One minute with... highlights of 2017

Thoughts on the Autumn Budget

‘It is hard to comment on anything other than the latest changes to taxation of property (basically, bringing the capital gains of non-resident companies on commercial property within the scope of tax; and the application of corporation tax, rather than income tax, to non-resident companies). Taxpayers may get some unpleasant surprises. For example, the latter change may result in the restriction of tax relief for the finance costs of discounted securities under the hybrid regime or the restriction of relief for carried forward losses. I would like to think this is the logical end to a series of changes to the taxation of property which began in 2012. However, it is difficult to say with any certainty that the government will be able to resist taxing real estate further, especially when it applies to non-residents (who cannot vote).

‘The UK economy weathered the worst effects of recession in the early nineties and, again, after the financial crisis in 2007 with the help of large flows of foreign investment into UK real estate. The current property tax regime may prevent this support occurring in future, which cannot be a good thing. Also, taxing people who cannot vote makes me feel uncomfortable. Taxation without representation was government policy of the middle to late 18th century with disastrous results.’

Brexit: an uncertain exit?

‘If it is not amended, one of the EU (Withdrawal) Bill’s main problems is its failure to give full effect to the general principles of EU law. This is likely to cause uncertainty going forward, as it becomes necessary to determine to what extent an existing judgment is based on a general principle of EU law, and therefore cannot be automatically relied upon to confer rights on taxpayers or, for that matter, HMRC, since the principle of abuse is presumably a general principle that works in its favour. A related problem is that the Bill does not identify what is, or what is not, a general principle. For example, does the term extend to principles that underlie a particular area of the law, such as the principle of neutrality in VAT? Another unsatisfactory issue is the retrospective loss of the ability to rely on the general principles; as currently drafted, a taxpayer will only be able to fully rely on the principles if they have commenced proceedings prior to Brexit day. On the current wording, taxpayers may therefore lose the ability to rely on general principles, even though the dispute relates to events that took place prior to Brexit day.’

The dangers of guidance dependency

‘The style of modern legislation means that advisers become very dependent on guidance. If you take the new anti-hybrid legislation, the rules are rather detailed and prescriptive and the overall sense of direction of the legislation is quickly lost. Of course, guidance is helpful but it can be long – for the hybrid rules, there are 390 pages. Producing this is a strain not just on HMRC resources but on the resources of all the consultative bodies involved. I sometimes worry it is not sustainable.

‘Guidance dependency is dangerous for taxpayers. Typically it is given by use of examples, but the examples provided are usually fairly straightforward and commercial life is usually much messier. It is dangerous to extrapolate what HMRC’s view might be of a more complex case from a simple case. When the legislation comes to be interpreted by the courts, little weight is given to HMRC’s guidance and so it is not a terribly reliable guide as to how the legislation may ultimately be interpreted. And if HMRC changes its mind, the taxpayer has very limited remedies: judicial review rarely succeeds in this area.’

What makes a good tax story?

‘I remember a tax director tweaking the adage that “There is no such thing as a good tax” to say “There is no such thing as a good tax story.” That’s not always true but it’s a fair comment. Many people do not find tax intrinsically interesting but they are fascinated by tax avoidance, especially if it can be depicted as a tale of money, greed and power.

‘Of course, taxes directly affect us all, so some of the best read stories are about the tax system and how HMRC interacts with taxpayers. Many FT readers also want to understand the economic and political drivers behind tax policy. That creates scope for exploring for why the tax system is so inefficient, complex and unfair and what could be done to improve it. That can only be a good thing. For all that we argue incessantly about taxes, the level of debate about them is often pretty poor.’

What’s worrying clients?

‘The emphasis on reputational aspects is very strong. Our clients tend to be pretty conservative in terms of tax risk, but even so, the proliferation of measures targeting – not always accurately – aggressive behaviour (including the extended DOTAS provisions, the failure to prevent offences, POTAS, enablers and followers notices), together with an ill-informed press, means we are frequently asked whether a transaction should be structured in a particular way, rather than could be. That is interesting work and likely to be a growing requirement of advisers with cautious reputations.’

Global lessons for UK tax policy

Last year Professor Rita de la Feria visited 16 countries across four continents. How, if at all, have her views on tax changed as a result? ‘The most significant impact was realising the importance of tax administration, and the need to take a holistic approach to taxation: what I have since designated as tax policy/administration symbiosis. Before this, I tended to consider tax administration as a post-policy consideration; administration implemented policy. What I have realised, however, is that policy must be designed in light of administrative feasibility. Tax administration must dictate tax policy, the same way as tax policy dictates tax administration.’

If you could make one change to tax law or practice, what would it be?

‘The adoption of a properly independent and effective review stage to provide a check and balance on HMRC’s conduct before matters go to litigation. The focus is always on bad behaviour by taxpayers, but equally there are many cases of poor behaviour by HMRC. Individuals do not always have the understanding, resources or capacity to challenge HMRC and it is not right to expect such people to go through an appeal process without an independent set of eyes looking at the issue, particularly where the remedy for the individual lies in public law and the amounts are small. You cannot expect people to launch judicial review proceedings in such cases. There needs to be a better oversight on HMRC as a public body.’

‘I would introduce US-style ‘check the box’ elections in the UK (or even globally, if I am being given ‘Global Tax Tsar’ powers), to enable people looking for certainty to elect whether to treat an entity as transparent or opaque for UK direct tax purposes. That would be as an overlay to the existing ‘default’ positions following the Memec and Anson cases. It would save an awful lot of time and trouble both for taxpayers and HMRC and provide much needed certainty in this area.’

‘It seems crazy that corporate residence can turn on whether a director dials in from the UK or flies to Jersey, so I’d look at reforming the central/effective management and control test, maybe taking the US approach and looking just at incorporation.

‘I’d also like to have a time machine, go back to 1997, and abolish principal private residence relief, so I can look millennials in the eye today.’

‘I would remove the limitation on the First-tier Tribunal’s jurisdiction, so that it has a supervisory, as well as an appellate jurisdiction. I have always found it difficult to understand how the FTT’s overriding objective ‘to deal with cases fairly and justly’ sits with the inability of the FTT to entertain appeals relating to public law matters, such as fairness and legitimate expectation. This goes against the idea that the FTT is accessible to all, and it creates an obstacle for taxpayers wishing to challenge HMRC’s behaviour but who may not have the means to pursue judicial review proceedings.’

‘The abolition of national insurance! It is an unnecessary complexity to the tax system. In my opinion, national insurance has essentially become another form of income tax and it seems that its only purpose is to keep the headline rates of tax artificially low.’

More certainty please

‘Extend the possibility of obtaining clearance on particular pieces of planning. It is clearly the intention of Parliament under self-assessment that the responsibility of making proper disclosure should lie with the taxpayer. Nonetheless, there are areas (not least the question of a person’s domicile, as noted above) where HMRC’s view can be difficult to predict (and indeed has not necessarily followed the case law), and where the determination can have a determining role in the analysis or advice.’

‘I would ask HMRC to bring back the post transaction valuation check (PTVC). The PTVC enabled taxpayers to determine their exposure to income tax (and NICs) under the employment-related securities legislation. If a company cannot use tax favoured equity incentives due to its structure, then any non-tax favoured incentives need some form of valuation, which can be provided by an external valuer but does not have the certainty of the PTVC.’

Tax and the City post-Brexit

‘There is clearly a real risk that banks could relocate London operations as a result of Brexit. This won’t just be about tax, but ending the fiscal punishment of the banks might remove a further incentive to scarper. There were signs of the government relenting with the prospective changes to the calculation of the bank levy but the quid pro quo was the bank surcharge, and the screws were tightened again with the latest corporate loss reform proposals. HMRC’s failure to engage with concerns about the interest barrier will not have helped.

‘Banks aside, the UK is a relatively low tax environment for corporates with broadly sensible exemptions for UK holding companies, especially when the proposed changes to the substantial shareholdings exemption are taken into account. Even though the UK tax code is too complex and unwieldy (admittedly not a bad thing for our business), and despite the fact that the evangelical fervour with which the UK has embraced BEPS is unlikely to have endeared it to the taxpaying community, my sense is this is not a real deterrent. London-based and paying tax at only 17% by 2020 is a pretty attractive proposition.’

Should we stay or should we go?

‘In my experience, the response so far of multinationals to Brexit has been very mixed, ranging from businesses that have undertaken a forensic analysis of the impact of all the different potential Brexit outcomes, through to the (more common) wait and see approach. Frankly, there is probably still too little information to take any active steps at the moment. I have, however, noticed a real perception shift with clients when discussing the UK as a potential headquarters or holding company jurisdiction. Understandably, the uncertainty surrounding Brexit has damaged the attractiveness of the UK, which is disappointing after nearly a decade of tax reform designed to improve the corporate tax system and ensure that the UK is indeed “open for business”.’

Concerns over ‘failure to prevent’

‘The wide ranging and extra-territoriality of the “failure to prevent” tax evasion measures will make its implementation a challenging exercise. Most directors and senior managers are incredulous when we first explain these measures. The measures raise some interesting and potentially problematic issues from an accountability and board corporate governance perspective.’

Hypothecation please

‘The absence of a direct linkage between public expenditure and taxation could be remedied by greater use of hypothecated taxes. In 2002, the Labour government announced an increase in NICs to pay the UK’s biggest ever increase in health spending. It was accused of breaking a manifesto pledge not to increase income tax, but the measure appeared to enjoy public support and the Labour party went on to win the next election. Hypothecated taxation promotes transparency. It could be used to provide additional funding for increased spending on the NHS and care for the elderly.”

A case that caught your eye?

‘The recent Supreme Court ruling in the Rangers case gives us the clearest demonstration yet of the application of the courts’ purposive approach to the interpretation of tax law. In this case, the crunch point was that any re-direction of ‘pay’ to an employee benefit trust (or other special vehicle) is earnings in the relevant employee’s hands. These types of tax planning arrangements are therefore ineffective. In the light of this robust decision, the obvious follow-up question is whether we still need the complex disguised remuneration legislation?’

‘Gulliver v HMRC for two reasons. First, it suggests that HMRC seems more inclined to challenge a person’s domicile status. Second, it confirms that, even if HMRC has accepted facts in relation to one tax year, that is not an impediment to it challenging those facts in a later tax year. The startling effect of this is that a taxpayer may potentially find himself having to prove the same thing over and over again in relation to exactly the same facts.’

What’s wrong with EU?

‘[The proposed CCCTB and financial transaction tax are] both terrible ideas that are almost certainly not going to happen. Both pushed by people with a political agenda who refuse to listen to counter-arguments, and entertained by policymakers who should know better. Anyone who calls a tax a ‘Robin Hood tax’ should be embarrassed to show their face in public.”

Undermining BEPS?

‘Many in the US are concerned that EU member states – whether individually or through the European Commission – may be undermining the work at the OECD on BEPS by pushing for consensus around one set of rules at the OECD, and then taking a different approach at the European level. The European push for public country by country reporting is one example of this, but there are others.’

What makes a good adviser?

‘It’s really simple. It’s all about sector knowledge and having a decent business brain. It’s all very well being technically good, but few tax advisers can see beyond this to advise on whether something makes commercial sense and how to implement the advice. The best tax people become ‘trusted advisers’ that you can pick up the phone to without fear that the clock is always ticking on fees; and you can talk through projects with them and get their commercial view.’