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FLIGHT Howard 2

Lord Flight was Shadow Chief Secretary to the Treasury from 2001-2004.  He is now chairman of Flight & Partners Recovery Fund.

Arguably, the most significant legislation in the most recent Finance Act was the penal attack on “tax avoidance”.  This is a subject – like sex in the nineteenth century – which no one talks about, but in which many engage!  In Parliament, discussion of this territory also muddies the water by mixing up evasion and avoidance, and being unclear what sort of avoidance is objectionable.

Tax evasion is a breach of the law and is a criminal offence.  However, tax avoidance is within the law by definition.  In all highly taxed economies, inevitably, people seek legal means to reduce their tax bills and, equally, governments use tax incentives to encourage particular behaviour.  In a low tax environment, such as Hong Kong, there is little tax avoidance and few government tax incentives.  Within tax avoidance there is an hierarchy of activities: there are all sorts of government tax incentives such as Pension Saving, ISAs, EIS, and the very tax incentives in the Finance Act, of which everyone would approve.  The whole point of people using these, however, is that they avoid taxation.  Up to half the population are tax avoiders in this sense.

Then there are government schemes which have been poorly drafted and are thus exploited and abused – in relation to which, fundamentally, the issue is that the law needs tightening up.  With regard to companies avoiding corporation tax, this results partly from EU Dutch and Luxembourg legislation, deliberately designed to attract modest tax revenues and UK law with regard to corporation tax liabilities. At the bottom of the heap are manufactured schemes – frequently fabrications which do not stand up – towards which aggressive HMRC measures are wholly justified.

The measures in the Finance Act do not, however, apply just to the latter, as the Government has implied.  They also apply to statutory government incentive schemes, largely brought in by the last Labour Government, in which the law is unclear and there is thus disagreement between lawyers and accountants and HMRC as to what is within and without the measures that were enacted.

There has, moreover, been a virtual stand-off by HMRC towards relevant accountants and advisers which has frustrated a sensible solution.  In the case of EIS investment, where HMRC had become justifiably annoyed at what they perceived as some cases of abuse, the industry sat down with HMRC and agreed a very sensible measure of pre-clearance of EIS qualification by HMRC, providing, on the one hand, the ability of HMRC to kill off schemes of which they disapproved; and, on the other, greater certainty to investors.

The harsh measures in the Budget, however, apply to film schemes, enterprise zone schemes and – where I think there is the largest potential injustice – the Business Premises Renovation Allowance Scheme (BPRA).  The Finance Act introduces a retrospective requirement, in which HMRC may consider that a scheme has been abused, for the full amount of tax being saved to be deposited up front within 90 days.  Mark Field has already raised the injustice of this with regard to Government film incentive schemes.

My first point is that where HMRC clearance of these schemes has been awaited for four or five years, HMRC should have disallowed them at the outset if it did not consider that the schemes met the terms of the legislation.

Secondly, one of the qualifications for the retrospective measures applying is that the schemes are DOTAS (Disclosure of Tax Avoidance Scheme) registered.  Frequently, registration goes back to a time when there was no requirement to so register, and individuals registered with the intention of being transparent.  Ironically, it ends up with those who registered out of proper principle being punished and those who did not register not being punished.  The Finance Act also enables HMRC to demand money when they cannot necessarily show that the relevant investors have done anything wrong.  Legislation also authorises HMRC to remove funds from an individual’s bank account.

All of this is a complicated and difficult territory in which few people understand or know what is in the Act.

The Treasury Select Committee and the Chartered Institute of Taxation have complained about the retrospective aspect of the measures; about unprecedented HMRC executive powers of decision; about HMRC having the position of judge and jury, and that the measures create a precedent in the UK tax system in which the tax authorities are given power to demand payment without any right of appeal.

The Select Committee also objected to the retrospective nature of the requirement for tax payers to pay 100 per cent upfront within 90 days, putting fiscal policy on a slippery slope towards arbitrary taxation.  Many individuals have been good faith, legitimate investors in, for example, BPRA schemes over several years, with no previous complaint from HMRC.  They now find themselves “on the wrong side”, with notices to pay.

The outcome, post the enactment of the Finance Act, also looks to be somewhat shambolic.  HMRC has published an extensive list of virtually all those who have invested in BPRA schemes as those to whom these arrangements will apply; but, at the same time, it also appears to be saying that these arrangements will not apply until negotiations have been completed.  Here, there is the practical point that, in many cases, most of the BPRA investment is compliant with the law, but HMRC has deemed part of a scheme to be outside the law, and therefore a modest amount of tax needs to be recovered.

I am uncomfortable with the accelerated payments rules on two major points.  They are contrary to two fundamental UK legal principles. In Britain, it has always been the case that you are innocent until proven guilty.  What is happening here is that the standard basis of self-assessment is being over-ridden, and tax payers are being treated as guilty until they can prove their innocence.  Furthermore, there is no proper appeal mechanism.  Harsh measures are justifiable in addressing manufactured bogus tax avoidance scheme,s but these are government legislated, statutory schemes with EU State Aid approved.  The new penalties are, moreover, clearly retrospective in their application.  There is a significant possibility of HMRC being taken to Court and of judicial reviews in which the Courts may find against HMRC.

The Treasury and HMRC have been unwilling to listen to the concerns of many respectable people here.  I hope that HMRC will be careful how they use the new powers which have been enacted – endeavouring to use them justly, and in a manner which is wholly transparent.

9 comments for: Lord Flight: Retrospective, arbitrary, unfair. Problems with the Finance Act

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