Holding on to the fruits of tax avoidance

It's difficult to think of a measure that has attracted such universal hostility as the proposals announced in the Queen's Speech for so-called Accelerated Payments. Badged by the Telegraph as treating taxpayers as "guilty until proven innocent" and by Pinsent Masons as "unconstitutional" and "having the effect of making HMRC judge and jury" they have nevertheless found their way into the Con/Lib Government's final Queen's Speech.

These are heavy charges. But are they justified? Do the Accelerated Payments provisions effect some step change to the present system for collecting tax? And if they did, would they be wrong to do so? The answer, in both cases, is an all but unqualified no.

Let's remind ourselves what the provisions do. Where your tax behaviour looks like 'bad' behaviour - defined in ways I shall come on to - HMRC can compel you to hand over the fruits of avoidance pending a final judicial determination. And, err, that's it. Standing back, the policy rationale is, where your behaviour looks like it's bad, you hand over the cash now. But should the courts later define your behaviour to be, in effect, 'good', you'll get the money back plus interest.

So the provisions are only about the question 'who should hold the cash?' in the meantime.

To, then, the first of the two questions I posed. Do they effect some step change?

Answer, clearly not.

The provisions bite only where you are holding on to the tax fruits of your avoidance behaviour in the meantime. But the question whether you are - or whether HMRC already have the cash - is not a function of some broad constitutional principle that you should enjoy the money until a court compels you to hand it over. It's a function, instead, largely of fortuity: whether you're employed or self-employed.

The effect of successful personal income tax planning is typically to remove an obligation to pay income tax on otherwise taxable income. This intended effect is achieved either through the taxpayer generating 'losses' which she can set against her other taxable income thus reducing her net taxable income. Or by triggering her entitlement to a tax credit which, again, she can set against her liability to pay income tax.

Now, where you are self-employed, or have other income not subject to deduction of tax at source, you claim the benefit of these losses or this tax credit by saying on your tax return, in effect, I have a liability to pay you 100 but I have losses of 80 so I will only pay you nine (45% of the remaining 20), and then handing over that nine. However, where your income is subject to deduction of tax at source (because, for example, your employer deducts it under PAYE) you claim the benefit by saying, in your tax return, you HMRC have deducted tax on 100 but you should only have deducted tax on 20, so please repay the 36 (45% of 80). Sometimes HMRC do, even where they think your claim to 80 of losses may not be secure, but increasingly they don't. So if you're self-employed, typically you'l have the cash. But if you're employed, generally HMRC will already hold it.

The effect of all of this is that the question 'who should hold the cash?' is one which, even under the legislation as it stands, is apt to produce different answers for different types of taxpayer. Or, in a nutshell, no step change to see here, move along.*

My second question was, even if the provisions effected a step change, would they be wrong to do so?

Plainly this is a question in relation to which different people can reasonably hold different views. My starting point is that HMRC is a department of Government, obliged as a matter of proper public administration to act reasonably in collecting tax, and that, where it says tax is due, it is generally likely (I put it no higher than that) to be right. The data in tax avoidance cases supports this proposition: HMRC claims to win over 80% of disputes. Now, one might reasonably ask, in those circumstances, why should HMRC not have the cash pending a determination.

And there are additional safeguards. In order for the accelerated payments provisions to apply, there must be more than a mere statistical probability that  HMRC will likely end up with the cash anyway, to justify them getting it now. For HMRC to issue an accelerated payment notice, they must be able to pass through one of three gates. The first gate is that an independent advisory panel has indicated that the transaction is likely to be "abusive". The second gate is that the transaction has already been disclosed under the Disclosure of Tax Avoidance Scheme regulations. The third gate is that HMRC must be of the view there is a judicial ruling which, if applied to the case, would deny the asserted advantage.

Now, none of these gates is perfect.** They are all proxies for the (technically challenging) question the subject of the taxpayer's appeal, what is 'good' and what is 'bad' tax avoidance. But they are, on any view real safeguards. And they have broadly the effect that only measures which are likely to be 'bad' avoidance cases should trigger the provision of an accelerated payment notice. Again, nothing to see here.

Summarising, the accelerated payments provisions are - or so it seems to me - well targeted provisions which seek to reduce tax avoidance behaviour by targeting one of the cash-flow benefits of that behaviour. In that objective, and generally in their execution, they are to be applauded.

*The existing legislation also gets to this result by compelling certain types of taxpayer wishing to challenge a HMRC determination that their transaction is 'bad' to pay the disputed tax as the price of pursuing the determination. But again, no step change.

**Indeed, the DOTAS gate is properly amenable of serious criticism. Many taxpayers made DOTAS disclosures out of an excess of caution and/or a desire to be good taxpaying citizens, even where they believed or were advised that their transaction was not disclosable. That they should be, in effect, punished for behaving in ways the Government would wish to encourage is likely to prove hugely counterproductive. The extent to which this generates an undesirable effect - that of a reduction in transparency in taxpayer behaviour - is a known unknown which any sensible Government should wish to guard against. Other, also weighty, criticisms may be made of the Judicial Ruling gate.

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