LIVEBLOG: Treasury Committee Inquiries & Disputes hearing with CIOT President
Liveblog on Treasury Sub-committee evidence session with CIOT President Ray McCann. The session is part of the “conduct of tax enquiries and resolution of tax disputes” inquiry and covered current employment taxes issues, including the disguised remuneration loan charge and IR35 reform.
The other witness, alongside Ray, was Tony Lennon from the BECTU sector of the union, Prospect. BECTU covers the media and entertainment industries and members include a large number of freelancers working either as self-employed or through personal service companies.
You can watch the session here.
Monday 10 December 2018
The session started at 1.25pm.
The chair, John Mann, opened proceedings. He asked about the loan charge. Tony Lennon said only two people had contacted him - his sector (film and TV, primarily) had not been significantly affected.
Ray McCann said CIOT had expressed reservations over the charge, mainly because it is unprecedented legislation. He doesn't believe it is retrospective in the conventional sense but it has retrospective effect. The retrospective effect displaces all the protections that taxpayers are given by parliament in terms of getting certainty for their affairs in the past. Even an individual who has disclosed their loan arrangement to HMRC will still be caught in April for quite an extensive period back. We have made representations to government and HMRC: "we are trying to find a situation where we can bring about something which will strike those who are caught by this legislation as a bit fairer. Equally we have to balance that... a change like this was long overdue and these arrangements have just gone on and on." He had seen that some people had used these arrangements right up to 2015, 2016. Back to 2010 and earlier HMRC had appeared 'not to be too fussed' by these arrangements but by 2015 the same couldn't be said to be true.
He saw 'a failure at all levels' - in terms of how HMRC have operated over the years, with delay and inaction, and also culpability on the part of those who have used these arrangements, many of whom he suspected had simply closed their ideas to the fact that they get an advantageous tax position and had gone along with representations made by promoters, often outside the UK. He had seen absurd claims made about the veracity of those arrangements.
Mann asked what should be done about the promoters. McCann said that as the law stands there is no obvious sanction the UK can apply against a promoter based in, say, the Isle of Man. It is uncertain whether a person acting in that way would be breaching any regulatory structure offshore. It is only in recent years that UK law has allowed the British government to punish a promoter making outrageous claims, selling egregious tax schemes. Against an onshore promoter it is limited until you get to 2015, by which time most of the promoters have moved out of that market.
Mann asked what percentage of the market offshore providers were. McCann said it was a high proportion in the Isle of Man and Channel Islands but he couldn't put a number on it. At HMRC (where he was to 2006) he had been heavily involved in trying to target EBTs. It was almost always offshore promoters behind the most egregious plans.
Mann asked Lennon if it was rare for his members to be involved in such schemes. And why? Lennon said these things seemed to go on a sectoral basis.
Wes Streeting asked why these schemes were so widespread and so difficult for HMRC to get a handle on and why HMRC had delayed so long even where schemes had been given a DOTAS number and people had declared them.
McCann said he was sympathetic to that charge. His hope was it was a small number that had declared under DOTAS and not been pursued. Going back to the Lawson era of the 1980s, up till then employer's NI was a 'Cinderella' at a low rate and it rose and rose and can now be the largest contribution some big employers make to the government. Employee NI is quite a high proportion of tax being paid. That has created a market of people willing to find a way to reward individuals in a way outside NI. There were exotic schemes in the 90s involving gold bullion, etc. which the government clamped down on. Then EBTs came along and were seen as providing the same benefits. Up to 2004 the Revenue rarely made public pronouncements - they didn't want to advertise. Those schemes became incredibly popular, offered huge advantages. Also popular because they don't require sophisticated arrangements. 'Plug and play' description used by HMRC. Kept being popular because the fixes being put in place were never really there. Combined by approach market had of differentiating schemes that were to all intents and purposes the same.
Streeting said he had been struck by difference between HMRC explanation and individual cases (constituents) - gave example of immigrant constituent who had scheme sold to him by an adviser. Also a mother who had returned to work - took professional advice and decided this scheme sounded appropriate and 20% contribution sounded 'about right'. Both those people face 100-250K costs. Not wealthy. They don't have anything like that money to spare. What sense of profile and motivation of people caught up in this? Is this typical?
McCann said his preference was if you change the law in this way we should have some sort of generous approach which gives credit to people in a way to get them out of these arrangements before the law changes. Loan charge is a general application to most EBTs from big banks to individuals. "The revenue have had various arrangements over the years to try and allow people to clear up their tax position. But this group, mainly contractors, for various reasons, those arrangements have just never worked for them. And I think it's because they come into this very late in the cycle, so by the time the contractor loan arrangements are being cleared up, the banks and so on and all the big companies are largely settled either because they've lost in the courts... or they've been able to take advantage of the employee benefit settlement opportunity." Difficult for me to look at most of the individuals I come across and had sympathy - that they could get into this situation without being aware there was something untoward. Sympathetic to point of view that if someone has included it on tax return and not had an enquiry HMRC should not easily dismiss that that person has tried. Also it's been put to me that there are people who have been told 'it's this arrangement or no job' - never met anyone in this situation but may be the case. Wouldn't dismiss lightly that there are some category of individuals who fall into that scenario. Majority of people knew what they were trying to get out of it. How could you genuinely believe that getting paid 7K a year earnings and 150K loan was appropriate year after year. "But I am sympathetic to the situation that a lot of them are ending up in. And I think the way that that should be resolved is by more generous terms whereby they can get out of it. It sticks in the craw for some people that someone who has done a tax avoidance scheme gets a generous offer to settle, but I think that's the way we've been for the last 10 years."
McCann said that some CIOT members had given advice in this area in the past. We changed our rules to require members to have more regard to what the tax system is intended to achieve for the country as a whole, including the intention of Parliament. He said he would have no hesitation in referring a member pretending this kind of arrangement was fine to the Taxation Disciplinary Board.
Simon Clarke asked whether the legislation was retrospective. McCann said the effect was retrospective but he didn't regard the charge as retrospective. In some respects it was worse because it displaces a lot of the taxpayer protections. He suspected the majority of people were in the schemes for the 2005-6 period onwards. Because of the clawing effect you could get a relatively low earning individual paying the highest rate of tax.
If it were found to be retrospective what difference would that make, asked Clarke. McCann said if it was actually retrospective the extent to which HMRC could apply it for an individual would be determined by the law as it stands; an individual who had declared it on their tax return would, without a further change to the law, be beyond the reach of HMRC in applying the loan charge, because that person would be protected under the Taxes Management Act 1970. If there was cause to believe the individual had deliberately evaded tax they would have a longer period of time but in most cases it would be well beyond the point at which the revenue can collect the tax.
Clarke asked what the tax profession's view on retrospective legislation was in the round.
McCann said the govt doesn't introduce retrospective legislation very frequently. We have objected to this for the reasons outlined - it's not strictly retrospective, We're generally not in favour of retrospective legislation because of the impact on taxpayer certainty. But Parliament needs to be able to look and judge something so egregious that retrospective legislation is needed but it needs to be a high bar.
Clarke asked of someone well versed in tax might foresee the risk of retrospective legislation.
McCann said he had been involved in the 2004 statement by the Paymaster General which warned of the possibility the govt would introduce retrospective legislation in response to abuses. That doesn't necessarily mean the average person will be aware of that. He hoped that greater public awareness would come out of this issue.
Mann asked about the Contractor Loan Settlement Opportunity. Is it working well? McCann said he had been critical of it. It should be more generous. Not right that HMRC prepared to give people credit against the loan charge only in circumstances where they are prepared to voluntarily pay taxed and duties for years that are out of time. His preference would be that out of time years left out of account completely. Firstly fairer. Secondly that was how earlier EBTSO operated. I don't understand why can't be consistent with that rule. Would deal with those who claim to have notified HMRC at the appropriate time that they had a loan arrangement. That would take away a lot of unfairness.
Charlie Elphicke said is it not the case that the law is quite clear whether taxpayers knew or not. McCann said the law on the loan charge was clear. Left to me I would have introduced a similar charge many years ago. Whether the legislation is capable of being understand by layperson a different question.
Elphicke: if I buy a stolen car the loss of it being returned to its owner sits with me unless I am able to recover it from the person who sold it to me. So isn't the issue really be the person who sold them the dodgy product.
McCann: loan charge first and foremost directed as the employer. Large nos of individuals effectively with fictitious employers. Mainly a name to provide a cashflow arrangements. Jimmy Carr, K2 scheme, was a loan scheme in 2012. Difficult to suggest anyone could have missed that. It was a cashflow arrangement. Carr gave it up quickly once pointed out it was avoidance. Difficulty of finding employers. Maybe some in firing line but probably a minority. Defaults to users in other cases.
Elphicke: if I'm the taxpayer and I'm told I won't have to pay tax don't I have some responsibility?
McCann: don't disagree for a moment. I've looked at several of these arrangements. All involve a large proportion of 'nudge nudge wink wink', you'll get the money. No promoter put on paper 'under no circumstances will you have to pay this loan back'. But equally most if not all involved knew that they wouldn't have to pay it back. If I had my choice all involved would have to pay the tax but that's not where we are. A large no will find impossible to pay taxes due within reasonable period of time.
Elphicke: my constituents who pay their taxes say 'how can this be fair'?
McCann: extent to which you look at this as fair depends on your perspective. If caught by the charge will think it's unfair. Difficulty is coming from how do we practically get these things cleared up? Don't see HMRC doing that in orderly fashion, bringing 100,000 individuals to book, will clog HMRC's resources even more.
Elphicke asked whether HMRC has discretion.
McCann said his view was HMRC has discretion to enter into settlements but not in discriminatory fashion. Has to be consistent. HMRC could compromise its claim against any individuals. I think they are keen to engage with as many of these people as possible to get things cleared up before loan charge kicks in. Will have less discretion once charge comes in in April. A window for better settlement arrangements.
Elphicke: so far HMRC taking too rigid a view?
McCann: problem with tax avoidance a lot of emotion comes into it. Can lose objectivity. Have yet to see an IR35 enquiry run by HMRC not full of emotion and bad spirit. Have to take that away and be more objective. If you have a loan charge user owing 250-300K who just can't pay is it in anyone's interests to drive that person into bankruptcy? Satisfied from discussions with senior people at HMRC they want to help people involved, getting things cleared up. But indivs affected need to contact HMRC to see what type of settlement is on offer.
Elphicke: HMRC have large stack of open enquiries. How deal?
McCann: various facilities over recent years. Called for a general clearance opportunity a few years back to let people put past behind them. HMRC have litigation strategy - if they think they'll win, can't give in. Created atmosphere where only part of business life in UK where compromise not allowed is tax. Too much rigidity.
Steve Baker, a new member of the committee, asked about retrospective effect. What does this mean?
McCann gave a hypothetical example. Retrospective - suppose I avoided tax through a scheme in 2011. Chancellor legislates now. Scheme doesn't work. In theory I owe 50K but whole lot of legislation in TMA says I don't have to pay that depending on what I've done. Time limit is four years - if HMRC haven't caught up with me by then I'm off the hook. If I've been careless it's 6 years. If I've deliberately set out to evade tax it's 20 years. Suppose we've got a law that says, from April this year, that £50,000 you've saved we're going to bring that back into tax. All those protections disappear. Only protection is tax treated as arising next year rather than in 2011 so won't have late payment charge. That's retrospective effect.
Baker - is retrospective effect more draconian then?
McCann - more complex because have to factor in interest, late payment interest. Might have to pay 70K. Retrospective effect - 50K. Has pluses and minuses. Real plus with retrospective legislation is you might not have to pay at all depending on how far back you go.
Baker asked about impact of off-payroll reforms on Lennon's members. He said lot of experience of TV and film workers working for BBC, also consultants in other areas, working through personal service companies (PSCs) whose situation reviewed as result of changes to public sector intermediate rules. Compliance generally good. Have seen people he thinks are genuinely self-employed put on PAYE. Also jobbing freelancers put on PAYE. Online status checker CEST has flaws - when tests on provision of services doesn't give enough weight to right to send a substitute on qualified basis, only absolute right; also doesn't test for whether you have multiple engagements. Engagers automatically following CEST. Practically all his members have multiple clients.
McCann was also asked about multiple clients. He said he had rarely seen someone who didn't have a number of clients, but often a preponderance of income from a single client. That's problematic for HMRC. HMRC suggest each individual contract needs to be tested separately - that's going too far.
Why do people choose to form companies? Lennon said they often don't choose. Some engagers have policies to deal only with PSCs. Not always certain whether engager has assessed nature of engagement correctly. Other engagers assess each case and may say your relationship is ambiguous but if you bill us through a limited co we will pay gross and won't put you on the payroll. Third it becomes fashionable. Indivs get the herd feel that everyone else seems to have one. Lastly people form cos because business model suggests that is right thing to do. First time a lot of people in our sector ever find out that you pay less tax on share dividends than income is when go to accountant having decided to set up co. Tax not a major driver. Bigger ones are engagers avoiding NICs, ignorance, herd instinct, mythology. We advise people if you're genuinely self-emp better to operate as sole trader. Biggest driver of becoming self-empl is ability to recover costs.
McCann said those using limited co attracted by huge differential between tax in dividends and tax on earnings. Eg husband and wife running limited co could have 100K a year between them paying no tax or NI because could take majority of profits out through dividends. If CT rate coming down as it is only tax charged is CT at 17-19% so that has been hugely attractive. That's attracted revenue to look at it. But not limited to dividend taxation. Advantageous position with regard to CGT.
Baker suggested the witnesses had told quite different stories about tax motivation.
Lennon said it was partly the scale of people's earnings. Most people working in film and tv will never run up tax bills of hundreds of thousands of pounds and will never go near an accountant until they have to.
McCann said his point was that often if you set a co up it's happy coincidence you discover tax advantages.
Mann invited the witnesses to send the further information in writing if they have anything further.
McCann said, in conclusion, that we have to find, between us, a way to encourage those affected by the loan charge to get in touch with HMRC. Mann invite his suggestions.
Lennon said, in conclusion, that his sector has a long tradition of self-employment. In dealing with abuses there is a danger we come up with a 'one size fits all' to solution taxation of workers that undermines the self-emp status of members of his union and other genuinely self-emp. Principal benefit for workers of self-emp is ability to recover business costs.
The session ended at 2.24pm.
By George Crozier, Head of External Relations.