sceptical that they can be extrapolated to very significant billion pound measures, as is now proposed.
Comparing the Labour and Conservative plans: the Conservatives’ in large part reflects current Government initiatives (unsurprisingly). Labour’s plans are more detailed (as you’d expect, from an opposition with something to prove).
It is the Lib Dems who stand out: for having no plan, for claiming the largest revenues, and for assuming the revenues ramp up faster than others.
Many thanks to R, P and K for their input on this, and to C for help with the statistical elements.
Estimating the tax gap is a very difficult exercise, with numerous sources of error and uncertainty. HMRC does an impressive job to rigorous standards, generally believed to be the best in the world (most tax authorities only produce tax gap figures for VAT, which is a far simpler job given that it can be estimated with reasonable accuracy “top-down” from national accounts data). About ten years ago, HMRC’s homework was favourably reviewed by the IMF, who made various recommendations, most of which have been followed. More recently it was also reviewed by the Office for National Statistics. ↩︎
Other figures are sometimes quoted, but they are statistically naive. Richard Murphy produced a figure of £90bn back in 2019, but he did this by adopting a “top-down” methodology which, as HMRC and the IMF (page 46 here) have explained, requires a series of significant adjustments which Murphy does not make. Murphy’s estimate also fails the “smell test”. It requires us to believe HMRC are missing more than 95% of all tax evasion – that does not seem plausible given that HMRC conduct random audits of businesses (absent HMRC being corrupt, which is Murphy’s view). We’re unaware of any tax expert who believes Murphy’s approach is credible, and no country has adopted it. ↩︎
These figures are all from HMRC’s 2024 tax gap report, covering tax years up to 2022/23. ↩︎
It’s sometimes said that the estimates ignore offshore avoidance. This is not quite right, and there are two separate points here.
First, our work identified that HMRC does not systematically match up offshore account reporting with self assessment data. But that is different from saying that offshore is not included in HMRC’s tax evasion estimates. At most, HMRC’s estimate may be missing some evasion that would be identified by cross-checking HMRC’s sources of data. If so, the amounts are likely modest.
Second, HMRC’s tax gap does not include areas where something we might describe of as “avoidance” is actually permitted under the rules – for example the “double Irish” structure Google used prior to 2015. So in 2015 it was a very valid criticism to say that the tax gap estimates ignore multinational tax avoidance. However, things have changed since 2015. The manyanti–avoidance rules implemented post-2015 make it much harder to see what “avoidance” remains permissible. Even the Tax Justice Network estimates (of which we’ve been very critical) show multinational avoidance costing the UK less than £2bn. This second criticism therefore feels of limited relevance today. ↩︎
Also note that the definition of “avoidance” doesn’t encompass planning that’s clearly permitted by the rules (even if many people wish it wasn’t). So, for example, the big tax advantages for non-doms aren’t a result of tax avoidance – they’re how the rules work. Ditto carried interest, avoiding SDLT on commercial property using enveloping, etc. ↩︎
We are sceptical of the Association of Revenue and Customs’ claim that £910m of additional expenditure would result in £11.3bn of additional revenues. They reach this figure by looking at historic targeted budget increases, all at least an order of magnitude smaller than what the ARC is proposing (see page 49). The obvious response is – why stop there? Why not £2bn? The obvious answer is: diminishing returns. ↩︎
The Association of Revenue and Customs (the trade union for HMRC personnel) estimated a £1bn per annum saving for business if HMRC response times could be improved; although the ARC has an obvious vested interest. ↩︎
Given they’re envisaged and permitted by Parliament, “loophole” is not really the right word, but we have been unable to think of a better one. Any suggestions gratefully received. ↩︎
Robert Venables KC has a reputation for providing tax avoidance scheme promoters with convenient opinions that their schemes work. The courts usually disagree. But on one occasion he went further – in 2018 he promoted a loan charge avoidance scheme where his client was a company called “Citadel Limited”1. The scheme was promoted to desperate and vulnerable taxpayers by an adviser who later disappeared with his clients’ money. And what Venables didn’t add: he controlled Citadel.
We’ve previously reported on the “loan schemes” sold to taxpayers in the 2010s. The schemes replaced normal taxable income with “loans” from offshore trusts, supposedly avoiding all tax on wage income. The Government eventually killed these schemes with the “loan charge” – a harsh one-off tax on the value of all these outstanding loans.
The loan charge was announced in 2016 and would apply on 5 April 2019, in many cases creating six figure tax bills. So, by 2018, those affected were desperate to find a solution.
For some avoidance scheme promoters, this created an irresistible opportunity to sell schemes to make the loan charge disappear. None of these schemes had any prospect of working. In February 2017 and August 2017, HMRC had published “Spotlights” making clear their position that the only way to avoid the loan charge was to (genuinely) repay the loan. But that didn’t stop the promoters.
We’ve previously written about the loan charge avoidance scheme promoted by Douglas Barrowman’s company, Vanquish. Many others were playing the same game.
Venables’ scheme was promoted via an individual called Phil Manley.
Manley had previously worked for HMRC in a largely administrative role, which he exaggerated, claiming to have technical expertise and inside knowledge of the loan charge. Manley claimed to have been the “tech lead responsible for finding the way to defeat” avoidance schemes (a role which doesn’t exist).
Manley used the Loan Charge Action Group to boost his profile and gain clients. 3 Manley told clients he could save them from the loan charge, so they could ignore the upcoming 30 September 2020 HMRC settlement deadline. Just before that deadline, Manley abandoned his clients and fled the UK, leaving his clients in a very difficult position. Many have told me he took their money.4
It appears from this and other reports that Venables was working with Manley. Venables neither confirms nor denies this (see below). We believe Venables should have been suspicious that Manley was exaggerating his experience and expertise; other tax experts and laypeople drew unfavourable conclusions at the time from Manley’s behaviour and communications.
The scheme
Six months before the report in The Times, Manley had sent this email to his clients: 5
Manley was, in fact, absolutely endorsing a tax avoidance scheme. Or, rather, two schemes – one for people who were employees, another for the self-employed:
We’ve uploaded a copy of the “Justice” (employed) document here, and the “Liberation” (self-employed) document here.
The email and the specification documents don’t set out the details of the scheme, but the concept was clear: pay 8% of the outstanding loans, and your loans – and the loan charge – would disappear:
And there’s then a clear sign in Manley’s email that this is very dangerous territory:
In the commercial world one sometimes sees lengthy tax opinions running to dozens of pages. These are for the largest and most complex transactions involving sophisticated multinational companies. Even so, a hundred page tax opinion would be highly unusual (none of our team can recall seeing one).
It is in our view extremely unwise for a normal individual to enter into an arrangement where the analysis is so complex that a 100+ page opinion is required.
This isn’t a case where a taxpayer client was approaching Venables with a structure, and asking Venables to independently advise on it. Venables (perhaps via Manley) was promoting a structure to taxpayers – vulnerable individuals who were desperate to escape the loan charge.
But those taxpayers weren’t Venables’ client. His client was “Citadel Limited”:
Citadel Limited is a UK company (with nothing to do with the well-known fund manager of similar name).
Nowhere in the “specification” documents promoting the scheme does Venables disclose his interest in Citadel.
So it appears that Venables was selling an opinion to taxpayers, knowing they wouldn’t be able to rely on it, and without disclosing that he was closely connected to his actual client (to whom the taxpayers would be paying a fee).
The consensus amongst tax professionals has always been that attempts to avoid the loan charge are doomed7.
So, whilst we don’t know the details of how Venables’ 2018 scheme was structured, we can be reasonably confident that it had no realistic prospect of success:8
HMRC “Spotlights” of February 2017 and August 2017 made clear that HMRC would challenge loan charge avoidance schemes. There were at least five ways HMRC could do this:.
The loan charge applied to all loans outstanding on 5 April 2019. There were specificprovisions in the loan charge legislation to prevent a loan being somehow eliminated without the loan being actually repaid in cash.
These provisions were backed-up by a a targeted anti-avoidance rule (“TAAR”) that countered schemes that artificially “repaid” loans.
Since at least the early 2000s, the courts have lost patience with tax avoidance schemes; we believe there is only one, the SHIPS case, where the taxpayer has prevailed.
After SHIPS, Parliament enacted a General Anti-Abuse Rule (GAAR) to counter schemes that no reasonable person could regard as a reasonable course of action. In our view it’s clear that entering into an artificial arrangement to defeat the loan charge (an anti-avoidance rule) was not a reasonable course of action, regardless of the detail of how the scheme works.
None of this requires the benefit of hindsight – the fact that loan charge avoidance schemes were doomed was obvious to professionals at the time Venables promoted his scheme in 2018.
Six years further on, as far as we are aware, every single loan charge avoidance scheme has either been abandoned or is the subject of an ongoing HMRC enquiry. Some of those promoting the schemes have been arrested for tax fraud – HMRC has said it is investigating 200 people for criminal offences relating to loan charge avoidance.
The Justice and Liberation schemes should have been disclosed under DOTAS, given that they were being mass-marketed and clearly had a main benefit of obtaining a tax advantage. We rather expect that they were not.
The problem with the Tax Bar
In 2014, Jolyon Maugham (not then a KC) wrote an article about the “Boys Who Won’t Say No” – the handful of tax KCs who had a reputation for issuing opinions that avoidance schemes would work.
Those opinions were vital for the promoters selling the scheme, as they could reassure clients that they had a KC opinion. However in practice these schemes were doomed, and had no real prospect of success – the clients would almost certainly lose their money. But the KCs knew that the clients couldn’t sue them, because the KC’s client was the promoter, who did just fine out of the scheme. And only the client can sue.
Ten years later, nothing has changed. Some tax KCs (it must be stressed, a small minority) still write highly dubious opinions for scheme promoters, knowing that the actual scheme users will have no recourse when (inevitably) the scheme fails.
The Justice and Liberation schemes appear to be an unusual and even worse case. Venables wasn’t just an adviser acting on someone else’s scheme – he was closely involved in the creation of the scheme and had an undisclosed interest in it. He surely knew that the scheme would be promoted to unrepresented and vulnerable individuals.
We don’t believe a solicitor would be permitted by the SRA to act in this way. The question is whether the Bar Standards Board will act.
A failure of regulation
The Bar remains the last outpost of cowboy tax advisers.
This is an important consumer protection for clients – any structure that sets out to achieve results contrary to the clear intention of Parliament will, given the modern caselaw, almost inevitably fail.
However, barristers are not required to follow the PCRT.9 They remain free to promote highly artificial and contrived schemes with no realistic prospect of success, secure in the knowledge that in practice they face no adverse consequences when the scheme fails.
There is a live Government consultation on regulating the tax profession and “improving standards”. The proposals will have no effect on the Bar, as it is already regulated.
Given the significance of KC opinions for tax avoidance schemes, this looks like a major omission. We will be writing shortly on our wider concerns with the consultation. In our view they will fail to curtail modern forms of tax avoidance, whilst imposing an unnecessary regulatory burden on people who have no involvement in tax avoidance.
Venables’ response
We wrote to Robert Venables KC asking for comment.
Venables’ response started with a rather childish insult…
… and then provided a series of highly specific statements which neither confirmed nor denied the points we had put to him:
Denial of promoting the scheme with Phil Manley
Venables categorically denied that he promoted the scheme:
It is, however, not obvious how this is consistent with the “specification” documents, which appear to be aimed at promoting the scheme to individual taxpayers. It is possible that Venables is using a particular meaning of “promoting”.
We asked Venables specifically if he caused the specification documents to be circulated to taxpayers; he declined to comment.
In his answer above, Venables seems to be trying to distance himself from Manley. We note the reports from 2019 that Manley and Venables were involved in a scheme to avoid the loan charge called “Insella” (confirmed by our discussions with contractors and by contemporaneous forum posts). It is surprising that Venables was unaware of these reports, and that someone following the loan charge as closely as Venables was unaware of the controversy around Mr Manley.
We gave Venables the opportunity to specifically confirm or deny that he worked with Manley, and that he caused the Justice and Liberation specifications to be circulated to taxpayers via Manley. Venables declined to comment.
Denial of ownership of Citadel
We asked Venables about the details of his scheme saying that – as Citadel was his company – usual considerations of client confidentiality shouldn’t prevent him responding.
Venables’ response was to distance himself from Citadel:
The implication is that Breamgale is a trustee for some unknown third party, who holds the beneficial interest in the Citadel shares. That is consistent with Breamgale’s PSC disclosure. But it doesn’t explain why Venables has been listed, at all times, as a PSC of Citadel Limited, and that unknown third party has not been.
We asked Venables to explain this; he declined to comment.
However, in our view whether or not Venables holds a beneficial interest in Citadel is not the key question. Even on Venables’ account, he still controls the company (unless his Companies House filings were incorrect). And that was not disclosed to the taxpayers receiving the scheme proposal.
Denial of a duty to disclose
Mr Venables doesn’t think there’s anything improper about marketing a scheme to unrepresented individual taxpayers without disclosing his links to Citadel:
And:
This is a very narrow view of a barrister’s duties, which go beyond the narrow duty to the barrister’s own client. In our view, the BSB’s requirements of honesty, integrity and independence preclude a barrister from promoting a tax scheme to unrepresented individuals without disclosing that he personally, or persons related to him, will benefit from the fees that they pay.
Claim of confidentiality
Venables’ email to us was headed “strictly confidential”. We asked what the basis was for claiming confidentiality, and received this response:
Many thanks to M, J and C for technical remuneration tax input, and to B for advice on barristers’ professional standards. Thanks to Simon Lock for the genealogical research, and thanks to all the contractors who provided us with background on Messrs. Venables and Manley.
Footnotes
Unrelated to the well-known Citadel, the fund manager. ↩︎
Venables’ reputation as a provider of avoidance opinions is hard to prove from publicly available sources, as the opinions he issues are rarely public. One exception is the Hyrax case – see in particular paragraph 80 of the judgment. Venables provided an opinion the structure wasn’t disclosable to HMRC under the DOTAS rules. The tribunal had no difficulty coming to the opposite conclusion. ↩︎
After Manley’s activities were reported in The Times in April and then June 2019, Ed Davey wrote on behalf of the All-Party Parliamentary Loan Charge Group saying Manley “hadn’t promoted tax avoidance schemes” and never had a formal role with the APPG or the Loan Charge Action Group. Manley clearly had promoted tax avoidance schemes. He may never have had a formal role, but Manley accompanied Davey on meetings with HMRC, and worked with the LCAG on their input to the Independent Loan Charge Review. Both bodies were at best naive in giving prominence to someone who was fairly clearly not an expert in the matters he purported to advise on. It’s hard to understand why Davey then defended Manley. ↩︎
The only explanation provided by Manley was that HMRC had “thrown [him] under the bus”. It is unclear what was meant. Some of Manley’s former clients believe he was delusional enough to think he could persuade HMRC/HMT to drop the loan charge, and he fled upon realising that this would not happen. Others believe he was a fraudster from the start; that seems plausible to us, given the gulf between Manley’s claims and his actual expertise. ↩︎
It is possible that the schemes discussed in this report were in fact “Insella”, or changed into “Insella”. It is also possible they were different schemes. How many schemes Venables and Manley promoted is an interesting question, but only of limited relevance to the matters discussed in this report. ↩︎
We weren’t sure about this when we first published this report, but are now reasonably confident they are brothers thanks to birth registration index data. Michael and Robert share a place of birth and mother’s maiden name, and the father owned a company now owned by Robert and Michael Venables. Many thanks to Simon Lock for the research on this. ↩︎
Just as if someone claimed to have a scheme which eliminated an employee’s tax on £100k of PAYE income then we would be reasonably confident that the scheme would fail, without knowing the details of the scheme. ↩︎
Unless they are also CIOT or ATT regulated, which most are not. ↩︎
Nadhim Zahawi’s attempt to silence me has now resulted in disciplinary action for his lawyer. This is a short piece on why it happened, and what it means – for the lawyer, for SLAPPs, and for Zahawi himself
In July 2022, Nadhim Zahawi’s solicitors, Osborne Clarke, threatened me with libel for saying that Zahawi had lied about his taxes (which, of course, he had). They said I couldn’t tell anyone about their threat, and it would be “improper” and a “serious matter” if I did. This was false; an attempt to intimidate me into silence. I referred the matter to the Solicitors Regulatory Authority.
The FT is now reporting that the SRA has taken action, and has referred the solicitor to the Solicitors Disciplinary Tribunal. He1 may be struck off.
I believe this is the first time a solicitor has been referred to the SDT for abusive tactics in libel litigation – often termed SLAPP.
The threats
Osborne Clarke sent me an email threatening me with a libel action in July 2022 for saying their client, Nadhim Zahawi, had lied. The email included this:
I didn’t respond, but instead published a more detailed analysis of why I thought Zahawi was lying. Osborne Clarke reacted by sending me a letter including this paragaph:
The law
The idea you can send someone a libel threat, and forbid them from telling anyone about it, is outrageous. It’s also without any legal merit.23.
I was shocked to discover that this attempt at intimidation was standard practice in the libel world. I knew the threat was toothless; but many other people who receive correspondence of this kind do not. Often the recipients have no legal representation at all. Even those that do often feel it is risky to publish the correspondence.
Osborne Clarke has made many other false4 claims of confidentiality/without prejudice (as have other libel firms). What makes Osborne Clarke’s behaviour worse is that I know that one recipient of their fake “confidentiality” assertion told Osborne Clarke in 2020 that there was no legal basis for confidentiality. Osborne Clarke responded by backing down. This wasn’t just a case of misunderstanding the law; they knew the confidentiality assertion was false when they made it to me.
Osborne Clarke is a good firm. They could have disciplined the lawyer involved and accepted the consequences. Instead they defend the indefensible.5 This is a disgrace.
The SRA itself has the power to fine solicitors up to £25,000. It only refers case to the Solicitors Disciplinary Tribunal in the most serious cases of misconduct, “particularly if the SRA’s view is that the misconduct is so serious it requires a solicitor to be prevented from practising”.
The wider consequences
The SRA acted with commendable speed after I raised the issue of false confidentiality assertions, and the abuse of without prejudice. It published a “warning notice” in November 2022 making clear that this behaviour was unacceptable.
However some libel solicitors have continued to act in this manner. They either ignore the SRA and continue to run the fake “confidentiality” argument, or they invent new spurious reasons why their libel threat cannot be published. My favourite (which is to say, the most disgraceful) is to claim that their letter is copyrighted.
I very much hope that the SRA’s action against Osborne Clarke will make clear that this behaviour will not be tolerated. Anyone else who’s received a supposedly “secret” libel threat should contact the SRA, particularly if this was after November 2022.
What the SRA has not done – and what that means
I also referred Osborne Clarke to the SRA for saying to me in correspondence things that we now know were untrue.
And:
And again:
All these claims are false. Zahawi’s taxes weren’t in fact “fully declared and paid in the UK”. He was the beneficiary of an offshore structure, which he had used to obtain a tax advantage.6 We can discard the possibility this was an accident, or forgetfulness: at the time these claims were made, Zahawi was deep in negotiations with HMRC to settle his unpaid tax, and pay a £1m penalty for negligence/carelessness.
So why hasn’t the SRA referred Osborne Clarke for making these false statements?
I believe there is only one reason: because Osborne Clarke didn’t know they were false; Zahawi had lied to his own lawyers.7.
So it may not be a coincidence that Zahawi announced he was standing down as an MP the day after the SRA’s decision.
I’ve set out the full timeline to the Zahawi affair, with links to all documents, here. I remain incredibly grateful to the dozens of lawyers, tax advisers and journalists who worked on this with me.
The SRA informed me about their decision on 8 May but said the matter was confidential until the SDT accepted the referral. Osborne Clarke clearly put the development in the public domain when they spoke to the FT, and the SRA has therefore told me that I am free to speak publicly about it. However the name of the solicitor referred to the SDT is not yet in the public domain, and so I won’t mention his name in this piece. ↩︎
Save in unusual cases, e.g. where the correspondence carrying the libel threat also contains confidential information. ↩︎
The claim this was justified by the “without prejudice” rule was also meritless. A party to dispute can make an offer to settle a dispute “without prejudice”; it cannot then be shown to a court. Without prejudice is not a separate rule of confidentiality, but it is often abused as such. Osborne Clarke’s email was not “without prejudice” because it contained no offer of settlement. I had also, anticipating this ploy, previously told Osborne Clarke I would not accept without prejudice correspondence. I wrote more about the legal issues here.↩︎
Not just false in my view; false in the view of every confidentiality specialist I’ve spoken to. Outside of a segment of the libel world, this behaviour is widely seen as bizarre. ↩︎
It is telling that Osborne Clarke say that their actions were “consistent with law and practice”. I’m sure they were consistent with the practice of the dodgier end of the libel profession. That is, however, no defence. And as for “consistent with the law”, neither they nor anyone else has ever attempted to explain how a letter containing no confidential information can be unilaterally asserted to be confidential, nor how the “without prejudice” rule is a barrier to publication. ↩︎
I suspect that Zahawi probably intentionally failed to pay tax, which is to say he “evaded” tax – although there is no way to be sure, and I doubt HMRC ever had sufficient evidence for a criminal prosecution. ↩︎
The SRA won’t say this publicly, because they don’t comment on their reasons for not making a referral, and Osborne Clarke are most unlikely to comment. Nadhim Zahawi’s spokespeople stopped replying to me a long time ago, but if they provide a statement I will of course include it in this article. ↩︎
We wrote in January about some of the ways private schools might try to avoid Labour’s proposed 20% VAT on school fees. One approach we mentioned – paying years’ of fees in advance – is now being widely used. We are concerned that schools and parents are not fully understanding the risks that these advance fee schemes create.Parents are being warned about the possibility of retrospective legislation – but a far worse prospect would be a challenge under existing law, and years of litigation.
This short report explains the risks, and suggests how the Labour Party, HMRC and schools could prevent a protracted period of uncertainty, and the potential for schools and parents to face significant unexpected costs.The Financial Times has more on this here.
We published a report in January concluding that most of the ways schools and parents could try to avoid VAT would not work. The one exception was paying fees in advance. We said that paying several years’ fees in advance would in principle avoid any later VAT change, because VAT would be charged at the point an early payment is made. We added that we doubted many people would want to do this – but it turns out we were wrong.
We have now received numerous reports of schools promoting the scheme.1
The advance payment schemes
Many schools (like Eton) have had advance fee schemes for years. They have in most cases been only occasionally used, but are now seeing much wider take-up. We’ve received reports that private schools across the country are now offering the schemes, and schools that have historically had only a couple of parents using the scheme each year, now have dozens.
This mostly isn’t visible to outsiders, but the sheer number of websites discussing the schemes gives an indication of how mainstream this is. For example:
Haberdashers Boys – the website didn’t mention an advance fee scheme in January 2022; from June 2022 it now does.
Perse School – the scheme wasn’t mentioned in 2022; is now.
Leeds Grammar didn’t mention its advance scheme in June 2023; it now does.
The older schemes usually don’t mention VAT; the schemes were a means of financial planning (and often limited to one year). By contrast, schemes now make clear that it’s all about the VAT – here’s one typical example:2
Interestingly, the wealthier/most sophisticated private schools appear not to be promoting fee schemes.
How do the schemes work?
VAT is charged at the point an early payment is made. If I pay £5,000 for a car today, for delivery in a year’s time, then VAT is chargeable now, and the relevant rules are those in force today. This principle is part of what’s called the “time of supply” rules.
The basic idea of the advance fee schemes is that, by paying several years’ fees in advance, the time of supply is now, and parents can “lock in” today’s VAT rules and be entirely unaffected by any subsequent imposition of VAT on school fees. As a general proposition, this is correct.
However when we look at the way the school advance fee schemes work, things get more complicated. Unlike the car example, parents paying school fees in advance aren’t paying an agreed sum and buying a product. The amount they pay is in reality placed on deposit with the school, and then used by the school to satisfy each term’s fees. This means that if, for example, school fees increase, then the fees paid in advance will be used up more quickly than anticipated, and the parents will (eventually) have to pay more. If the parents decide to remove the child from the school, they get the money back (subject to notice periods). If the child gets a scholarship, the parents get a refund. And the schemes often let parents pull out of the scheme, and get their money back, at any time (with notice).
Or, as one school puts it: the scheme operates by “parents buying a credit against future invoices at a discounted amount.” And:
What does the School do with fees paid in advance?
Fees paid in advance form part of the general unrestricted reserves of the School, the School is therefore free to used fees paid in advance as it sees fit. However, as a general rule fees paid in advance are held in a separate bank account from the School’s general account and an amount is then released to general funds at the start of each term.
These schemes therefore don’t work at all like normal advance payments arrangements, and don’t have the usual benefit of locking in a price.
This means that, if we ignore VAT for a moment, the schemes don’t make much sense for most parents. There’s a discount for advance payment, but the discount rates we have seen are small – between 1% and 4%. That doesn’t make much sense given current bank base rates – you’d be better off putting the cash in a deposit account or other investments. And that would have the considerable advantage of being safe – by contrast, money paid in advance to a school may be lost if the school experiences financial difficulty.3
It’s therefore unsurprising that, historically, advance fee schemes were only rarely used – typically a handful of parents each year. Generally those parents had particular circumstances for which paying fees in advance made sense. One example would be where parents divorce, and pre-paying many years’ fees in advance formed part of the financial settlement
The recent widespread take-up of these schemes is, therefore, all about VAT.
So what tax risk are schools and parents running?
Retrospective legislation
The first risk is retrospective legislation.
It’s fairly common for new tax and VAT legislation to include “anti-forestalling” rules which prevent someone avoiding the tax between the date the legislation is announced, and the date it’s enacted. Labour have said that they’ll do this.
So, if we assume (for example) an election on 10 October 2024, we’d expect an announcement on school fee VAT a few days later, saying that legislation would be brought forward to apply VAT to school fees from April 2025. We’d also expect this to include a statement that anti-forestalling rules will apply VAT to any advance payment of more than one term made on or after the date of the announcement.
This won’t affect people who prepaid years of school fees before the election.
If Labour want to close that “loophole”, they’d need to enact proper retrospective legislation, going back before the post-election announcement. There are suggestions Labour has already discussed this.
The simplest way for retrospection to work would be to simply apply VAT to all payments in advance which relate to education services provided from April 2025 onwards. The time of supply could be (for example) the start of the term, or the time at which parents generally are required to pay for that term’s education.
What practical effect would retrospective legislation have?
If the suggested approach above were adopted, then the school would be required to account for VAT around the start of each term. Most of the scheme T&Cs we’ve seen should permit the schools to charge tax when necessary. So, in addition to applying part of the parents’ advance payment to school fees, they’d apply part of it to cover the VAT.
So where, for example, parents had paid in advance for five years, the additional VAT charges mean the funds would be used-up after four years, and the parents would then have to pay again. I expect in practice parents would cancel their participation in the scheme.
Things are messier if parents only paid for the Summer 2025 term in advance. Their advance payment would not be enough to cover the VAT, and the schools would have to ask them to pay more. This would present schools with the practical difficulty and risk of collecting additional money from unhappy parents.4
So, whilst retrospective legislation is unlikely to be welcomed by schools or parents, its implementation would be reasonably straightforward, and schools should in practice be able to cover the tax.
Most schools which are offering advance fee schemes are explicitly warning parents about the potential for retrospective legislation, and saying that if this happens then the parents would have to pay the VAT. That is unlikely to perturb parents too much, because it’s a one-way bet: best case, they save the VAT; worst case, they don’t. They’re not running any new risks (except the risk of the school going bust).
Could retrospective legislation be challenged?
It is often suggested that retrospective legislation is unlawful, either the ECHR/Human Rights Act or for some other reason. Our view is that any legal challenge is very unlikely to succeed, for two reasons. First, the courts have generally been relaxed about retrospective tax legislation in the context of anti-avoidance.5 Second, and more fundamentally, even if a taxpayer were successful, the way the Human Rights Act works means that primary tax legislation cannot be overriden – the court would issue a “declaration of incompatibility” and ask Parliament to think again.6
Retrospection will remain politically controversial – Geoffrey Howe made the argument against it very well back in 1978, and many people still share that view.7 But as a legal matter it’s our view that retrospective tax legislation to close what Government perceives (rightly or wrongly) as an avoidance scheme will generally be lawful, and when it’s implemented by primary legislation, there’s no realistic prospect of challenging it.
HMRC challenge
The messier outcome is that there is no retrospective legislation, but HMRC start to challenge some advance fee schemes on the the basis that they are not effective under the usual VAT principles. We haven’t seen any schools warning parents of this risk, probably because they aren’t aware of it themselves.8
Advance fee schemes have been around for decades, and never to our knowledge challenged – but of course there was never any reason to challenge them until now, as they created no tax advantage.
How might such a challenge be made? We can think of a few potential approaches:
That, realistically, the invoice for the advance fees is not actually an invoice for the supply of school fees, but rather relates to an advance of credit. The parents are making a deposit with the school. The school then charges parents for each term’s school fees, and the deposit is used to satisfy this. It would follow that VAT is due separately on each term’s fees, at the time it is invoiced or applied to the deposit. Some of the scheme T&Cs we’ve seen look susceptible to this kind of challenge (particularly where termly invoices are issued); others less so.
That the advance fee arrangement is artificial with the essential aim of avoiding a future VAT charge, and so can be countered using the Halifax VAT anti-abuse doctrine. If VAT had already been imposed on private school fees for a future date, and people were paying in advance before that date, then we believe it’s likely Halifax would apply, given the somewhat artificial nature of the schemes. However given that currently there is no VAT on private school fees, and the scheme is avoiding anticipated future change in law, the argument becomes much more difficult for HMRC. We are unaware of any authority permitting Halifax to be used in this manner, but it is not out of the question.
A year before the Halifax judgment, in the BUPA Hospitals case, the CJEU ruled against a scheme operated by private health companies to make advance payments to pre-empt a change in UK VAT law. The time of supply rules are in large part anti-avoidance rules,9 and so the CJEU applied them purposively to defeat the scheme. There are a number of differences between the BUPA Hospitals advance payment scheme and the private schools’ scheme; but it would not take much imagination to apply a similar argument.
Other technical VAT arguments, for example that the prepayment actually amounts to the purchase of a voucher so that the complex VAT rules on vouchers apply – HMRC may be able to argue that it is a “multi-purpose voucher”10 so that VAT is chargeable at the point that termly fees are satisfied with the prepayment arrangement.
Considerable analysis would be required to reach a view on these issues. We haven’t undertaken that analysis, and so have no view on whether ultimately HMRC or schools/parents would prevail. However these arguments are not fanciful, and the prospect of an HMRC challenge is in our view real.
What practical effect would an HMRC challenge have?
Any HMRC challenge would be a bad outcome for schools and parents.
HMRC VAT challenges are often made years after the event. HMRC usually has between one and four years to open an enquiry (depending on whether full disclosure was made to it). But HMRC can take broadly as long as it likes before issuing a “closure notice” saying that VAT is due. By this time, several years of VAT liability could have built up.
Unlike income tax/corporation tax, when HMRC issues that “closure notice”, the taxpayer has to pay the VAT up-front. Schools would then presumably seek to recover the VAT from parents.
Given that years may have passed, this may not be straightforward (particularly where children have left the school).
Whilst scheme T&Cs generally permit schools to recover the VAT from parents, parents argue that this was limited to the retrospective tax scenario that they were warned about. As far as we are aware, parents have not been warned about the possibility of challenge under current law, and that may both make them unhappy and provide potential legal grounds for resisting claims by schools.
It is therefore our view that schools may be running material risks which they don’t fully understand – years of litigation and uncertainty over whether they can recover the VAT from parents. Some schools could get into serious financial difficulty, particularly if several years of VAT have built up.
This is a much worse outcome for schools and parents than retrospective legislation.
What’s the impact on VAT revenues?
Let’s say Labour don’t legislation retrospectively, and HMRC either don’t challenge the schemes, or the challenges fail.
How much VAT revenue would be lost as a result of these schemes?
The IFS has estimated that imposing VAT on private school fees would raise about £1.6bn. We have written about the difficulty of making estimates in this area, and so that figure needs to be viewed cautiously, but it is in our view the only serious estimate that has been published.
So for every 1% of parents that use the schemes, there would broadly be a loss of VAT revenue of £16m.11 Plus the costs of challenging the scheme, if that is how HMRC proceeds.
What should happen?
We believe it’s in nobody’s interest to have years of litigation, and schools potentially finding themselves with large VAT bills they cannot afford to pay. To prevent this worst-case scenario, we would suggest that all parties try to provide as much clarity as possible.
If Labour plans to enact retrospective legislation, it should say so now, at least in broad terms, and not just drop hints. That would probably end the schemes now, and prevent everyone involved wasting time and money.
Schools should warn parents of the potential for legal challenge under current law, and that this could result in the schools pursuing parents for VAT potentially years later.
It would also seem sensible for schools to warn parents that fees paid in advance could be lost if the school enters into financial difficulty. We’ve received many reports of communications from schools, and of those only Dulwich College mentions this scenario.
Schools should be careful to plan for the worst-case scenario, and ensure that they will always have enough funds to cover a VAT assessment.
If Labour wins the election, and announces it will introduce VAT on school fees without retrospection, then HMRC should either challenge the schemes early or say clearly that it will not be challenging them. HMRC often waits until the last week of the limitation period – that would be unfortunate here.
In that same scenario, schools could minimise the risk of an HMRC challenge years after the event by providing full disclosure up-front, for example by sending HMRC a letter explaining precisely how their advance fee scheme works.
Thanks to L, R, O, W and C for drawing our attention to this, to E for the VAT technical input and K for a discussion on insolvency rules. And thanks to Anna Gross at the Financial Times.
Image by www.raisin.co.uk and licensed under Creative Commons Attribution Licensing.
Footnotes
We have also received a few reports of other schools considering the scheme but not doing so, because of the risks we discuss below. ↩︎
2. Legislation in 2012 retrospectively reversed a tax avoidance scheme implemented by Barclays. There was no attempt to challenge this in the courts.
3. Legislation in 2013 retrospectively closed down an SDLT avoidance scheme – the High Court refused permission for a judicial review to challenge the retrospection.
The House of Commons Library has written an excellent briefing on retrospective legislation which goes through these and other cases. ↩︎
By contrast, EU-law based challenges arguments enabled the courts to potentially override Acts of Parliament – but, post Brexit, such challenges can no longer be made. ↩︎
See, for example, the Protocol published by the Government in 2011 which says that retrospective legislation will only be enacted in “exceptional” cases. This is, however, in no sense legally binding. ↩︎
In the many briefings on advance fee schemes online, we’ve seen only one, from haysmacintyre, which mentions the point. ↩︎
An important point which we missed in the first draft of this report. Thanks to Professor Rita de la Feria for raising it. ↩︎
On the basis that the VAT due on the supply of education services is not known at the time the advance fee scheme is entered into or, in some implementations of the scheme which cover ancillary fees, because the services supplied are not known. This feels a rather artificial argument, but the voucher rules have always been rather artificial ↩︎
Presumably actually more, because parents at more expensive schools have a stronger incentive to pay in advance, and more ability to do so. There is also a technical reason it would be higher than the naive £16m figure, because in future years the schools will have reduced input VAT but their output VAT will be unchanged. So the parents who don’t use the scheme will obtain a small benefit from the fact others have used it. A quick example: imagine a school with £1,000 of fee income and £250 of VATable expenses. Without advance payment, it would have a VAT bill of 15% of its fees (i.e. 20% x (1000 – 250) = £150 out of £1,000). But say (unrealistically) 10% of the fees are paid in advance, its VAT bill would now be 14% of its fees (20% x (900 x 250) = £130 out of £900). ↩︎
An unknown individual is trying to keep their tax avoidance scheme, and resultant dispute with HMRC, private. They attempted to apply to the courts for anonymity – and failed. But they’re so desperate to keep their name out of the papers that they then dropped their dispute with HMRC and applied for a lifetime anonymity order. HMRC are opposing this. So are Tax Policy Associates.
UPDATE 22 November 2024: the anonymous taxpayer lost their appeal and, unless they take the point to the Court of Appeal, their name will be revealed on 11 December.
UPDATE 9 December 2024: the anonymity has now been lost. It’s Frankie Dettori.
UPDATE 3 April 2025. We’ve published the bundle of legal arguments from the anonymity appeal here, and the authorities bundle (i.e. supporting caselaw/legislation) here.
There is an excellent Telegraph article on the Dettori affair here.
UPDATE 20 May 2025: HMRC has committed that, whenever a taxpayer makes an application for anonymity at a court/tribunal, it will (where appropriate) ask the court to serve notice of the application on the Press Association.
Open justice and tax appeals
Here’s the deal: your tax affairs are confidential. HMRC is bound by a strict statutory confidentiality obligation. Nobody can see your tax return. Nobody can find out if HMRC investigates you. If you buy a tax avoidance scheme, HMRC challenges you, and you give up and pay the tax, nobody will ever know.1 But if you appeal against HMRC’s decision, and it hits a tax tribunal, everybody will find out.
So normally tax appeals are open: anyone can attend,2 decisions are often published, and you don’t get to hide anything.
This is important in its own right, but it also shapes taxpayer incentives. If I was a billionaire faced with an HMRC demand for say £100m, I have an incentive to contest it even if my prospects of winning are low. The costs of an appeal are unlikely to top £1m, so an appeal is economically sensible even if I have only a 5% chance of winning. 3 The prospect of public opprobrium changes the calculation. If taxpayers could appeal anonymously then we would see more appeals on technically marginal points by wealthy individual and corporate taxpayers.
The first anonymity order
So it was very surprising that, in September 2021, an unknown taxpayer was granted anonymity by the First Tier Tribunal. More surprising still was that this was despite the taxpayer providing no evidence whatsoever of any harm or prejudice he would suffer if his name became public.4 This was in stark contrast with the Peter Andre case. The judgment wasn’t published, and nobody (other than HMRC) knew this had happened.
HMRC appealed to the Upper Tier Tribunal. In a forceful judgment, the UTT said the First Tier Tribunal had made “material errors of law” which resulted in “a blanket derogation from open justice by the backdoor”:
and:
The UTT said the taxpayer’s name would be published two weeks after the appeal deadline passed. The taxpayer didn’t appeal – given the strength of the UTT judgment, his prospects would have been bleak. He did something else…
The new application
The mystery taxpayer is so desperate to keep his name out of the papers that, when it became clear he wouldn’t obtain anonymity, he dropped his original appeal against HMRC’s tax assessment,5 and then applied to the tribunal to preserve his anonymity forever.
This goes back to the incentives point – the mystery taxpayer was only willing to appeal against the tax assessment if he could do so anonymously. Which is precisely why such anonymous appeals should only be permitted in exceptional circumstances.
HMRC is opposing the taxpayer’s application. We applied to the Upper Tier Tribunal for copies of the application and HMRC’s response, and the UTT kindly agreed to provide us with the documents, on the condition we didn’t publish them.
We can however say that we regard the taxpayer’s application as weak; he asks for anonymity whilst not identifying a single reason why his case merits it. The taxpayer then pleads a series of cases which are either irrelevant, or relate to circumstances where there was a genuine reason to seek anonymity (mental illness, a stillborn child, and someone who didn’t want the fact they’d worked as a stripper to become public). HMRC’s response to this is robust and comprehensive.
We have made our own short submission, which we are able to publish. We don’t repeat the points in HMRC’s response, but make two additional points of general public policy (PDF version here):
We understand that the Times and the Press Association have also received copies of the UTT documents, and may be making their own submissions.
Who is the taxpayer?
We don’t know for sure.
The judgment does not reveal the identity of the taxpayer, other than that he is a man. Nor does it say what the underlying dispute is – but our team is reasonably confident that, on the basis of the details that are provided in the judgment and certain other materials in the public domain, it relates to a mass-marketed tax avoidance scheme.
We have gone further, and used those materials to narrow down the identity of the taxpayer, but we don’t believe it would be responsible to publish our findings at this stage. However, to prevent unfair speculation, we will say that we don’t believe the taxpayer is a current or former politician. We won’t respond to any other queries about who the taxpayer might be.
The role of HMRC and the courts
HMRC deserves plaudits for pursuing this appeal so robustly. If it hadn’t, then the anonymity would have stood, and nobody would have known about it (given that the original FTT decision doesn’t appear to have been published). HMRC went further, and asked for the Press Association to be sent copies of the tribunal documents.
It is, however, disconcerting that nobody was aware of the original 2021 anonymity judgment. We would suggest:
Tax Tribunals should follow the approach of the High Court in the Zeromska-Smith case, and serve copies of applications for anonymity on the Press Association (i.e. to enable the media to oppose such applications).
HMRC doesn’t appear to have requested service on the media in the original 2021 hearing – we believe it should always do so.
When anonymity is granted by the First Tier Tribunal, HMRC should ensure that the judgments become public. We should all have a right to know the extent to which anonymity orders are being applied for and granted.
Update 23 May 2024: there has now been another unrelated anonymity decision – L v Commissioners for HMRC. HMRC took a neutral position on the point, and the FTT’s findings of fact make the decision to grant anonymity look reasonable. However it is still perturbing that no notice was given to the media, and so this was in practice an uncontested application.
Many thanks to George Peretz KC for his pro bono assistance in this matter (George successfully acted for HMRC on one of the few tax confidentiality cases).
Thanks also to our frequently collaborator M, and above all to Ian Richardson at Grant Thornton in the Isle of Man – he was I believe being the first person to spot the UTT judgment, and alert us to this case (but it has, we believe, nothing to do with the Isle of Man).
Most of all, thanks to the Press Association, and to The Times and News Group Newspapers, for intervening in the appeal as third parties.
In theory. You have to find out where it is, or obtain a link to a video conference – one commenter below has had difficulty doing this. ↩︎
i.e. because appealing has an expected return of £3m. That’s the £100m cost of not appealing minus 95% x the £101m cost in the scenario where I lose, minus 5% x the £1m cost in the scenario where I win. £100m – (95% x £100m + £1m) – (5% x £0m + £1m) = £3m. ↩︎
New polling evidence from Tax Policy Associates and WeThink shows that half the public doesn’t understand a basic principle of income tax: the way that tax rates apply to income above a threshold. Our polling suggests that 50% of people believe that, once you hit the higher rate threshold, the 40% higher rate applies to all your earnings.
UPDATE October 2024 – we ran a new poll with completely different wording, testing the same point. The results were consistent.
If you live in England1, earn £50,269, and get a £1 pay rise, you’ll pay an additional 28p in tax – 20% income tax and 8% national insurance.
The £50,270 you’re now earning puts you at the top of the basic rate tax band. Get another £1 pay rise and you’re now in the higher rate tax band – and you’ll pay an additional 42p in tax – 40% income tax and 2% national insurance.2
The important thing is that the higher 40% rate applies only to your income above the £50,270 40% threshold. But it’s often suggested that many people don’t appreciate this, and think that the 40% applies to all your income – so that the £1 pay raise results in a massive additional tax bill.3 That is a very significant misunderstanding – but how common is it really?4
I was surprised at the results when I tested this with a Twitter poll:
This should be taken as nothing more than entertainment – Twitter polls are useless as a measure of public opinion.5 Thanks to WeThink, we can now do rather better.
The polling evidence
WeThink kindly included this issue as part of their regular opinion polling (they polled 1,164 people, before weighting).
Our question was:
“Suppose that you earn £50,270, the highest amount in the basic rate 20% income tax band. You get a £1 a year pay rise, and are now in the 40% higher rate tax band. How much additional tax do you think you will pay?”
I think it’s clear that the correct answer is “a small amount”.7 But 50% of the public doesn’t agree:
What about supporters of different political parties?
Given their very different demographics we might expect to see different results. We don’t:8
Scotland
The Scottish rates are different. There is a 21% “intermediate rate” income tax band for earnings up to £43,662, and then a 42% “higher rate” tax band.
But the level of public understanding is almost identical:
How does the result vary with income, education, etc?
One obvious response to his data is to say that, as only a small proportion of the country pays the higher rate, it stands to reason that only a small proportion understand it.
If that were really what’s going on then we’d see a wide variation across polling subgroups, with higher awareness of the correct position amongst graduates, people living in London, and others who statistically are more likely to earn £50k. But we don’t see this at all in the data – the 50-50 breakdown is true across almost all the subgroups.
That said, we don’t right now have enough data to say this definitively – many of the subgroups are too small for statistical validity. So WeThink have kindly agreed to run some more polling so we can get enough data to do proper justice to the question, look in detail at the subgroups, and test the question by reference to income levels.
We’ll be returning to this issue soon.
Why is this important?
It used to be that only a small number of people paid higher rate tax – that is no longer the case. By 2027/28, the IFS has estimated 14% of adults will be in this tax band, which equates to about a quarter of all individual income taxpayers. It’s reasonable to expect that about half of all households will include someone paying higher rate tax at some point in their lifetime. So the higher rate is more important than it ever was.
Our poll findings shouldn’t cause concern that people are paying the wrong amount of tax. Employees are paid by PAYE, which deducts the correct tax automatically. The self employed either use HMRC’s self assessment system (which calculates the tax due) or use an accountant.
There are, however, other potential consequences of a widespread misunderstanding as to how income tax works.
First, and perhaps most importantly, there are anecdotal reports of people turning away work because they believe entering the higher rate tax band will cost them large amounts of money. If that’s true for even a small percentage of the population, then it’s a problem for the individuals in question and the country as a whole. We’d suggest it’s something that HMRC and policymakers should investigate. (We are unlikely to be able to look into this ourselves with further polling, due to the statistical limits of polling samples.)
Second, it would be sensible to assume that other basic tax concepts are equally misunderstood. Policymakers, media and others communicating about tax (including Tax Policy Associates) should try to bear this in mind.
Finally, it means that we should be careful when looking at opinion polling on tax questions: the responses may be based upon fundamental misunderstandings of the question.
Many thanks to Brian Cooper and Mike Gray at WeThink/Omnisis for their generosity in running polls for us pro bono. They ask for nothing in return, and don’t even ask to be credited.
It used to be slightly more because of the High Income Child Benefit charge, but that’s now moved from £50k to £60k. However that doesn’t change the point of this article – the additional tax is still less than the £1 of additional earnings ↩︎
A similar misconception used to exist regarding the Lib Dem policy in the 1990s and 2000s of putting a penny on income tax to increase funding for education. It was often said that many voters believed this meant exactly 1p more tax, rather than a 1% increase in the rate of income tax. I dimly recall there may have been an opinion poll confirming that this was a widespread belief, but I can’t find it now, and the story may be more myth than reality. ↩︎
i.e. because Twitter is not an accurate reflection of the population, my followers on Twitter are not an accurate reflection of Twitter users, and people clicking on the poll weren’t an accurate reflection of my followers. Twitter polls are fun, but are mostly useless. There is an excellent explainer on this here. ↩︎
Note that we forced people to make a choice, and didn’t provide a “not sure” option. The question of whether “forced choice” is the best approach has a long history… I have no expertise in this, and was happy to be guided by the experts at WeThink. ↩︎
Depending on how you read the question, the additional tax might be 14p, 20p, 40p, or 42p – but I don’t think that matters.. the amount is “small” in each case. The only exception is if you have significant savings, due to the loss of £500 personal savings allowance you’re a higher rate payer. For someone with around £12,000 of savings outside an ISA that could mean the £1 tax increase costs them £200 (£500 x 40%). ↩︎
The Lib Dem result is subject to larger uncertainties given the smaller number of respondents – there’s no statistically significant difference between the Lib Dem result and the Labour/Tory result. ↩︎
It’s very hard for normal people to understand tax legislation, and it’s often equally hard for tax lawyers, unless they have a deep familiarity with the rules.
Here’s an example, promoted by the Angela Rayner CGT controversy (although I don’t believe this point has any bearing on her position).1 A couple who are not living together in reality can, nevertheless, be “living together” for tax purposes.
So imagine a couple, with no children, who are married, but keep separate houses and live separate lifestyles (as if they’re dating, but they’re actually married). They are not, in the normal meaning of the term, “living together”. Does that mean they can each have a CGT-exempt main residence?
The legislation
HMRC guidance on divorce and separation says what HMRC think “living together” means. But it’s unclear whether this is just HMRC’s view (which has no legal status) or reflects the law. So it’s always important to look at the actual legislation (which, unhelpfully but typically, isn’t cited by the HMRC guidance).
There is nothing in this section, or near it, that suggests the phrase “living together” has a different meaning from normal English, and someone reading this (tax specialist or layperson) would be forgiven for thinking that the usual ordinary meaning can be applied.
But TCGA ends with an interpretation provision in section 288, and in subsection 3 we see:
Section 1011 of the Income Tax Act 2007 then says:
So our hypothetical “separate lifestyle” married couple may not be living together in ordinary human terms, but they are almost certainly4 “living together” from a tax perspective, unless they have split up.
They aren’t living together, but they are “living together”. Brilliant.
This is really poor legislative drafting. It’s an area highly relevant to normal people, who often won’t be advised, and yet the way the legislation is drafted is impenetrable; misleading, even. How hard would it have been to add a provision to s222(6) TCGA cross-referencing either to section 288(6), or directly to s1011?
Modern legislation is usually better – there was a “Tax Rewrite Project” in the 2000s which aimed to clarify things, for example by including copious cross-references to defined terms. But in this case it didn’t help – take for example this provision of the ITA 2007 which uses the “living together” term without any hint that it’s defined in s1011.
How could anyone get this point right?
Practitioners working in the area will know this point.
For other practitioners, it is always good practice to check the interpretation provisions at the end of an Act before advising, but it’s easy to forget to do this, particularly when a term doesn’t look like a defined term.5 A non-specialist, particularly one in a hurry, could easily assume “living together” is just a simple factual question, and not check. That’s why it’s so dangerous for a tax adviser to advise outside their area of expertise.
For the layperson, it seems to me almost hopeless. You can’t rely on HMRC guidance, and you can’t dip in and out of tax legislation and hope to find the correct rule. I have no answer to this.
For completeness, there are two ways it could in theory be relevant. First, Angela Rayner could have been wrongly advised that the fact she and Mark Rayner lived in separate houses meant that they were not “living together” and they each had a separate main residence exemption. That seems unlikely, but is not impossible if she was advised by a non-specialist. Second, it could be that there are personal circumstances we are unaware of that mean that Angela and Mark Rayner really were separated well in advance of the 2020 date that they announced their separation – but there’s no reason to think that’s the case. ↩︎
That’s not the only CGT consequence of being married. Transfers of assets between spouses aren’t subject to CGT (the original acquisition cost of the asset is “inherited” by the receiving spouse). Again, this is only if they are “living together”. ↩︎
This and the other excerpts I’ve quoted are from the legislation as it stood in 2015, when Angela Rayner sold her property. Tax legislation changes frequently and one always has to look at the legislation as it stood at the time in question (although in this case the changes aren’t material). ↩︎
I say “almost certainly” because it could be argued that s1011(c) applies to a “separate lifestyle” couple. I would say not – my view is that in context it means the couple have split up, but this point is not beyond doubt. ↩︎
In my first week as a tax trainee, a partner (Richard McIlwee, long retired) gave us a fantastic 30 minute talk on statutory interpretation. The key message was “keep reading”. When you’ve read a clause, read to the end of that section. Then read to the end of the chapter. Then read to the end of the Part. Then read the interpretation provisions of the Act. ↩︎
The Post Office’s incompetent compensation process left thousands of postmasters with large tax liabilities. When we revealed this, the Government forced the Post Office to fix the situation – but the Post Office did so far too slowly. New Freedom of Information Act disclosures reveal that, when we identified this new problem, the Post Office’s only concern was the PR impact.And the Post Office continues to cover-up the reasons for its failures.
The Post Office scandal has had three separate phases, with three separate scandals. First, from 1999 to 2015, persecuting and prosecuting postmasters for “shortfalls” which it knew were caused by bugs in its Horizon system, and withholdingevidence which would have demonstrated their innocence. Second, from 2017 to 2021, aggressively and improperly litigating to cover-up its failures, when it knew a core plank of its defence was a lie. Third, from 2021, designing and running compensation schemes to ensure it paid its victims as little as possible.
The Post Office says that it’s changed and is now dedicated to righting the wrongs of the past. But the evidence shows that it continues to prioritise covering-up its misdeeds over doing the right thing.
The incompetence
One small scandal within the compensation scandal was that, when the Post Office designed its HSS compensation scheme, it gave no thought to the tax position of the postmasters. The result was that many saw almost half of their compensation lost to tax. Any competent tax adviser would have identified this issue and suggested solutions; the Post Office either didn’t obtain proper advice, or ignored it. It was incompetent.
When we identified the issue, the Government intervened and, in June 2023, required the Post Office to make “top-up” payments to postmasters to cover their tax liability, and provide them with a letter explaining their tax position. It then changed the law to ensure the “top-up” payments would not themselves be taxable. Everything had been done to fix the Post Office’s mess, and all that the Post Office had to do was run the calculations and get the letters out.
So it was incomprehensible that, by the end of 2023, with the self assessment deadline looming, the Post Office had only made a fraction of the top-up payments. 1,100 postmasters hadn’t received a letter or top-up payment, and were left with a £10k tax bill they’d have to pay without any help or assistance.
This should not have been a difficult task. The Post Office knew what the HSS compensation payments were, and what years they covered. So calculating the amount of the top-up payment should have been a spreadsheet exercise. I’ve spoken to accountants familiar with this kind of exercise (from other compensation schemes), and they think a small team could have calculated the appropriate top-ups in a few weeks.1
However the Post Office was unable to do this after six months. More incompetence.
The sole focus was on the PR
How did Nick Read, the Post Office CEO, react when we reported that the Post Office had incompetently left 1,200 postmasters with a serious tax problem? Did he demand an explanation for this from his team? Did he ensure a solution was prioritised?
There is no sign of Read being surprised by the Post Office’s slow response, much less being disturbed by it. Instead, the sole focus of Read and his team was on the public relations impact. Apparently my twitter thread identifying the issue wasn’t very “helpful”:
The team’s subsequent response showed no attempt to understand, or even recognise, the actual criticism: that the Post Office’s response was unjustifiably slow, and had – completely unnecessarily – left 1,100 postmasters in a difficult position:
I don’t know if this is because they didn’t understand the issue, or were shielding Read from it. Either way, this looks like a dysfunctional management team.
And so, in the end, Read thought it was all okay, because there wasn’t much media pickup of the story:
Read had zero interest in the fundamental question: how come the Post Office had left 1,100 postmasters hanging?
I tried to establish how the Post Office had got this so wrong, and failed to achieve in six months what a competent team of accountants would have achieved in a few weeks. The obvious answer is that they didn’t have enough staff engaged on the task – so I filed a Freedom of Information Act request asking how many staff had been involved.
The Post Office is refusing to tell me:
Needless to say, the idea that telling me the number of staff involved in a project would enable those staff to be identified is daft. It’s a cover-up, and not a very good one. (You can see the Post Office’s complete response here.)
I asked for a review of this decision immediately, on 21 February. The Post Office should have responded within 20 business days. They haven’t responded at all, not even to acknowledge receipt.
The Post Office hasn’t changed. Its only interest is in preserving the little that’s left of its own reputation.
Footnotes
A few would have been trickier, for example where the postmaster operated their business through a partnership or company; but reasonable simplifying assumptions could have been made. ↩︎
The Post Office’s offers of compensation under its “HSS” settlement scheme were often insultingly low. But it falsely claimed the offers were confidential, and couldn’t be shown to anyone. That resulted in most being accepted; in 90% of cases the postmasters didn’t even take legal advice. The Solicitors Regulation Authority has now ordered the Post Office to stop making this false confidentiality claim. But it’s too late – most of the settlements are now completed. The Post Office has again succeeded in using unethical legal tactics to minimise compensation payouts.
The Horizon Compensation Advisory Board then took the matter up – it’s published its correspondence with the Post Office and the SRA. The outcome is that the SRA has ordered the Post Office to cease its behaviour, and the Post Office has reluctantly taken a “policy decision” to do so.
The correspondence between the Post Office and the Advisory Board suggests the Post Office never had any genuine legal or commercial basis for its approach. The purpose was to minimise compensation. The Post Office’s legal response to the scandal has been notable for its unethical legal tactics throughout;1 this was just another.
What the Post Office did
When the Post Office made settlement offers to postmasters under its “HSS” scheme, it included this paragraph saying that postmasters couldn’t discuss the offer with anyone:
These were mostly old, vulnerable, people who’d suffered tremendously. Preventing them speaking to anyone had consequences. Postmasters 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 write to their MP, or speak to reporters.
Probably as a result, 90% of postmasters never instructed a lawyer.2 Many received derisory amounts of compensation.
I believe the Post Office’s imposition of confidentiality was responsible for all this. And it was a lie. The letters weren’t confidential at all.
Where the Post Office was making an offer, then it was perfectly proper for it to say its offer is made “without prejudice”. That’s a common law doctrine that prevents statements made in settlement discussions from being adduced as evidence in court. But “without prejudice” is a form of legal privilege, and not a rule of confidentiality – the claim that the “without prejudice” label stopped the postmaster showing the letter to third parties was false.
Worse, the paragraph was included on all settlement offers, even “nil offers” where the Post Office was offering nothing. In those cases it was entirely improper to claim the letter was “without prejudice”, because it wasn’t an attempt to settle a dispute, just a denial of liability.
There was never anything to stop recipients of the HSS offers from sharing them with other postmasters, friends, or journalists, or indeed publishing them (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 surely knew this. I believe this was a deliberate and cynical tactic to minimise compensation.3 It was 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 defence
The Post Office provided several defences in correspondence with the Advisory Board in December 2023 and January 2024:
This explains why the letters are “without prejudice”, and why the Post Office want the communications to be confidential, but it doesn’t explain why the Post Office thinks that the letters are confidential.
“Nobody else has complained” is not a legal argument, and in any case it’s the unrepresented postmasters who suffered prejudice.
Then:
This is deeply patronising. Postmasters should be able to choose whether or not to share their offers, and make their own decisions about their privacy. But in any case, this isn’t a legal defence of the Post Office’s position.
And here’s the Post Office’s defence of claiming that “nil offer” letters were “without prejudice”:
A nil offer is not an offer of settlement and the “without prejudice” doctrine does not apply. The Post Office’s wish “to be consistent” is not relevant.
This correspondence suggests to me that the Post Office never had any genuine legal or commercial basis for its approach. It was always about minimising compensation.
The SRA response
The SRA doesn’t normally write to lawyers and tell them to stop doing something; that’s not its role. It investigates solicitors where there may have been a breach of SRA standards and regulations, and in extreme cases it intervenes to shut down firms.
But in this case the SRA has acted decisively – this is from their letter to the Advisory Board of 31 January:
Note the key points: the SRA says that “without prejudice” cannot unilaterally impose a duty of confidentiality, and that in any event the term should not be used when the Post Office is asserting it has no liability.
The Post Office’s response
The Post Office has now said it’s made a “policy decision” to cease the “without prejudice” labelling. It is not even trying to defend its previous position that the labelling enabled it to unilaterally assert that its offers were confidential.
and:
This is disingenuous. Nobody ever doubted that it was acceptable to label settlement offers “without prejudice”, so the fact the Post Office received external legal advice on this point tells us nothing.
But look at what is missing: a statement that the Post Office received external legal advice that its assertion of confidentiality was appropriate, or that it was acceptable to label nil offers “without prejudice”. The obvious inference is that the Post Office wasn’t acting on the basis of external legal advice at all. But it proceeded to mislead postmasters, and continued even after being put on notice that its position was wrong.
If that is correct, it’s scandalous.
What should happen next?
At least 1,726 settlements were agreed with postmasters who never received any legal advice, off the back of settlement offers that falsely claimed to be confidential. The Post Office behaved oppressively, and all these settlements should be reopened, with the Post Office having no role in the settlement process.
The SRA’s investigation into the Post Office’s internal and external lawyers is necessarily highly complex and will, I expect take years to resolve. The “without prejudice” issue, by contrast, is freestanding and should be relatively straightforward. I hope that the SRA can accelerate it.
Thanks to the Advisory Board for pursuing this matter, and The Times and Channel 4 for reporting it. Thanks also to B and K for their assistance on the law of confidence and the “without prejudice” doctrine, and C and X for sharing their practical experience of confidentiality provisions in settlements.
As of 4 April 2023, 1,924 settlements had been entered into. The Post Office agreed 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. ↩︎
Settlement offers aren’t usually stated to be confidential at all, for the very good reason that confidentiality can’t be unilaterally imposed. Final settlements, on the other hand, often are confidential (sometimes improperly), but that is typically achieved by a separately negotiated NDA/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 was as unusual as it is troubling. ↩︎
Less Tax for Landlords was the trading name of the One Consultancy Group. It was badly named, because its incompetence means many landlords are now paying more tax. Most of LT4L’s key staff were salesmen who, by their own admission, know nothing about tax. They relied on LT4L’s co-founder Chris Bailey.
Bailey was previously severely reprimanded by the Association of Chartered Certified Accountants (ACCA), and subsequently ceased to be a member. He’s now been reprimanded and fined by the Institute of Chartered Accountants in England & Wales (ICAEW), and then expelled by the ICAEW for failing to pay the fine. We don’t believe any of this has been disclosed to his clients.
So Bailey is now completely unregulated – we don’t believe that’s been disclosed to his clients (although his colleagues apparently knew). Just one more reason (on top of their incompetent advice) why LT4L should not be acting for anyone, and why their clients should urgently be seeking independent advice.
ICAEW
Bailey was reprimanded by the ICAEW in a disciplinary decision on 20 December 2022. He was accused of submitting tax returns for a client over four years without her authorisation, and then corresponding with HMRC about that client – again without her authorisation. From April to September 2020, Bailey failed to reply to enquiries from the ICAEW’s professional conduct department. He was therefore reprimanded, and agreed to pay a fine of £10,000 plus £4,285 costs.
Chris Bailey has sent me a statement in which he denies any wrongdoing, but says he lost all his emails and so couldn’t prove he’d obtained the clients’ authorisation. He doesn’t explain why he didn’t respond to the ICAEW’s emails for six months. Bailey says he appealed; that’s not what the ICAEW told me, and seems inconsistent with the fact that he agreed to the reprimand and fine.
Bailey’s explanation for not paying the fine is that Barclays erroneously restricted access to his accounts. It’s unclear how that could have happened without Bailey being aware of it.
And Bailey says he’s in the process of rejoining the ICAEW. However the ICAEW told me it’s not aware of an application from him.
An ICAEW spokesperson told me:
“Christopher Bailey has ceased to be an ICAEW member and this decision will be included in our next monthly Disciplinary Orders and Regulatory Decisions publication, in line with our processes.
“We encourage anyone who thinks they have had contact with someone holding themselves out as an ICAEW member when their membership has been cessated to contact our Professional Standards department.”
Because Bailey’s membership has ceased, the ICAEW says (not unreasonably) it’s not in the public interest to pursue our complaint about Bailey’s actions, but I expect they will take our complaint forward if/when Bailey applies to be readmitted.
ACCA
At around the same time, Bailey was disciplined by the Association of Chartered Certified Accountants for failing to provide audit files when requested. He provided a series of excuses for this: he first said he needed more time, then claimed the clients were audit-exempt, then claimed the files were offsite, and finally blamed a software issue. He was found guilty of misconduct and severely reprimanded.
The ACCA accepted that the failure to disclose was not deliberate; it is not clear how they came to this conclusion, given his successive contradictory excuses.
Some time after the ACCA decision, Bailey’s ACCA membership ceased.
There’sacampaignclaiming that you can legally stop paying tax to protest the war in Gaza, or even that it is illegal for you to pay tax. None of the claims have any legal basis – they originate in a racist US anti-tax cult. The man behind the campaign used the same arguments to try to avoid paying council tax in 2016 – he failed and spent Christmas in jail. The claim that you can legally stop paying tax is therefore either deluded or dishonest.
UPDATE 8 June: we reported today on another version of the same conspiracy theories, this time using them to profit from charging fees to vulnerable people in debt
UPDATE 6 May 2025: the “no tax for genocide” campaign now admits that it’s not lawful (or indeed required) to withhold tax. Instead they propose requesting refunds from HMRC.But Chris Coverdale continues to make false claims that it’s legal (indeed, required) to not pay tax, and to publish a nonsensical “trust deed” that supposedly facilitates this.
The claims
The various websites1 makes a series of legal claims:2
The trust document is posted here. The first paragraph of the trust refers to the signatory being a “sovereign man/woman”. This wording is legally meaningless and comes straight from the US sovereign citizen movement, which has its origins in a fringe racist group and the KKK. “Sovereign citizens” have used arguments of this kind to try to escape US tax, without any success. It’s also notable that the document says it’s a deed, but isn’t – whoever drafted it hasn’t even bothered to google the word “deed”.
Here’s the key section of the document (the “Primary Beneficiary” is the Government):
The idea that we can individually “withdraw our consent” to tax or other laws is (obviously) false but, again, a common theme in sovereign citizen propaganda.5 If people could legally stop paying tax any time they disapproved of the government, the government would long since have run out of money.6
A further sign that the document originates in the US is that the trust is said to be “revocable” – revocable trusts are a US legal concept which have no equivalent in the UK.7 The consequences of signing such a document would be complex and uncertain – the trust may not be a substantive trust at all as drafted and, if it is, would give rise to a very messy tax position. One prominent trusts expert told us it would be a “disaster” for the person signing it, if it actually was recognised as a trust. Certainly nobody should do such a thing without detailed tax and trust advice.8
The “trust” then supposedly remains in place until a series of very specific and very unlikely things happen:
Which in practice means that you are stopping paying tax forever.
It’s unclear how much reality the trust has, even in the minds of the people running this scheme. At least one has confessed they just spend the money. Others have talked about putting a cheque in an envelope in a drawer.
So the “trust deed” appears to be neither a trust nor a deed.
Coverdale describes himself as a “behavioural scientist, governance consultant, peace campaigner and memetic engineer.” Despite having been prosecuted for failing to pay tax, he said in January 2023 that you can’t be prosecuted for failing to pay tax:
In our view, Coverdale is either dishonest or delusional.
HMRC and councils pursue people for non-payment of tax all the time. They’re not going to behave any differently just because you wave a funny trust document at them.
The campaigners have the additional practical problem that most people pay don’t actually pay income tax – their employer deducts it under PAYE. The campaigners have an answer to this problem – ask HMRC to stop PAYE:
We expect most people will realise immediately that this doesn’t work – you can’t stop your employer deducting PAYE by notifying HMRC that you wish the money to go into trust (and tax evasion would be very easy if you could). The law requires employers to apply PAYE, and HMRC has no discretion to disapply the law.9
We don’t know who the “team of experts” are, but we would be surprised if they include any tax advisers or lawyers.10 We don’t believe any qualified lawyer or tax adviser would agree with any of the claims made.11
The context
There is a long history of people protesting by withholding tax: the Peasants’ Revolt against the poll tax; the US colonists protesting against the Tea Act, the Women’s Tax Resistance League demanding equal voting rights, the 1989-91 anti-poll tax campaign. The protesters in these cases knew that their actions were illegal, but believed they were justified by wider moral considerations.
In recent times there has been a different type of tax protester. Not paying tax is central to their worldview, rather than just a tactic they adopt. They claim that they have found a “true” legal system which lets them walk away from tax and other inconvenient laws. It’s part of what adherents call the “sovereign citizen” or (particularly in the UK) the “freeman on the land” movement, which has its origins in the racist far-right in the US (although, oddly, UK followers seem to be found on the Left as much as the Right.)12
A better term for these movements is “pseudolaw” – the use of arguments that sound legal, but in fact are no more than gobbledegook, and the belief that correctly worded documents (like this trust) have almost magical power.13 There is a very complete analysis of the history of these arguments in the Canadian decision Meads v Meads (summarised in this post by barrister Adam Wagner). More recently, respected criminal barrister and blogger CrimeGirl has written an excellent summary of reported UK pseudolaw cases, and the “Secret Barrister” has written about pseudolaw arguments deployed to try to escape Covid regulations.
The most famous modern tax protester is Hollywood star Wesley Snipes – he used sovereign citizen arguments to avoid paying $15m of US tax, and was jailed for three years as a result. We don’t have any evidence for how widespread the modern UK tax protest movement is, but the prominence of the issue on council websites suggests it is more than a small fringe.
One thing all the various strains of sovereign citizen/freeman on the land have in common is that they behave like a cult, following charismatic leaders and believing to a fanatical level of religious certainty that their pseudo-legal beliefs are correct, regardless of the evidence.
What about the war in Gaza?
We are commenting on the law, and take no position on foreign policy, defence policy, or the war in Gaza. However, Gaza doesn’t seem to be the genuine inspiration behind this campaign – the people behind it have been runningthesame tax argumentsforyears. The US sovereign citizen movement they’re inspired by, and from where they’ve taken both their arguments and their pseudo-legal documents, has its origins in a fringe racist group and the KKK. These are arguments that have been rejected time and again by the courts in the US, UK, Canada and Australia.
Anyone who wishes to protest by not paying tax should be aware that this will break the law – that’s what civil disobedience by definition is. If someone believes that’s ethically justified, and is willing to take the legal and financial consequences, then we can respect their choice. But we can’t respect campaigners misleading people with false claims that you can legally stop paying tax.
Many thanks to criminal barrister Sarah McGill of Lincoln House Chambers for reviewing a draft of this article, and to C for the trusts tax expertise.
Footnotes
This and many of the other links in this article are tagged “nofollow”, which means that they should be ignored by search engines, and so won’t boost the internet profile of the websites. ↩︎
This is the kind of fringe thing we normally wouldn’t comment on, for fear we’re just giving it further publicity. But now it’s broken into the mainstream, including a disappointingly credulous piece in the Telegraph, we thought it would be helpful to comment. ↩︎
With the obvious exception of tax treaties, at least some of the time. ↩︎
When we were a member of the EU the position was in some cases different, as a UK law could be overriden by EU treaties or legislation. But this was only because Parliament permitted it to be different. ↩︎
This seems to be a variation on the normative fallacy. Sovereign citizens believe that individuals should be able to freely choose to opt out of the legal system that applies to everyone else – a valid political/philosophical view. However they then make an invalid leap of logic to the position that individuals in fact are able to opt out of the legal system. ↩︎
The reference to the trust being “discretionary” also makes no sense, because as drafted there is no discretion. Whoever drafted it appears to have been throwing words at a page. ↩︎
Trusts are nowadays not a good way of avoiding tax, because there’s an immediate 20% inheritance tax charge when you put property into trust. Things are different for non-doms, as they don’t generally face the 20% charge if they put foreign property into a foreign trust, and so trusts remain a very important way for non-doms to minimise their UK tax (or avoid UK tax, depending on your viewpoint). ↩︎
Although lawyers and advisers may have different views on whether those promoting this scheme have any liability under civil or criminal law. Our initial view was that the rules requiring disclosure of tax avoidance schemes won’t apply, because the promoters here are not acting in the course of a business; however it now seems they charge a monthly subscription, which suggests DOTAS could well apply. And if the promoters are aware that their scheme does not work (and Coverdale’s conviction suggests they might be) then they could be criminally liable for conspiracy to defraud the revenue. The IRS in the US has successfully pursued fraud charges against people organising sovereign citizen tax protest schemes. ↩︎
Obviously by analogy with pseudoscience, although it appears to us more akin to a “cargo cult” – it’s trying to summon legal effects by mimicking legal language. ↩︎
Thanks to pollsters WeThink, we polled public attitudes to paying more tax to provide the NHS with additional funding. We found a majority against raising tax, and few of those in favour of raising tax willing to pay more than £100 per year.
There may no longer be a majority in favour of increasing tax to pay for NHS spending
We first asked a simple question: “Do you think taxes should be increased to pay for additional NHS funding?”:
I was surprised to see a majority against increasing tax.1 Historic YouGov polling from 2017, 2018 and 2019 showed a majority in favour of raising income tax to fund the NHS. Recent YouGov polling has showed this majority reducing somewhat. Our result may be a further development of that, or it may result from polling differences.2
Women are more strongly against increasing tax to fund the NHS:
Regional variation is limited, with the striking exception of Wales:
But we get more of a clue as to what’s going on if we break it down by age:
Perhaps it’s unsurprising that people who use the NHS more, and pay less tax, are more willing for tax to go up to pay for additional NHS funding.
And high earners are less in favour of raising tax:3
Supporters of higher tax are willing to pay more tax themselves, but not much
Contrary to what some cynics might believe, the vast majority of those in favour of increasing tax are willing to pay more tax themselves:
But only to a very small degree. Very few of those people are then willing to pay more than £100/year in additional tax:
Willingness to pay goes up with income, but not enough to make much difference – the majority of people earning £60k or more aren’t willing to pay more than £100:4
The detailed tables don’t show much variation by age, region or education.
The reluctance by UK voters to pay additional tax either reflects, or causes, the UK to have one of the lowest overall rates of tax on average earners in the developed world. This statistic – the proportion of gross wages paid in tax – is often called the “tax wedge”, and the OECD provides data for 2022 which looks like this:
It’s even more dramatic than that, because those countries with a lower tax wedge than the UK, have a smaller state than the UK.
Another way to put that is: every country in the world which has higher public spending than the UK (as a % of GDP) also taxes the average worker more than the UK:
As the IFS points out, average earners in the UK have seen their tax burden fall over the last few years (with the overall tax increase borne by higher earners).
The relatively low income tax paid by an average earner in the UK, and the fact that this has fallen in recent times, is very rarely heard in public discourse. Indeed I’m not sure I can ever recall a politician making it.
This might explain why, despite widespread unhappiness with the state of the NHS, politicians are so unwilling to raise taxes significantly, and instead resort to gimmicks.
If you’re on the Left and you don’t talk about this, or your response is to question the statistics, then you’re in denial.
These polls are what happens when you want European-style public services, but think you can achieve it without European-style tax.
We can (and in my view should) raise additional tax from the wealthiest. But those who want to see significantly expanded public services need to either accept that means most ordinary people paying more tax (and advocate for that!), or believe that the UK can do something no country in the world can, and fund European levels of spending solely by taxing above-average taxpayers. I don’t think that’s possible. You’re free to disagree with me – but you need to understand you’re arguing for something that literally nobody has achieved.
I’m keen to explore more about public attitudes to tax using questions with actual numbers, rather than asking people generalities. Please do drop me a line if you have any suggestions for topics and approaches. When we commission a poll we will always publish its findings in full.
Many thanks to WeThink for conducting this polling for us pro bono – they didn’t even ask to be credited. The polling was conducted by WeThink on 14-15 March 2024, questioned 1,270 people and is weighted to a national representative population. The full tables are available here.
Footnotes
Other parties are included in the data, but I don’t show them here because the numbers are too small for statistical significance. ↩︎
Note that YouGov specifies income tax; we didn’t specify which tax we’d raise. YouGov also gives a “not sure” option and we did not. The question of whether “forced choice” is the best approach has a long history… I have no expertise in this, and was happy to be guided by the experts at WeThink. ↩︎
I’ve combined the £60-80k, £80k-100k and £100k+ brackets in the data because otherwise the numbers are too small to be statistically valid. ↩︎
I’ve combined earning brackets and additional tax amounts to achieve statistically validity. We would need a much larger sample than that obtained by normal opinion polls to obtain statistically valid results for those on £100k+ incomes. So, tempting as it is to look at the raw numbers, and snigger at the 26% of people earning £100k are only willing to pay £10 more tax, these numbers are subject to massive uncertainty and shouldn’t be used. ↩︎
Until last week’s Budget, someone earning £50k with three children under 18 faced a marginal tax rate of 71%. That was deeply unfair to those affected, and damaging for the country as a whole. So it’s great news that this marginal rate has been cut to 57% – about 500,000 families will benefit. But other high marginal rates remain in the tax system – the challenge is how to fix them fairly, without the burden falling on people on lower incomes.
In the run up to the Budget, we and many others were concerned about the very high marginal tax rates hitting parents earning £50-60k. This chart shows how the marginal tax rate (y axis) varies with gross employment income (x axis) for someone with three children under 18:
(If you click on this chart and the others below, you’ll go to an interactive version that lets you see the effects of the various different marginal rates for the UK and Scotland).
The “marginal tax rate” is the percentage of tax you’ll pay on the next £ you earn. The tower at the £50-60k point shows the marginal rate hitting 71%. The reason: the phasing out of of child benefit (via the “high income child benefit charge”) that started at £50k. So when your earnings hit this level, you’d take home only 29p for every £ you earned. For many people that wasn’t worth it – so they chose to work fewer hours. That’s bad for the UK as a whole.
This is why the marginal rate is so important – it affects the incentive to work more hours/earn more money.1
The marginal rate of tax in the UK for high earners in theory caps out at 47% (45% income tax plus 2% national insurance2) once you get to £125,140. I’m not terribly convinced this disincentivises anyone to work (and I spent many years working in an environment surrounded by colleagues and clients paying tax at this rate). But once you get to marginal rates of well over 50%, things are very different.
The Hunt solution
I’d like to see a complete end to the child benefit taper, paid for by a slightly higher tax rate on high earners. Jeremy Hunt didn’t do that. But he pushed out the start of the taper from £50k to £60, and made the phasing gentler, running from £60-80k instead of £50-60k. That, and the national insurance change, means the chart now looks like this:
We can overlay the two – 2023/24 in red and 2024/25 in orange (although it’s not terribly readable; you can play with the different rates on the interactive version of the charts here):
The longer taper period means that the top marginal rate has fallen from 71% to 57% – but of course this rate applies across a wider range of incomes. A less serious effect, but more people affected.
This cost about £660m:
And more radical change is promised. One of the unfairnesses of the child benefit taper is that it applies to a household if one earner hits £60k in income; it doesn’t apply if (for example) there are two earners, both on £59k. The promise is that this will be fixed by applying the high income child benefit charge to household income, not individual income. That faces a number of practical and technical challenges. I’d simply abolish the taper and the high income child benefit charge altogether.
What’s the highest marginal rate now?
Even after Hunt’s reforms, with three children under 18, the tapering of child benefit takes the marginal rate to 57%. It’s very odd that someone earning £60-80k has a higher marginal rate than someone earning £1m.
And there are other anomalies.
Personal allowance taper
The personal allowance – the amount we earn before income tax kicks in – starts to be tapered-out if your salary hits £100k, and is gone completely by £125k. That’s responsible for the second tower on the chart above – a marginal rate of £62% between £100k and £125k.
And if we add in student loans, which are really just a complicated hidden graduate tax…3
… we see a top marginal rate for someone earning £100k of over 70%. This isn’t just theoretical – we’ve received lots of messages like this:
That’s a problem for all of us, just not just those personally affected.
There’s not much popular appeal in cutting taxes on people earning £100k. But it would be the right thing to do – the challenge is how to do it without increasing the tax burden on people earning less. The obvious answer is to slightly increase tax on everyone earning more than £100k – for example with a new 45% marginal rate on people earning £100k and a new 48% rate on people earning £125k.
But the tax raises required to fund an end to the taper may be significantly less than this, given the widespread “avoidance” of the 60+% rates by people making additional pension contributions, or simply working fewer hours/turning away work.
Childcare subsidy
The Government has created a new childcare support scheme for parents with children under 3. This could be worth £10,000 per child for parents living in London, once both parents have income of £7,904. And it vanishes completely once one parent’s earnings hit £100k. That does impossible things to the marginal tax rate:
That’s a marginal rate of -20,000% when the parents become eligible for the childcare, and a marginal rate of 20,000% when they lose it at £100k.4.
It’s easier to see what this means if we plot the gross salary vs the net salary:
As your income hits £100k, you lose £20k of net income, and that doesn’t recover until you earn £154k. Clearly no rational person in this position would earn between £100k-£154k if they had a choice, and that’s a deeply irrational result.
This all relates to the new childcare subsidy, and not the pre-existing tax-free childcare scheme, which also vanishes at £100k. The benefit of tax-free childcare are less (usually under c£7k/child) so the curve for that looks less dramatic. However, as the scheme applies to children under 11, taxpayers feel these effects for many more years.
Where next?
If a political party went into an election promising a tax system with these marginal rates, there would be uproar. But instead, we’ve drifted into this disaster over many years, with the topic entirely absent from public debate.
That’s now changed – and that’s a good thing for the country as a whole. The challenge is how to make further progress, and eliminate anomalous marginal rates without raising tax on everyone else.
And the other key challenge, particularly for the next Government, is resisting the temptation to introduce further tapers into the tax system.
Official portrait of the Chancellor of the Exchequer Jeremy Hunt by Andrew Parsons / No 10 Downing Street. Crown copyright.
Footnotes
Everything interesting happens at the margin. For more on why that is, and some international context, there’s a fascinating paper by the Tax Foundation here. ↩︎
Note that I’m not including employer’s national insurance here. Employer’s national insurance is absolutely a tax on labour in the long term, because it reduces pay packets in the long term. But it’s not usually included in a calculation of a marginal tax rate, because it’s not economically passed to you in the short term, and so it won’t rationally affect your decision whether or not to work more hours. There’s a good explanation of this point here.↩︎
For someone starting university between 2012 and 2023, you pay 9% of your salary over £27,295, until the loan is repaid. Of course, the effect on individuals – even those on the same income – will vary widely, depending on how much loan they borrowed, how long they’ve been earning, and how their salary ramped up over time. ↩︎
The 20,000% figure is rather arbitrary, and a result of the code having a resolution of £100 of income . If the resolution was 1p then the marginal rate would be 200 million percent. But the concept of a marginal tax rate doesn’t really work in this scenario ↩︎
A very strange High Court decision was just published – Webster v HMRC. It reveals that an unknown person or company is engaged in an international strategic litigation campaign to block international tax and transparency initiatives, and is going to great lengths to remain anonymous.
On the face of it, this case is about FATCA.
It used to be easy to evade tax on your income. Open an offshore bank account, put your money in that, and HMRC would likely never find out.
That changed in the mid-2010s. The US created FATCA, which forced governments all over the world to require their banks to report US citizens’ bank accounts to the IRS. The rest of the world first complained this was outrageous, Yankee imperialism, then decided it was a brilliant idea.
The outcome was the OECD common reporting standard (CRS), which does much the same thing for most countries in the world.1 On the face of it, Ms Webster is seeking a declaration that HMRC’s reporting of her UK bank accounts to the US was unlawful. But the implications are very wide. If she succeeded, it’s likely that reporting under CRS would also be unlawful. And if a UK court reached that view, we could easily see courts across the world, striking FATCA and CRS legislation down. This would be a disaster.
It became clear in the course of Ms Webster’s litigation that her claim was funded by an anonymous third party which was running “an international strategic data protection litigation campaign” seeking to block the implementation of tax and transparency measures:
This could be someone with a genuine ideological belief that an individual right to privacy is more important than countering tax evasion (a kind of libertarian equivalent of the Good Law Project). But it is also possibly something more sinister: a person with something to hide, using this litigation to block the rules that prevent its secrets from being uncovered – that would (of course) be entirely improper. So HMRC added abuse of process to its defence, and obtained a court order seeking disclosure of the identity of the funder.
At which point Ms Webster said she didn’t know – only her lawyers, Mishcon de Reya, knew the identity of the funder.
This judgment concerns an attempt by Ms Webster (or, more likely, her funder) to strike out the abuse of process defence, so the funder’s identity doesn’t have to be disclosed.
It did not go well:
Indeed the judge, Mrs Justice Collins Rice, seemed rather concerned at what was going on:
So it seems either the mysterious funder will have to step out of the shadows, or the case will have to be dropped. A successful appeal against this judgment is unlikely.
Which begs the question: who is the mysterious funder, and what else are they up to in their “international strategic litigation” to block tax and transparency initiatives?
We don’t have to look very far. The biggest reversal to recent transparency initiatives was the 2022 decision of the CJEU to block public disclosure of beneficial ownership of companies across the EU.2 And the law firm involved in that?
So we don’t know who is behind this campaign, and we don’t know what else they’re up to, but it’s a reasonable inference that they’ve had one huge success already.
Barrowman’s notorious PPE contract was in the name of PPE Medpro Limited, a UK company. The company has a “shadow” – there’s an identically named Isle of Man company controlled by Barrowman. This is highly unusual – and we’ve found six other Barrowman businesses with identically named offshore “shadow companies”. In one case, involving Barrowman’s Smartpay business, there’s evidence that the “shadow” was used to trick third parties into thinking that they were dealing with a UK company, when they were actually contracting with an offshore company. And Smartpay admitted to a tax tribunal that this was the purpose of the arrangement. We believe there are grounds for a criminal investigation into whether Smartpay committed fraud.
And this all raises the question whether PPE Medpro used a similar tactic to trick the Government into thinking they were dealing with a UK company, when they were actually contracting with an offshore company. That could explain how the £65m profit from the sale of PPE to the Government ended up untaxed and offshore. Barrowman doesn’t deny the Smartpay “trick”, but does deny misleading the Government.
The shadow companies
We can identify seven “shadow companies” – offshore companies which duplicate the names of other, mostly UK, companies:
This won’t be tax planning or tax avoidance, for the simple reason that tax rules don’t care about company names. It isn’t brand/name protection,14 because the UK companies are active, not dormant. It’s not to serve Isle of Man customers rather than UK customers, because the solutions sold by these companies are, we believe, very focused on the UK, and (excepting PPE Medpro) UK tax avoidance.15
Our team can’t recall seeing legitimate businesses with identically named companies incorporated in different jurisdictions.
The reason is obvious: the potential for error.16 For this reason, businesses much larger than Barrowman’s, with very complex group structures, don’t duplicate names.17
So, when normal companies go out of their way to avoid even similar company names, why does Barrowman’s group do the opposite, and deliberately create “shadow companies”?
There’s one obvious answer: to trick people into thinking they’re dealing with a UK company, when they’re actually dealing with an offshore company. This isn’t speculation: we have evidence of Smartpay doing exactly this. And Smartpay has admitted it.
The evidence of fraud by Smartpay
In September 2015, Jane18 secured a contract through a recruitment agency, and decided to use Smartpay as her umbrella company. This turned out to be a bad mistake, because Smartpay embroiled Jane in a tax avoidance scheme which may have been a fraud on Jane and HMRC, and ended up costing Jane a large amount of money. This report, however, focuses on a entirely separate issue.
The idea behind “umbrella companies” is that employment agencies don’t want to take on employees, but individual contractors don’t want to be self-employed (given the complications of “IR35”). So both essentially farm this out to an “umbrella company”. The umbrella company has lots of individuals on its books, including Jane. When Jane found a job through a recruitment company, Fuel Recruitment, they engaged the umbrella, and the umbrella employed Jane.19
On the other hand, Fuel Recruitment and other recruitment agencies insisted that umbrellas were UK companies. By 2015 there was widespread suspicion of umbrella companies, and the legal and reputational risks they created, and it had become market practice to require assurance that the umbrella was a UK company in the form of a “compliance pack”.
Smartpay chose to resolve this with a “bait and switch”. Their Isle of Man company, Smartpay Consulting Limited changed its name to Smartpay Limited on 27 April 2015. It was this Smartpay Limited that engaged Jane as an employee. The UK Smartpay Limited would give Fuel Recruitment the compliance certificate as if it was the employer. That wasn’t true.
Jane didn’t notice, but when Smartpay sent her their application form, the company’s registered office (shown at the bottom of each page) was in the Isle of Man:
And when she signed an employment contract, she didn’t notice that her legal employer would be Smartpay Limited, an Isle of Man company:
The UK Smartpay Limited provides the compliance pack
Fuel Recruitment, Jane’s recruitment agency, then asked Smartpay for its “compliance pack”.20
So Smartpay sent out this email to Fuel Recruitment:
Jane was definitely employed by the Isle of Man Smartpay Limited. But in that email, the UK Smartpay Limited was claiming to be the employer. Here’s the company information they provided to Fuel Recruitment:
They then provided a (poor quality) scan of the UK company’s certificate of incorporation:
The professional indemnity insurance certificate provided was for the UK company:
The “compliance pack” was therefore a false representation – a claim that the employer was a UK company when it was not.23
The metadata to Smartpay’s standard compliance pack indicates it was prepared by John Hardman, the former solicitor, struck off for dishonesty, who acts as Barrowman’s legal adviser.24
The Smartpay admission
This wasn’t a one-off – it was in fact Smartpay’s standard practice. That has been confirmed, surprisingly, by Smartpay itself.
Like other Barrowman companies, the two Smartpay Limited entities unlawfully failed to notify HMRC that they were promoting a tax avoidance scheme.25 HMRC took this to a tax tribunal, which reached the same conclusions as other tribunals had for the other Barrowman companies: the failure to notify was unlawful.
In trying to construct an argument for their scheme not being notifiable, the Smartpay companies (the “Respondents” in the tribunal hearing) admitted that the UK company acted as “undisclosed agent” of the Isle of Man company in order to trick employment agencies (and perhaps even the individual employees) into thinking that they were dealing with a UK company. Here’s the key paragraph of the tribunal judgment:
Undisclosed agency26 can be a perfectly proper arrangement.27 However in this case the employment agencies were seeking specific confirmation that the employer was a UK company. That was the whole purpose of the “compliance pack”.
The head of operations at Fuel Recruitment, told the FT his company only works with UK-registered companies and was only ever engaged with Smartpay Ltd in the UK. He added that he had “no knowledge of a business registered in the Isle of Man”.
In providing the pack from the wrong company, Smartpay was being deliberately deceptive, for the purpose of obtaining business that it otherwise wouldn’t receive.
The legal consequences
Did this mean Smartpay committed the criminal offence of fraud by false representation?
We asked Michael Gomulka, a criminal barrister at 25 Bedford Row who specialises in fraud. He says that fraud is “very simple… it’s making a dishonest misrepresentation for the purposes of making a gain for oneself or the risk of causing a loss to another”. And “prima facie, there appear to be good grounds for the authorities to investigate whether fraud was taking place” in Smartpay Limited’s dealings with its clients.
In this case it seems reasonably clear that a false representation was made (i.e. that the employer was a UK company), that those involved knew it was false, and that they made it to make a gain (i.e. earn fees from the arrangement, which they wouldn’t have earned if Fuel Recruitment knew about the Isle of Man company).
Were those individuals running Smartpay “dishonest”?
That means asking whether their conduct was dishonest by the standards of ordinary decent people (regardless of whether the individuals in question believed at the time they were being dishonest).28 The leading textbook of criminal law and practice, Archbold, says:
“In most cases the jury will need no further direction than the short two-limb test in Barton “(a) what was the defendant’s actual state of knowledge or belief as to the facts and (b) was his conduct dishonest by the standards of ordinary decent people?”
We expect most ordinary decent people would say the behaviour here was dishonest; but ultimately that is something a jury would have to decide.
Which individuals would have committed the offence? We don’t know who was operating the Smartpay business day-to-day, although we understand that Timothy Eve and Lisa Rowe run Barrowman’s tax business day-to-day. The director of the Isle of Man Smartpay Limited was Timothy Eve (the Deputy Chairman of Knox, Barrowman’s business). We don’t recognise the names of the individuals who were directors of the UK Smartpay Limited at the time.29 We also don’t know how involved Douglas Barrowman was personally in these arrangements.
We therefore believe there should be a criminal investigation into Smartpay. There is no statute of limitation on fraud.
Did the Smartpay companies avoid corporation tax?
The fact that Smartpay UK was acting as the agent of Smartpay Isle of Man means that Smartpay Isle of Man may be subject to UK corporation tax on its profits. We do not know if HMRC has already investigated this matter; if not, we believe they should.
Ordinarily 2015 is too long ago for HMRC to open an investigation (technically a “discovery assessment”), but if the Isle of Man company never notified HMRC that it had come within the charge to corporation tax, and the correct analysis is that it did, then HMRC are able to go back 20 years.
The PPE Medpro hypothesis
Given that we know the Smartpay Limited “shadow” was used to trick its commercial counterparties, the obvious question is whether the other “shadow” companies were used for the same purpose.
And there is one obvious suspect: PPE Medpro Limited.
The Guardian reported (and Barrowman does not seem to contest) that PPE Medpro made a £65m profit from its sale of £202m of PPE to the Government:
But whilst the Government certainly seems to have thought it paid the £202m to the UK PPE Medpro Limited,30 between 8 July 2020 and 28 August 2020,31 there is no sign of a £65m profit in the company’s accounts for the year ending 5 April 2021:
There is, in fact, only £4m of profit32, and no sign elsewhere in the accounts of the other £61m of profit.33
This is very strange, and there is a legitimate public interest in asking how a UK company can make £61m of profit without it appearing in the company’s accounts and (presumably) without the company paying tax on that profit.
We can probably discard three possibilities:
The UK PPE Medpro received the £202m but paid most or all of it away in payments to other parties, leaving it with only a small accounting profit. In a normal case of buying products from a wholesaler and on-selling them, this would be uncontroversial. However in this case it would be highly aggressive from a UK tax perspective – I would expect HMRC to assert that paying out most/all of the £65m profit was not arm’s length, and therefore tax the UK PPE Medpro on some of that profit. There’s no sign that this has happened.34
The UK PPE Medpro was acting as a disclosed agent for other parties. That would be consistent with the accounts, because it would be the other parties who received most, or even all, of the £202m and not UK PPE Medpro. It would in principle leave little UK tax in the UK PPE Medpro, save some small amount sufficient to remunerate it for its (minor) role. But the existence of an agency arrangement lets HMRC argue that the other parties have a UK taxable presence (a “permanent establishment”). This would therefore be a highly tax-inefficient structure. Furthermore, there is no sign of any agency in PPE Medpro’s contract with the Government, and it is not mentioned in the Governments’ civil claim (if the Government was aware of an agency relationship then it would usually want to add the principals as defendants, so it could seek recovery from them).
Some very sophisticated and/or unusual accounting treatment. The FY21 accounts were prepared using the free Companies House filing service. The last two sets of accounts were prepared using Taxfiler – the cheapest alternative to the free Companies House software. We’ve spoken to accounting firms who believe this means the accounts were prepared in-house, without the involvement of a proper firm of accountants. It therefore seems unlikely anything very complicated is going on with the accounts
That leaves two other possibilities, which are more aggressive variants of the first two above.
The UK PPE Medpro again pays most of the £202m away to other parties, leaving it with only a small profit, but argues that the payments are all tax-deductible and so it pays little or no corporation tax. This would be a bold claim, given the size of the profit, and an HMRC enquiry/challenge would be almost inevitable. This would, therefore, not be a structure most advisers would recommend. We would not necessarily know about any HMRC enquiry (such matters are confidential). Whilst there would often be a reference included in subsequent company accounts, the absence of such a reference does not mean there is no challenge.
The UK PPE Medpro was acting as an agent for other parties, but an undisclosed agent. Smartpay’s trick was that Fuel Recruitment thought it was contracting with the UK Smartpay Limited, but was actually contracting with the Isle of Man Smartpay Limited. Could PPE Medpro have played the same game? The UK Government perhaps thought it was contracting with the UK PPE Medpro, but was actually contracting with the Isle of Man PPE Medpro (and potentially also with other parties.35). This again seems a real possibility. But an undisclosed agency arrangement could create serious legal jeopardy for Barrowman – it creates the potential for both a fraud against the Government (who thought they were contracting with a UK company) and a fraud against HMRC (given that the very tax-relevant agency arrangement would have been hidden from them).
These two scenarios feel more likely than the first two possibilities – but fundamentally all we have is the mystery of the UK PPE Medpro’s accounts. There is no evidence which lets us choose between these two scenarios, and it is perfectly possible there was some other scenario which we are missing. Isle of Man companies aren’t required to publish accounts. Barrowman shows no inclination to reveal any details of his business affairs, and indeed will break the law to keep his affairs private. The question of what happened to the “missing” £61m therefore may remain unresolved.
We expect that the Government will, in the course of its civil litigation, seek disclosure of the “behind the scenes” legal documentation that could shed light on what happened to the £61m of profit. We also expect that HMRC has open enquiries against the UK PPE Medpro and can issue an information notice requiring disclosure of all relevant documentation.36 If it doesn’t, we would urge HMRC to make a discovery assessment in light of Barrowman’s admission that the company made a large profit which (it appears) has gone untaxed.
What about the other five companies?
We currently have no explanation for the shadow companies other than Smartpay Limited and (possibly) PPE Medpro Limited. We have no evidence they behaved improperly; we also have no legitimate explanation for why they were established.
Barrowman’s response
We asked both Barrowman and his lawyers for comment, specifically asking why Barrowman operated identically named companies in different jurisdictions. Barrowman’s lawyers, Grosvenor Law, told us that “Mr Barrowman has confirmed that he has no intention to engage with you”. Barrowman didn’t respond, even when we put to him the fraud accusation concerning Smartpay Limited, and mentioned the admission by Smartpay in the tax tribunal.
It is very unusual for someone to respond to an accusation of fraud with what amounts to “no comment”.
A spokesperson for the Knox Group did respond to the FT, saying:
“We do not operate shadow companies and consider that your description of these entities is deliberately misleading. The Smartpay business was at all times a significant commercial operation. Disputes with HMRC happen across all business sectors and the matter to which you refer has been determined through a court process. All taxes have been paid. Further, PPE Medpro did not mislead anybody and all appropriate taxes have been paid.”
Note the absence of any denial that their standard practice was for the Isle of Man Smartpay Limited to employ the contractors, and then the UK Smartpay Limited to falsely represent to recruitment agencies that it was the employer. Instead this seems to be a denial of a tax evasion allegation which has not been made.37 It would, of course, be hard for Barrowman to deny something which his own companies admitted in court.
The claim that “disputes with HMRC happen across all business sectors” is highly misleading. Our team has worked with a wide range of companies, from SMEs to the world’s largest corporations. Disputes with HMRC are indeed commonplace; but the disputes Barrowman’s companies have are highly abnormal. We are unaware of any legitimate business which has unlawfully failed to disclose tax avoidance schemes to HMRC on at least three occasions38. We are also unaware of any legitimate business which has been described by HMRC as using “a series of tactics to try and frustrate efforts to work out the tax legally due, in a sustained campaign of non-compliance”.
Douglas Barrowman told the FT:
“This deliberate witch-hunt is being pursued against me by individuals with hidden agendas, who hide behind their keyboards and invent theories of foul play at every situation — regardless of whether it bears any resemblance to the truth.”
Again, Barrowman’s problem is that previous “theories of foul play” turned out to be correct, as admitted by Barrowman himself, and that Barrowman has admitted not telling the truth. Given his failure to address the serious accusations which have been made, we expect people will form their own judgment as to who is “hiding”.
Thanks to V for helping review documentation, C, T and I for their helpful discussion around corporate structures, and Michael Gomulka and L for their invaluable input on criminal law and the modern dishonesty test. Thanks again to D for insurance advice, and to S for his review of our draft. Thanks to R for their accounting expertise. And to Anna Gross at the FT for her work developing the story, and in particular for asking the critical questions that led to us discovering the evidence of fraud.
Thanks most of all to Jane (who we cannot name), for providing the critical documentary evidence.
Footnotes
The UK PPE Medpro’s deep links to Barrowman are well documented, and whilst he initially denied any connection, he has since admitted it. The Isle of Man company has the same directors; Voirrey Coole and Anthony Page ↩︎
The Isle of Man company was called Smartpay Consulting Limited but changed its name to Smartpay Limited on 27 April 2015. The registered offices of both the UK and Isle of Man companies are associated with Knox/Barrowman. Email headers in emails sent by Smartpay refer to the sending IP address and internal networks used by Barrowman’s AML tax avoidance business. Smartpay legal documentation has metadata showing John Hardman as the author. Barrowman’s correspondence with the FT implicitly accepts that he controls Smartpay. ↩︎
The Carnegie Knox website is currently down, so we are linking to an archived version on the Internet Archive. Note that some business networks block the Internet Archive; if this happens to you we suggest using your mobile or a home computer. ↩︎
We understand that the UK company has recently been sold to a third party; we do not know if the Isle of Man company has also been sold. We have no reason to believe that the new owner of Carnegie Knox (UK) was involved in any of the matters discussed in this report. ↩︎
We are also excluding Monthly Advance Loans Limited, as the UK company appears to serve UK customers and the Isle of Man company served Isle of Man customers (although it appears to have ceased that business and changed its name last year to MAL Technology Limited). Regulatory considerations often mean that consumer lending has to be carried out by a locally-incorporated company, although it is still unusual to use the same name in two different jurisdictions ↩︎
We have, after some thought, excluded one company which have Paul Ruocco and Knox links, but which we are not confident are part of Barrowman’s group: Umbrellaworx Limited, which runs a live contractor umbrella scheme, is the name of both a UK company and a Maltese company. ↩︎
i.e. stopping some third party setting up a UK company with the same name as your foreign company, and then leaving the UK company dormant ↩︎
With the exception we note above, Monthly Advance Loans Limited, where the Isle of Man company does appear to have undertaken Isle of Man business, and therefore it’s not included in our list of seven. ↩︎
We are aware of one multinational which had two similarly named companies (something like “Pineapple 58233 Ltd” and “Pineapple 582233 Limited”) and accidentally put the wrong company name on an important contract it had signed with a third party. Extricating itself from that mess was very expensive. ↩︎
That’s the theory. Unfortunately the reality is that this arrangement creates lots of opportunities for bad actors to abuse tax and employment law, and downright commit fraud. A recent government consultation may improve things. ↩︎
Many people we speak to who are active in this area believe that some recruitment companies have connived in bad, and even criminal, behaviour by umbrella companies. Fuel Recruitment, by contrast, were extremely straight with the FT, and it is in our view clear that they had no involvement in Smartpay’s unethical and perhaps illegal behaviour ↩︎
It’s unclear why some emails came from smartpaylimited.co.uk and some from smartpaylimited.com. ↩︎
The company is shown as Smart Pay Limited; there seems to be some inconsistency here. Even the current website shows the spelling as “Smart Pay Limited” on the homepage, but “Smartpay Limited” in the privacy policy. As far as Companies House is concerned, Smart Pay Limited is the same as Smartpay Limited, which is the same as S M Artpay Limited. Spaces and punctuation don’t matter. ↩︎
The arrangement may have invalidated the insurance, in which case there may also have been a false representation that the employee was properly insured. However the impact of the undisclosed agency on the insurance is a difficult question, dependent on the precise terms of the insurance (which we have not been able to review). ↩︎
Metadata is the hidden information contained in computer document files. For example, if you open a PDF document in Adobe Acrobat, then click “File” and “Properties”, you will see the author of the document (or at least the person whose details were entered into the application that generated the original document) and the details of the application that generated the PDF. Metadata should be interpreted with caution. It can be easily faked. More importantly, metadata does not tell you who wrote a document. The default setting is that the name of the “author” is taken from the current logged-in user of the machine on which the PDF was created, but this default can be changed. Someone else could be using that person’s computer. In this case we have seen metadata identifying Hardman as the author across a large number of documents used by many members of Barrowman’s group. It is therefore a reasonable inference that Hardman, or someone working closely with him, is responsible for the documents. We have also had confirmation from independent sources that Hardman acts as legal counsel to Barrowman and the Knox Group. ↩︎
We are not sure if the UK company was truly acting as an “undisclosed agent”; that would have required an appointment by the Isle of Man company. It would also have had VAT, corporation tax and possibly insurance law and employment law consequences. A proper assessment would require a review of the full facts and circumstances surrounding the relationship between the two Smartpay entities, including legal documentation. That will not change the potentially criminal consequences of a fraudulent misrepresentation, but could impact these other issues. ↩︎
For example someone purchasing goods or real estate may be acting for a particular end-purchaser, but think they obtain a better price by not disclosing the identity of the end-purchaser to the seller. That might annoy the seller, but it’s not fraud. Unless the seller asks “are you buying for yourself, or are you acting for another party”, and the buyer lies – then it is potentially fraud. So, where it matters, particularly in financial contracts entered into by regulated parties, businesses often require a representation that their counterparty is not acting as agent. ↩︎
The subjective element of the test for dishonesty (see Ghosh (1982)) was removed by Ivey [2017] for civil cases, and that decision was confirmed to apply to criminal cases in Barton [2020]. The fact that a defendant might plead he or she was acting in line with what others in the sector were doing, and therefore did not believe it to be dishonest is no longer relevant if the jury finds they knew what they were doing and it was objectively dishonest. ↩︎
Paul Ruocco, who has extensive Barrowman connections, became listed as the “person with significant control” of the company in 2017, and became a director on 1 November 2019. ↩︎
The profit and loss account balance doesn’t necessarily tell us that – there could have been dividends. But the accounts show £913k owing to HMRC and, whilst some of it could be PAYE for the month, we expect most of it is corporation tax. That implies a profit of around £4m. ↩︎
It is also possible that some or even all of the £4m comes from another source, as the company made a similar amount of profit in the following two years (suggesting PPE Medpro had another source of income).33Note the £4m of “other debtors”. If these related to PPE supply, we would expect them to be ‘trade debtors’. This suggests that money has come in and been loaned to another party. ↩︎
There is a tax and social security balance in the accounts of £931k. This will likely be a mix of corporation tax and VAT (on the basis that there’s unlikely to be PAYE given there are no staff disclosed). Assuming that all is corporation tax, this would imply a taxable profit below £5m (based on a headline rate of 19%) if all the tax was paid post year end, as would normally be the case for a small company. ↩︎
Barrowman has mentioned a “consortium”, but the UK PPE Medpro is clearly not a consortium itself – perhaps it was fronting for the consortium via an undisclosed agency of some kind? ↩︎
The statement also amounts to an admission than Smartpay is part of the Knox Group, which we believed was the case but can now be considered confirmed. ↩︎
Smartpay, AML and AML/Denmedical; we also understand there were additional cases which Barrowman companies conceded before they reached a tribunal. ↩︎
It’s being reported that Jeremy Hunt is considering abolishing the non-dom regime. Some are suggesting he’s thinking of stealing Labour’s policy. But he could have a rather different objective – a principled reform of the existing rules, which are currently deeply irrational.
The non-dom rules mean (very broadly) that a foreigner living in the UK who is classified as having a non-UK domicile isn’t taxed on their foreign income and gains, unless they bring (“remit”) the proceeds into the UK. That can continue for up to 15 years, even if they live in the UK for all of that time.
Labour are committed to abolishing the non-dom regime. It’s probably fair to say this is for three reasons:
Labour believes the non-dom regime is of little practical use to normal people arriving in the UK (even highly paid ones), but of huge value to the exceedingly wealthy.
That means the rules are inequitable, because some people (non-doms, sometimes very wealthy) pay less tax on their income than normal UK domiciled individuals (whether poor or wealthy).
Labour doesn’t believe large numbers of non-doms will leave the UK as a result of scrapping the rules, and can point to supporting evidence. Hence they believe abolishing the non-dom regime could raise funds for spending.
That all suggests the non-dom rules should be scrapped and replaced with a simpler system that operates for a shorter amount of time, perhaps providing a more useful exemption to “normal” people, but a less useful exemption for the very wealthy. That appears to be Labour’s current policy.
It’s possible Jeremy Hunt is considering stealing Labour’s clothes, out of some mixture of principle (perhaps he agrees with the above analysis!) and politics (it will neuter a popular Labour policy).
But it’s also possible that Mr Hunt has his own reasons for wanting to abolish the non-dom regime, which are similar in some respects to Labours, but with a very different emphasis. For example:
Mr Hunt could believe that the rules are absurdly complicated given the uncertainty around the “domicile” definition. If so, he’s correct – HMRC accurately but unhelpfully says the concept “cannot be defined precisely“. This is not how tax rules should work.
He may also regard it as deeply irrational that the non-dom rules, and the remittance basis in particular, creates a powerful incentive for some very wealthy people to keep their wealth outside the UK.
On the other hand, Mr Hunt may be more relaxed about the vertical inequity created by the rules, particularly if he believes there is an overall economic benefit.
And he may be less sanguine about the prospect of non-doms fleeing the UK upon any abolition of the rules, and therefore not see abolition as a practical source of revenues. That seems to have been Mr Hunt’s view back in 2022.
These views point to abolition, but a different kind of abolition from Labour.
Mr Hunt could abolish the concept of “domicile” and replace it with a simple year-count using the (very successful) modern statutory residence test (sufficiently simple that it can be fairly comprehensively summarised in flowcharts like this).
He could then also abolish the “remittance” concept and simply exempt non-doms on all of their foreign income and gains.
But, unlike Labour, he might keep the current 15 year limit (or perhaps reduce it slightly).
There would be some obvious advantages from such a change:
The rules would be fairer, and much more useful to moderately wealthy immigrants (think: doctors, IT professionals, junior and mid-level bankers) who have some wealth abroad, but can’t justify the cost of advisers to manage their “remittance” position, and so don’t get much benefit from the non-dom regime.
The UK would therefore, at the margins, become more attractive to moderately wealthy immigrants.
The rules would be less easy to manipulate if they had a simple robust test of domicile.
The UK economy might benefit from an influx of spending from non-doms who no longer need to manage their remittances very cautiously.
This does raise some difficult questions:
That influx of spending from non-doms could have negative effects, e.g. adding to asset price inflation. I’m not an economist, so I’m not able to assess the pros and cons here.
There would be winners and losers, as there are from most tax changes – replacing domicile with a simple statutory test would be better for some people and worse for others. But many of the wealthy losers would manage their affairs so they didn’t in fact lose (e.g. by leaving the UK). The wealthy winners would cash their winnings – we’d collect less tax from them. Would this be overcome by additional tax from the immigrants we attracted, or from multiplier effects from “good” new spending from existing non-doms?
Non-doms would be able to bring more funds into the UK without paying more tax; this could be portrayed as a tax-cut for the very wealthy (and in some respects it would be).
How do you deal with the transition from the old rules to the new? There must be £10bns of unremitted non-dom income and gains sitting offshore. Do you keep make those funds subject to the old remittance rules forever? That means you keep all the complexity, and reduce the benefit of encouraging non-doms to bring funds to the UK. Or do you bin the remittance rules entirely, and effectively have an amnesty on non-doms’ offshore funds? That means you lose the small-but-significant tax currently collected from historic remittances. There could be simplified compromise approaches, for example a 15% flat rate on all historic remittances (but then you need to keep mixed fund rules to track what is a historic remittance and what isn’t). No easy answers!
These would be good questions for Mr Hunt to consider.
However all discussions about the non-dom rules should come with a health warning: remember the trusts. The 15 year limit is essentially voluntary for the very wealthy, because a non-dom who is about to run into the time limit can put foreign property in a trust, and then (big simplification alert) essentially preserve the benefit of the non-dom rules forever. Any non-dom reform which doesn’t change the treatment of these trusts will not materially impact the very wealthy. A reduction of the 15 year limit would have only a very limited impact on people in this category.
Any reform (Labour or Conservative) that doesn’t properly consider the position of trusts will be half-baked.
The recent publication of Rishi Sunak and Keir Starmer’s tax returns brought into focus the large difference between the marginal rates of tax on employment income (47%) and capital gains tax (20% for shares; 28% for real estate). Many people propose closing this gap. But how unusual is it in an international context? What do we see if we look across the rest of the OECD?
The UK rate of income tax on dividends tops out at 39.35%, but the rate of capital gains tax on sales of shares is 20%.1 This is a large gap, and encourages significant avoidance – so I’ve suggested closing it. Some people responded by saying that other countries also had a large gap between CGT and income tax, and the UK would be an outlier if we closed it. My initial reaction was that this was wrong, but I don’t think it’s wise to ever propose tax policy changes without looking at what the rest of the world does.2 This short article therefore compares rates across the developed world.3
CGT vs income tax on dividends
Here’s a chart showing, for each country in the OECD, the highest marginal rate of income tax on dividends and the highest marginal rate of capital gains tax on share sales. The arrowhead is the CGT rate. The tail of the arrow is the income tax rate. The chart is sorted by CGT rate.
In other words, this shows us the size of the CGT/income tax gap:
The position is rather nuanced:
The big Continental economies – France, Germany, Italy, Spain, have CGT rates more-or-less equal to income tax rates. In that sense the UK is an anomaly.
However whilst the UK has a slightly below average rate of CGT on shares, it has one of the highest rates of income tax on dividends. Higher than France, Portugal, Italy, Spain. Which is surprising.
Quite a few countries have no CGT at all (arrowheads on the 0% line), although one could probably make a fair case that none of those are particularly comparable to the UK.4 I’d expect those countries have a lot of avoidance, with people manufacturing gains rather than taking dividends from private companies.
Two countries have no income tax on dividends at all (arrow tails on the 0%) line – Latvia and Estonia. Curiously they charge CGT on shares, so I’d expect there is a lot of avoidance by taking dividends rather than selling shares in private companies.
So is it true to say the UK has an unusually large gap between the rates of income tax and capital gains tax? Somewhat, depending on whether you think the comparison should be focussed on the big Continental economies or drawn more widely.
This differential between the income tax rate on dividends and the CGT rate on shares is important when we’re thinking about the potential for avoidance, given how easy it is for owners of private companies to shift their return from dividends to capital gains. That was Nigel Lawson’s point back in 1988.
But if we increased the UK CGT rate to match the dividend income tax rate of 39.35% it would be one of the highest in the world, with only Denmark and Australia higher (and the Australian rate is halved where an asset is owned for a year or more). That shouldn’t rule out such a change, but it should make us hesitate.5
And I suspect it would be politically highly controversial to follow France, Germany, Italy and Spain, equalise the rates of income tax and CGT on dividends/shares at around 30%. It would be seen by many as a tax cut for the rich, and that would probably be correct.6
CGT vs income tax and NI/SS on employment income
As a tax lawyer, I start by looking at the problems of avoidance and economic distortion caused by a large income tax/GGT rate differential. However, often people are making a more political point: that it’s inequitable to tax capital gains so much less than employment income. That’s most often an argument associated with the political Left, but even a technocratic centrist like James Mirrlees argued that the combined rates of corporate and shareholder taxation should equal the tax rates on employment income.7
What if we take the chart above, but instead of comparing CGT with income tax on dividend income, we compare it with tax on employment income, i.e. income tax and national insurance/social security?
This is a dramatically different picture, as almost all countries tax employment income significantly higher than investment income, and therefore almost all the OECD has a big differential between CGT and tax on employment income.8 Once we include national insurance/social security, the UK’s differential looks unexceptional (particularly compared to the likes of Belgium – 0% CGT vs 60% tax on employment income!).9
The UK would therefore be an outlier if we equalised CGT and income tax on dividends at the employment income marginal rate of 47%. We’d have the highest rate of CGT in the developed world, which doesn’t feel like a great idea. I find this an uncomfortable conclusion, given the avoidance and distortion that results from taxing different types of income at wildly different rates.
I still believe we should increase the rate of UK capital gains tax, but I’d probably be cautious at going much above 30%, although if indexation (allowance for inflation) is reintroduced then perhaps we have more scope.10 But in a world full of crazy and inequitable tax systems, perhaps we have to be careful not to be too sane.
The data and code that created the charts is here.
Notes on the underlying data:
The tax rate on dividends is the highest marginal combined national/state rate taking account of imputation systems, tax credits and tax allowances. Source is the wonderful OECD tax database, column K.
The tax rate on labour income is the highest marginal rate of combined national/state, including employee social security/NI (but not employer rates). Again the OECD tax database is the source – see the “all in rate” column F.
The CGT rate is the highest marginal combined national/state rate on shares. Source: this helpful table from PwC and Tax Policy Associates research.
Note that these are rates for local residents. Some countries (e.g. France) in principle tax foreigners on local gains (although tax treaties mean in practice this rarely applies). Other countries like the UK/US only tax local residents on gains in stock/shares.
Footnotes
In principle both rates reflect the fact that a company’s profits are subject to tax at 25% – that means the effective rate of tax on dividends from a UK company can be as 54%, if the dividend is entirely paid out of taxable profits. However using the 54% figure would be misleading for two important reasons. First, dividends aren’t always paid out of taxable profits (in some circumstances you can borrow to pay a dividend). Second, UK resident individuals receive dividends from countries all over the world. The 54% is relevant only to where a UK resident individual receives a dividend from a UK company. This will in practice be a minority of cases. The same is true for most other countries, and therefore it would be misleading to present each country’s rate of tax on dividends adjusted to reflect that same country’s rate of corporate tax. ↩︎
Both in terms of being informed by their experiences and because of the inevitable-if-controversial spectre of tax competition. It is absolutely possible to make the case that the UK should have a tax system that’s very different from the rest of the world but, if one does so, it’s important to understant that this is what you are doing, and consider the implications. ↩︎
It therefore doesn’t include countries like Singapore and the tax havens, who are not OECD members. ↩︎
Switzerland is interesting, because whilst it has no CGT it does have a wealth tax, raising about 1% of GDP – by comparison the UK raises about 0.5% of GDP from CGT, and most countries raise much less. Given the concentration of financial wealth in Switzerland it is likely that the Swiss system as a whole ends up significantly under-taxing wealth. ↩︎
It’s sometimes proposed we increase the rate to 57%. That would be significantly higher than any other country. ↩︎
i.e. because I expect the revenue gains from increasing the rate of CGT would be smaller than the revenue losses from reducing dividend tax. ↩︎
It’s even more dramatic if you bring employer national insurance into it. On the face of it that would make sense, given that in the long run most of the economic incidence of employer national insurance falls on employee wages. But in the short term it doesn’t, and therefore marginal rates (and the charts in this article) don’t include employer taxes. Suffice to say that for almost all countries including employer taxation would materially expand the delta between rates of tax on labour income and CGT ↩︎
Anecdotally, this leads to a large amount of planning/avoidance by those on high incomes, so that the apparently high income tax rate in France, Belgium etc tends to be paid by the middle classes and not the very wealthy. However I am not aware of any data on the subject (and anecdotes from tax lawyers are inevitably unrepresentative and should be treated with caution). ↩︎
People used to complain indexation was too complicated; in the days of online tax return that should no longer be an issue. The advantage of a higher rate plus indexation is that we are (effectively) reducing the rate for “real” longer term investors, but not for people who magically turn income into gains. The analysis really requires us to look at how inflation is catered for in other countries’ tax system; I believe most countries don’t have any indexation allowance, but I’m not aware of any centralised resource on the subject. So this would be a reasonably sized project, but one which is worth doing. ↩︎
![In the case of an individual living with his spouse or civil partner]—
(a)there can only be one residence or main residence for both, so long as living together and, where a notice under subsection (5)(a) above affects both the individual and his spouse or civil partner], it must be given by both,](https://taxpolicy.org.uk/wp-content/uploads/2024/04/Screenshot-2024-04-12-at-13.20.20.png)
![References in this Act to [an individual living with his spouse or civil partner] shall be construed in accordance with [section 1011 of ITA 2007].](https://taxpolicy.org.uk/wp-content/uploads/2024/04/Screenshot-2024-04-12-at-13.09.42.png)
![WP communications are a form of legal privilege, which only subsists for as long as the communications which are subject to it remain confidential. The reason the offers are WP is to allow the
kind of commercial settlement negotiations that we undertake on the HSS. We designed the
scheme to be as postmaster centric as possible and as [name of senior external lawyer redacted]
has recently commented, the very low evidential burden on postmasters means that we can make
the sorts of offers that a court would not be in a position to make. While we are in discussion with
a postmaster, those discussions remain confidential until such time as we have reached a settlement. This is very normal and protects both sides. None of our claimant firms have challenged
the point as they understand the benefit to both parties and the fact that there is no disadvantage
to their clients.](https://taxpolicy.org.uk/wp-content/uploads/2024/03/image-38.png)
