John Kavanagh's UK Tax Blog

Legal Professional Privilege - a loophole exploited by HMRC?

noreply@blogger.com (John Kavanagh) — Mon, 18 Oct 2010 14:17:00 +0000

The recent decision in the case of R (on the application of Prudential Plc and another) v Special Commissioner of Income Tax and another shows that the issue of legal professional privilege ("LPP") in relation to documents regarding advice given to a client on tax matters underlines the unsatisfactory and anomalous current state of the law.

As matters stand, documents are protected from disclosure to HMRC where they are created in relation to tax advice given by a solicitor or barrister but not where the advice is given by a tax adviser or accountant. It is surely absurd that a client can ensure that he obtains the benefit of LPP where he instructs his solicitor to obtain advice from a non-solicitor tax adviser on his behalf but not if he goes to the tax adviser directly. Big Brother HMRC is exploiting this particular loophole rather regularly now - even though we all know how much they are against exploiting loopholes when the boot is on the other foot.

Neither am I terribly impressed that the accountancy bodies seem to be looking to have LPP extended just to them so that they can compete with the lawyers. Surely it is the nature of the advice, not the status of the adviser, which should determine whether documents are protected? A client's right to privacy and confidentiality of communication should be an inalienable right, not one which depends on an irrelevancy such as the professional status of the adviser with whom he is communicating.

How I can help you

noreply@blogger.com (John Kavanagh) — Wed, 29 Sep 2010 01:53:00 +0000

I get several approaches each and every day from people who seem to be desperate for me to help them with their tax problems. I do not even respond to most of these for reasons which I intend to clarify in this post. I honestly do not intend to appear rude or arrogant, but there is a protocol which works well for me and for my clients and since I don't intend to depart from it, it's probably best that I set it out here.

I see my job as finding possible arguments and defences in relation to tax disputes that the vast majority of accountants and advisers simply never discover or appreciate. I do not intend that as a criticism of them at all, but I have an extremely impressive and enviable 25 year track record of turning tax bills into repayments, potential tax disasters into major triumphs and unhappy clients and vexed advisers into very content people. The total tax I have saved for clients is certainly many, many millions. I always justify my fees in terms of tax you will save; if I can't do that, I will tell you so and charge nothing.

Nowadays, I prefer to work with other professional advisers (lawyers, accountants and trustees, sometimes financial advisers) in a way that the authorities do not necessarily know I am the one giving the advice behind the scenes; not because I want to hide my light under a bushel but because I want to make sure that clients have the best chance of securing the best possible result in their tax disputes tactically, strategically, promptly, efficiently and discreetly. I have learned that my reputation for getting the better of HMRC rarely works to the advantage of my clients when the former knows I am involved!

I am always happy to discuss potential new work both with clients and their advisers. An email (to uktaxconsulting@gmail.com) setting out the issue at stake will always receive a response; I'm sorry to say that a phone call asking for a "quote" or a request for a conversation on an unspecified issue are unlikely to be met with the same enthusiasm.

It's official - HMRC really are bad sports.

noreply@blogger.com (John Kavanagh) — Wed, 11 Aug 2010 07:50:00 +0000

The England team are unlikely to get the best of receptions when they come onto the pitch at Wembley tonight but there is another team which is proving just as unpopular - HMRC!

HMRC approaches each game it is involved in as if it is not just the strongest team in the league but is also the referee - and one who changes the rules to suit himself whenever he sees play that he considers "unfair". However, unlike Sepp Blatter's FIFA, who deliberately cover their eyes like the proverbial wise monkey so they see no evil, this particular game does have an off-pitch official in the form of the Courts.

HMRC's opposition this time was Portsmouth FC, or rather their administrators. HMRC complained that the proposed Corporate Voluntary Arrangement ("CVA") to deal with the Club's debts was unfair to them, partly because it failed to take into account £13 million of tax it claimed it was owed in relation to payments for image rights. However, this was a rather dubious appeal for a penalty on HMRC's part as it had previously lost a case before the Tax Tribunal which ruled that no tax was due on such payments. Fortunately, even though HMRC hoped they could pull the wool over the referee's eyes on this occasion, the Court saw through this dirty tackle & awarded a free kick to Portsmouth. The CVA will now go ahead as originally planned.

This news came on the same day that it was reported that HMRC was also being blamed by Professional Golf Association Tour officials for the increasing difficulties they face in encouraging foreign players to compete in European Tour events. This is a consequence of HMRC's success in a case it brought against the tennis player André Agassi in 2006, following which it is now able to impose UK tax not just on prize money but on sponsorship & endorsements connected with UK sporting events. PGA officials are reported to be particularly worried about the effects this may have on the forthcoming Ryder Cup which is being held in Wales this year.

We already have a tax system which encourages the UK's most successful sportsmen to base themselves abroad and if it also discourages big name foreign sportsmen from coming here to xompete, maybe it is time for a major rethink. Many of our sporting heroes may be selfish, spoiled prima donnas but there is no doubt that their activities in this country generate wealth, jobs and international prestige for the UK. It would be a shame if the shortsightedness of our greedy taxmen spoiled that.

A masochist's delight

noreply@blogger.com (John Kavanagh) — Tue, 22 Jun 2010 13:15:00 +0000

Today's Budget was expected to be a painful affair and indeed it was a masochist's delight. There was precious little carrot but lots and lots of stick.

As expected, VAT is to rise to 20% from 4 January 2011 - as mentioned in my last Budget blog, this should actually stimulate spending on luxury items in the short term.

For large companies, the reductions in corporation tax, although welcome, will undoubtedly be partly offset by the reduced rates of capital allowances. The tax rate may decrease but the taxable base will increase. I wonder whether and how the relatively certain knowledge of lower rates of corporation tax in the future will affect actual investment on the one hand and accounting on the other. Making a provision in one year even if one only has to release it in the next could be worth significant sums of tax for larger companies.

Many smaller companies may be more concerned with how they are going to stay in business and make profits rather than how those profits will be taxed when made. Those investing in plant and machinery for future production will be "incentivised" to do so early in order to avoid the effects of the reduction in the Annual Investment Allowance in 2012, again stimulating spending on fixed assets in the short term by making it more expensive to do so in the long term.

Buried in the Press Releases are announcements of the legislation amending the Enterprise Management Initiative and Venture Capital Trusts scheme to ensure that they qualify as approved State Aid under EU rules. There are some similarly-motivated changes to Consortium Relief. The fact is that it is no longer possible for the UK to single out UK companies for support of this kind. In times like this, one wonders whether that can be considered a good thing.

The increase in the CGT rate from 18% to 28% is swingeing. The fact is that most taxable capital gains are made by higher-rate taxpayers and trustees - or by basic rate taxpayers who for one year only are turned into higher-rate taxpayers by the receipt of a capital gain - so the tax take will be increased substantially. There will be issues arising for deceased estates because the higher rate applies to personal representatives as well - there may be some traps for the unwary here. Since there is no longer any indexation allowance for individuals and trustees and inflationary gains are therefore taxable once more, the effective rate of tax is extraordinarily high. What fairness there once was in the CGT system now seems to have flown out of the window. Note, however, the Government's contrasting generosity in increasing the entrepreneur's relief lifetime limit to £5 million.

There is an interesting Press Release, the contents of which are, in effect, that if MP's were subject to the same rules as everybody else regarding their subsistence and travelling expenses, they might have to pay some tax and this will never do. Therefore the said payments will be tax-exempt. Unlike many of the other Budget proposals, I would suggest that this is unlikely to meet with much opposition in Committee or in the Finance Bill debates.

Polling day at last

noreply@blogger.com (John Kavanagh) — Thu, 06 May 2010 10:07:00 +0000

Polling day is finally here and from the tax adviser's and taxpayer's perspective, today is not so much the end as the beginning. It looks likely that the results of the poll will not directly decide who goes on to govern us; that will be a matter of feverish negotiation behind the scenes.

Whoever forms a government, there is no doubt that taxes will have to rise substantially in due course; the 1% NIC rise and the 50% top rate of income tax will barely make a dent in the deficit. VAT seems the most likely area to be targeted and the announcement of a significant increase in the standard rate at some future specified date would probably have the perverse effect of stimulating the economy temporarily. I do not think that forecasts of a UK standard rate of 20% in the next couple of years are at all unrealistic or alarmist. We can expect evasion and large scale avoidance to be targeted by all parties, although one wonders how this would be done if there are civil service cut-backs, as appears likely, especially if the Conservatives are in power. Pension fund exemptions and reliefs are also likely to to be whittled away even further. Council tax may rise as central funding diminishes and local authorities resist making cuts. There may be additions to the range of "green" taxes and rises in duty on alcohol, tobacco and hydrocarbon fuel seem inevitable.

In the end, the taxpayer is set to suffer a considerable amount of pain, whichever party is in power. My forecast for the eventual outcome is a Conservative minority government. In my view, the Liberal Democrats will only support one of the other parties if they agree to proportional representation and that will almost certainly mean that we will never have a majority Government again and I doubt that that is something that either Labour or the Conservatives can tolerate.

Some thoughts on the Budget

noreply@blogger.com (John Kavanagh) — Wed, 24 Mar 2010 16:24:00 +0000

Rarely has the task of delivering a Budget been such an inconvenience to a Chancellor. Mr Darling had precious little to crow about and very little room for manoeuvre. This was a political Budget, with all the major fiscal and economic decisions made or incapable of being made so close to the looming Election. The Chancellor's speech was pedestrian and dull until mention was made of a new tax information exchange agreement with Belize. Laughter and cheering ensued at this point; I wonder why? Mr Cameron's reply was impressive. Most telling was his criticism of Labour for introducing measures which his party had initially proposed and which ministers had derided. If the Government still has any fresh ideas about how to lift the country out of recession, they were by no means obvious from this Budget.

Most of the tax changes mentioned in the Press Releases are either unsurprising or largely insignificant. The following caught my eye:

SDLT

For first time buyers, there is a temporary incentive to buy; incentives have not been common in recent budgets. However, there is a return to usual form for the buyer of £1 million+ properties - a disincentive to delay their purchases in the face of a swingeing increase in SDLT from 2011 onwards.

Offshore penalties

The keys to sophisticated offshore tax evasion are secrecy and non-disclosure. The fact that HMRC has been prepared to pay for information which has been obtained criminally is a strong indication of its determination to tackle this issue. The introduction of a higher tariff of penalties for offshore evasion structures which use tax havens with which the UK does not have tax information exchange agreements is clearly part of the overall effort to stamp out this kind of evasion but what will it actually achieve? Offshore structures are used frequently for investment and trading by non-UK residents and for legitimate tax avoidance. This fact often serves to give a veneer of legitimacy to structures which are frankly nothing more than heavily disguised evasion. Will the tax havens which have information exchange agreements be more or less likely to be used by legitimate avoiders or illegitimate evaders? A recurring problem with HMRC is their frequent inability to differentiate between the two groups.

Disclosure of avoidance schemes

HMRC are clearly still not happy with the scope of the DOTAS regulations and will be increasing penalties for non-compliance as well as revising and extending the “hallmarks” that identify the type of scheme covered by them. What constitutes avoidance is often a nebulous concept; HMRC moves the goalposts but is frustrated when the imaginative avoider still manages to put the ball in the net. HMRC's view of what constitutes unacceptable avoidance is much wider than the tax profession's. At the risk of torturing an analogy to death, one could say that they have recently begun to ask the referees, in the shape of the Courts, to disallow past goals on the basis that the goalposts were not actually where everybody thought HMRC had said they had put them. Thankfully, the Courts are there to provide a measure of sanity, but not before HMRC have rattled sabres, run up huge costs and cowed the vast majority into silent compliance.

Overall, this was a dull and uneventful Budget. But without doubt, it marked the beginning of an election campaign which promises to be neither dull nor uneventful.

What do we expect from the Pre-Budget Report?

noreply@blogger.com (John Kavanagh) — Thu, 06 Nov 2008 21:56:00 +0000

The Pre-Budget report will be announced within the next few weeks. It may be too early to expect any radical upheaval of the UK tax system but it must surely be coming given the hugely altered economic and fiscal landscape.

With the UK taxpayer being obliged to bail out the banks, there is likely to be increased emphasis in the UK on tackling perceived tax avoidance. It seems to me that the obvious steps to ameliorate the effects of a deepening recession are to encourage investment in business and capital projects, while perhaps beginning to increase rates of personal income tax for those with higher incomes.

High levels of stamp duty are doing nothing to help the liquidity of the UK property market and where there are no transactions, there are no tax receipts. Economics suggests that we start to shift the emphasis from taxing transactions and incomes to taxing private wealth, but politics and the lobbyists may be saying something else.

More tax avoidance nonsense

noreply@blogger.com (John Kavanagh) — Thu, 01 May 2008 10:52:00 +0000

An article in The Independent reports criticism of United Business Media for its decision to move its base to the Republic of Ireland. Vincent Cable, the Liberal Democrats' spokesman on economic affairs, referred to this move as "blatant tax avoidance".

Has he not heard of the right to freedom of movement of capital? The reason for the move is immaterial, while the fact that the group earns between 75 and 85% of its profits (depending on whose analysis you accept) from overseas is very relevant. Why should a genuinely multi-national business put the interests of the treasury ahead of its shareholders' interests? There is no earthly reason I can think of.

Even Richard Murphy thinks this story is "a storm in a tea cup", and where tax planning is concerned, he is usually the one making mountains out of molehills - not that he can resist his usual mud-slinging, calling the company "an aggressive and litigious tax avoider". The litigation he refers to is a continuing dispute over the interpretation of the capital gains de=grouping provisions - hardly especially aggressive tax planning, but given the sloppy drafting of the legislation in question, well worth arguing if success will lead to an additional £80 million of value to shareholders.

John Kavanagh in pugnacious form

noreply@blogger.com (John Kavanagh) — Mon, 14 Apr 2008 15:39:00 +0000

Dennis Howlett blogged the following on 13 April 2008:

"John Kavanagh is in pugnacious form over the Tesco/Guardian libel match:

(Then quoting my earlier blog:)

"It seems that we have reached a stage where the rhetoric of journalists, fuelled by their constant pursuit of scandal and inspired by the tendentious writings of self-appointed experts like Richard Murphy, Prem Sikka and their like, has been so successful in persuading the public that tax avoidance is immoral and unethical that merely to state that someone is a tax avoider is seen as libellous if untrue."

The fact of the matter is that Richard is an expert in his field - he doesn’t need to be self appointed. Check the organizations that support and sponsor his research. Strike 1.

If John read what Richard and others say, he would find it isn’t about avoidance per se but the use of what Tesco already admits is a highly complex structure that has allowed it to provisionally avoid (at the very least) stamp duty. Ostensibly, that goes against HMRC’s general position of substance over form in the creation of tax planning arrangements. Strike 2.

John goes on to say:

"I rather like Tesco’s approach to this case. If the Guardian argues successfully that their article is not defamatory, then Tesco loses their case but regains the moral high ground. If the article is defamatory if untrue, the Guardian will have to show that it got its facts right in order to win, and only Tesco can know whether they have.
John has got this the wrong way around. Anyone remember the MacDonald’s case? As Alex Hawkes correctly points out:

"Richard Northedge has a similar view: that Tesco could be entering into a MacLibel situation.

"This battle has the appearance of a Goliath versus David fight – and remember who won that. Tesco should look at the MacLibel case: after years of dispute, the hamburger giant won but it was the protestors that gained the sympathy and McDonalds is still regarded as a representative of big bad business.

Alex then goes on to argue that justice is blind and therefore the courts will not take the moral/ethical issue into consideration. I’d prefer that it does because if you think about the basis for common law, it is built on an unwritten but well understood code of ethics. Even if the courts rules in Tesco’s favour (assuming it ever gets that far), then Tesco is in a no-win position.

If, as I suspect, Tesco is forced to reveal what it has done, then the MacLibel issue takes on greater poignancy. I see a growing concern for issues that have an ethical flavour and which go to the heart of issues around sustainability, risk, compliance and social responsibility. It seems to me that you can hardly fly the flag of supporting issues around say Fair Trade while at the same time engaging in tax avoidance on the scale that Tesco already admits. That makes you a hypocrite. Strike 3.

Endnote: You wouldn’t expect John to agree with the position taken by Alex Hawkes, Richard Murphy, Prem Sikka and myself. His bio says: “I am Director of Private Clients in the London office of Shaws, Chartered Tax Advisers. I advise on all aspects of tax affecting private clients, with an emphasis on non-domiciliaries and offshore strategies.”

My response:

John Kavanagh on April 14th, 2008 4:37 pm

Unless you are much bigger than me, Dennis, I think I am going to have to ask you to step outside! Seriously, though, I will try to address your strikes and see if I can persuade anyone reading this that I have in fact hit a home run.

Strike 1

Richard Murphy is an expert in a field which he and journalists have created - analysing the tax charges in published accounts and comparing them with the headline rate. Not rocket science, and it hardly makes him an expert on tax avoidance any more than staring into the night sky makes one an expert in astronomy, but a chap’s got to make a living. Neither, as far as I am aware, is he an expert in ethics, and it is his (and seemingly your) blunt assertion that tax avoidance is immoral and unethical which seems to me to be unproven and which should be, and currently isn’t, the subject of considered debate. Whether the Guardian is in the wrong or Tesco is in the wrong in this little spat is not such an important question to me.

Strike 2

So now you’re telling me that if I don’t like being taught ethics by Richard Murphy, I should take lessons from HMRC instead? I fear we are not moving towards rapprochement, Dennis.

Strike 3

We would hate hypocrisy to come into this, wouldn’t we, Dennis? But then if one discovers that Guardian Media Group has entered into substantially similar transactions to those entered into by Tesco, that rather pulls the moral high ground from under their feet, doesn’t it?

Thanks for the headline, though.

Regards

John Kavanagh

PS Isn’t your reference to my bio a slightly low blow from someone who“specialised in providing…(inter alia) …offshore tax services” in a previous incarnation?!

Even more on The Guardian and Tesco

noreply@blogger.com (John Kavanagh) — Mon, 14 Apr 2008 14:34:00 +0000

A story by Stephen Glover in The Independent suggests that not only did the Guardian get their story about Tesco wrong but Guardian Media Group has engaged in exactly the same kind of avoidance as Tesco - or is it tax planning or mitigation when carried out by the gentlemen of the press?

More on The Guardian and Tesco

noreply@blogger.com (John Kavanagh) — Wed, 09 Apr 2008 09:30:00 +0000

In response to my comment on Alex Hawkes Tax Hack blog, John Adamson wrote:

"I'm not sure John Kavanagh is right on his first two points. The reality is that the whole issue of tax avoidance is now becoming one not just of public interest, but one of political interest too. I'm not sure people ARE tired of hearing about it, I actually think it's a more relevant issue than ever. So isn't it perfectly legitimate for a journalist to ask questions? And as one of Britain's largest private companies doesn't Tesco have a moral and social responsibility, let alone a legal responsibility, to be transparent about its activities? The disturbing issue here is what appears to be an over-reaction by a company under pressure, and implicit threats to any journalist that looks at the company, Surely in a democracy that is a very worrying development?"

I responded:

Despite their name, public limited companies do not owe a duty to the public in general. Their main duty is to two groups of people; shareholders and customers.

Tesco's duty to its shareholders is to maximise its profits by any legal and ethical means, including the legitimate avoidance of tax. I've no doubt that vast numbers of Tesco shares are owned by pension funds and charities. Is it ethical or moral to deny these groups the higher dividends and capital growth that result from proper management of the company's affairs?

As far as their duty to their customers is concerned, who is the Guardian to say that they would not prefer a penny off a tin of baked beans rather than to give it to Gordon Brown? I can imagine what pensioners, those on benefits and the low paid would say and I think it differs from the Guardian's view.

We need to remember that the tax companies pay is just an element in their profits; in one way or another it is always borne by the shareholder or the consumer, in reduced dividends or increased prices.

I therefore think it is for Tesco to decide, as a purely commercial matter, whether the advantages of a sensible tax minimisation policy are outweighed by the opprobrium heaped upon them by a politically-motivated corner of the press. If the press over-step the mark, as I think they have here, it is their right to seek redress in the Courts.

The major disadvantage of the form of democracy we have is that the opinion that gains most credence is often the one which is shouted longest and loudest, not necessarily the one which has been most carefully and impartially considered. I am tired of hearing just one side of a debate, especially when it is supported by claims of ethical or moral superiority which are subjective and unproven.

The Guardian & Tesco

noreply@blogger.com (John Kavanagh) — Tue, 08 Apr 2008 13:18:00 +0000

I just posted the following comment on Alex Hawkes' Accountancy Age blog regarding Tesco's decision to sue The Guardian for libel over its accusations of tax avoidance.

"What an interesting situation.

The Guardian has effectively conflated two issues. The first is whether tax avoidance is immoral and unethical, and the second is whether Tesco has engaged in it. The first question has been in the public domain so long now that one is tired of hearing about it. The second was a confidential matter between Tesco and HMRC before the Guardian journalists stuck their big noses in it.

It seems that we have reached a stage where the rhetoric of journalists, fuelled by their constant pursuit of scandal and inspired by the tendentious writings of self-appointed experts like Richard Murphy, Prem Sikka and their like, has been so successful in persuading the public that tax avoidance is immoral and unethical that merely to state that someone is a tax avoider is seen as libellous if untrue.

I, for one, would love to see the Courts take a view on whether tax avoidance is immoral or unethical as journalists like Alex Hawkes so frequently opine. I would be utterly astonished if any Court found that it was, irrespective of what the journalists have to say.

I rather like Tesco's approach to this case. If the Guardian argues successfully that their article is not defamatory, then Tesco loses their case but regains the moral high ground. If the article is defamatory if untrue, the Guardian will have to show that it got its facts right in order to win, and only Tesco can know whether they have.

I am particularly looking forward to the day that the Guardian's legal advisers are forced to argue that what they have said about Tesco is not defamatory because there is in fact nothing at all unethical or immoral about tax avoidance!"

A waste of time and money

noreply@blogger.com (John Kavanagh) — Tue, 18 Mar 2008 17:42:00 +0000

I spent much of this morning with a client advising him on the implications of the Budget on an offshore structure set up some time ago. I had already given him a great deal of advice about the implications of the Pre-Budget report and we were ready to make wholesale changes which in the event did not have to be made.

I can't help feeling sorry for clients who have paid for advice that turned out to be useless to them, because it related to a hypothetical situation which never existed. The amelioration of what would have been draconian changes is welcome, but how much better would it have been if the Government had not gone around flying kites in the first place? I would love to know the amounts of time and money wasted because of the Government's dithering and equivocation. It's a stupid way to run a country.

Ramsay for Dummies

noreply@blogger.com (John Kavanagh) — Tue, 26 Feb 2008 15:56:00 +0000

The proposed changes to CGT and residence/domicile are making a lot of work for tax planners - it's an ill wind that blows no good! As well as negotiating mountains of legislation, advisers also have to consider the case law as it applies to tax avoidance and this has been a complex and changing area. Thanks to this brilliant article by Patrick Soares, we can all save some time and leave the tax cases on the Ramsay principle on the shelf.

Tax is becoming too simple!

noreply@blogger.com (John Kavanagh) — Mon, 25 Feb 2008 11:36:00 +0000

According to an article in the FT, the Chartered Institute of Taxation is complaining that the tax system is being over-simplified! Perhaps that is a slight misrepresentation of the truth - which is that the Institute is criticising the rewriting of the complex and "arcane" provisions relating to the taxation of derivatives and corporate loan relationships. The grounds for complaint are that, firstly, the process of "simplification" is in danger of undoing the Government's previous work in eliminating the many loopholes and issues thrown up the original legislation and, secondly, there is no point in taking this risk because the legislation is only really relevant to taxpayers with professional advisers who are well able to understand the legislation as it is currently drafted.

HMRC have pooh-poohed these suggestions, saying that the majority of users/customers/victims (not sure what the current term is) of the legislation do not agree with the Institute's views. Are they mad?

Welcome

noreply@blogger.com (John Kavanagh) — Tue, 19 Feb 2008 11:34:00 +0000

If you came here following a link to http://www.uktaxconsulting.com/, either from a forum post or a search engine result, you are in the right place. If you would like to get in touch with me, please see the contact details at the foot of this page.

I will be posting more articles on this site in the coming weeks.