One minute with... highlights of 2018 so far

What should we look out for in 2018?

For me, it’s all about Brexit. Brexit will profoundly affect VAT: and it is likely to be a key area in which critical concepts in the EU Withdrawal Bill, such as retained EU law and the way in which EU legal principles will continue to operate, are likely to be tested.

I would also point to the Trade Bill and the Taxation (Cross-border Trade) Bill. I am particularly interested in the new regime for UK trade remedies, which will give the government power to impose duties to deal with dumping and foreign subsidies: a new Trade Remedies Authority will look at whether the conditions laid down in WTO rules for imposing these duties has been met, but the final public interest decision will be for the secretary of state. For someone like me, interested in both tax and economic regulation, this is fascinating stuff. But there is much else in those Bills that tax advisers will need to get on top of.

It will also be interesting to see what the government is planning to do about state aid law after Brexit. My view is that we will have to have a domestic regime as a condition of any deep trade deal with the EU, but there are real issues in how that is going to work.

More immediately, I am worried that HMRC simply doesn’t have the resources properly to prepare for its new work-load after Brexit and the challenge of dealing with new law: that will affect all of us and all of our clients.

A government consultation on how to make the taxation of trusts ‘simpler, fairer and more transparent’ was announced in the 2017 Autumn Budget. We don’t yet know what exactly its focus will be, although hopefully it will include practical issues such as: simplifying the tax calculation and reporting of ten yearly charges; the operation of section 81 (property moving between settlements) and reducing its complexity; and reviewing the rationale for 18–25 trusts.

What is the biggest myth about corporate tax avoidance today?

There are lots of widely repeated myths, such as that developing countries are losing three times more from tax avoidance by multinational companies than they get in aid. It would be nice if it were true, because then there would be a simple way to increase funding for health, education and infrastructure in very poor countries – just by changing the tax rules in Paris or New York. But the numbers are based on a triple misunderstanding: it is an estimate that wasn’t a tax loss; it wasn’t to do with multinational companies; and it was mainly not related to countries that receive aid. More fundamentally, these kinds of myths encourage people to forget that tax is political, and that for a government to collect a large proportion of GDP as tax revenue, a large proportion of the population will bear the tax. It’s the myth of: ‘Don’t tax you, don’t tax me. Tax the guy behind the tree.’

You see this kind of wishful thinking in the UK debates, too. People tend to assume that there must be huge sums of money related to big names like Facebook and Google. But Facebook makes around $14 in profit per user per year, so even though the tax issues are really knotty, wherever the tax is paid it is never going to cover a huge amount of health or social welfare spending per person.

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

I would try to restore a sense of reality to the UK tax system. The decision in Wilkinson [2005] UKHL 30 caused a whole scale change in the attitude and approach of HMRC. The case involved a widow’s bereavement allowance and some of my then colleagues in the Revenue approached the decision with almost a complete lack of understanding of what eliminating discretion would mean in the ‘real world’. What was most alarming was the complete loss of context and the Revenue’s position that whatever discretion it had did not extend to giving a relief that Parliament had not provided. Extra statutory concessions were washed away, removing the ‘oil’ that sometimes allowed the wheels of the tax system to turn.

We should be under no illusion. The spate of critical tribunal judgments on penalties is a direct result of an HMRC culture whereby inspectors feel duty bound to pursue tax or penalties simply because they think they are due, and too many find it difficult or impossible to back down. Equally, no matter how well intentioned or designed our laws, we cannot legislate for every eventuality. HMRC having greater principled management discretion is essential in my view.

I’d put a halt to the common reporting standard (CRS). I’m all for everyone paying the tax legally due but the erosion of privacy in the name of fairness has gone beyond the pale. And, of course, the ‘elephant in the room’ – that there is still corruption at governmental level in some jurisdictions receiving CRS information – is never discussed.

As so often happens in life, the pendulum swings one way too much (and the relentless flogging of tax schemes had indeed got out of hand). Inevitably, though, the response brings about a swing of the pendulum too far the other way, which I believe has now happened, as a client’s reasonable attempts at privacy start to be seen as attempts to hide assets from the taxman. The suggestion these days that anyone with offshore assets ‘must’ be a tax evader, or at least somehow immoral, is a ridiculous media frenzy. Most of us need only to examine the investments made within our own pensions to find some offshore assets – and there should be nothing wrong with that. We do, after all, live in a global economy.

Speaking as a tax adviser, I would revise HMRC’s litigation and settlement strategy (LSS). I wouldn’t rip it up completely as from the government’s perspective there needs to be a published strategy which does not reward tax avoidance. However, the policy and perhaps equally importantly the huge associated political pressure felt by HMRC not to be seen to be endorsing ‘sweetheart’ deals, sometimes prevents HMRC taking a sensible approach, for example on technical points or reaching a settlement. A more flexible approach in the LSS might be better for the long-term relationship between HMRC and taxpayers without encouraging avoidance.

Let’s make that two changes. I think the hybrids rules are terrible – they just smack of something which seemed like a good idea conceptually, but in the real world they are almost unworkable. If you take ten entirely commercial cross-border financial transactions, two or three of them will be caught on a technicality. HMRC has to be applauded for the effort put into the guidance, but it is an impossible job to make the guidance even nearly comprehensive.

I would also like to see a sensible ‘reverse’ Ramsay/GAAR principle that works in the taxpayer’s favour should an inappropriate or unfair tax charge otherwise arise. It’s nothing more than giving HMRC and the courts the discretion not to apply a charge that is patently wrong.

For the OECD to bang heads together even more on transfer pricing (TP) to get countries to harmonise. A particular example is the ‘new’ TP documentation standards. For the most part, BEPS Action 13 has brought us a long way to harmonise the previously disparate documentation requirements of individual territories across the world. However, surprisingly few territories seem to be implementing the recommendations on master file, local file and country by country report in a straightforward manner. For example, some countries require much of the same content, but on a special form. Several others have adopted a local file ‘plus’, with additional modifications or information requirements. And whether you have an (unnecessary, in my view) obligation to file a ‘local subset’ of your CBC report or leave the tax authorities to share the global report among themselves under a multilateral competent authority agreement is another step still. Taxpayers are still left with the burden of navigating multiple nuances. For all territories to play nicely may still be too much to hope for. Surely tax authorities have bigger TP fish to fry than tinkering with an already relatively comprehensive risk assessment tool?

I would make HMRC’s published practice binding (other than where, say, aggressive tax avoidance is involved). Given how frequently HMT/HMRC have said ‘we’ll make this clear in guidance’ in recent years, it seems only fair.

If I were allowed a second change, I would rewrite the group relief precluding ‘arrangements’ rules for consortia. I do a good amount of joint venture work and, more than any other part of the tax code I regularly deal with, these rules seem to cause problems on purely commercial structures for illogical reasons. For example, why should surrenders between a shareholder and joint venture be denied in the period between arrangements to take the joint venture into the shareholder’s group arising and being completed? If nothing else, a change to these rules might make me slightly less unpopular with our project financing team when I suggest that their normal security arrangements should be changed to facilitate consortium relief!

A ban on retrospective legislation. It has become notorious in Indian taxation following the famous Vodafone decision. We need an international standard banning it. I know that will never happen, not least because it will be hard to agree a definition of what counts as retrospective. But it’s a nice thought. More generally, the pendulum has swung too much in the way of the tax authorities with automatic information exchange, more countries introducing general anti-avoidance rules and the expansion of the territorial tax base. I get a sense that the balance needs redressing so that taxpayers’ rights do not get forgotten in the newly found zeal of tax authorities flexing their enlarged muscles.

Which new rules are of particular concern?

I’ve been getting up to speed on the new EU Directive DAC6, which was adopted by the EU Council on 25 May 2018. It is described as bringing in new transparency rules for intermediaries that design or sell potentially harmful tax schemes. However, the scope is much wider than this suggests. Firstly, taxpayers themselves may need to report if there is no intermediary. Secondly, it is possible that in-house counsel/tax advisers could be intermediaries. Thirdly, a number of the ‘hallmarks’ do not require any tax advantage main benefit and could capture simple cross-border transfers of business. I think this is going to create a substantial compliance burden for taxpayers and advisers, and lead to disclosures being required for a number of commercial transactions. Moreover, whilst reporting under these rules will not take place until 2020 there will then be a requirement to report transactions which took place between the date the directive enters into force and 2020. So this is something that multinational groups and tax advisers need to familiarise themselves with quickly.

US tax reform is causing a variety of problems – not only for US taxpayers but for any taxpayers or groups with current or potential US operations or investments. We are beginning now to see some real difficulties in practice with some of the unintended consequences of the hastily enacted rules. One example is a new controlled foreign company ‘downward attribution’ rule which can easily apply in unintended fashion where two private equity funds make a joint venture investment in a non-US portfolio company. The non-US portfolio company can in some cases be treated under the new rules as a CFC of US investors in the first private equity fund simply because the second private equity fund has a large investment in an unrelated US company.

It isn’t a ‘new’ rule per se, but the application of the GAAR in the first GAAR panel opinions is concerning, notably ‘Employee rewards using gold bullion (Mr X)’ (18 July 2017). Briefly, the taxpayer argued that he was not subject to employment income tax. Without commenting on the technical merits of the scheme, it is important to bear in mind that the GAAR is only engaged if, in effect, the scheme would otherwise have succeeded. In Mr X’s case, this would mean that on a proper application of ITEPA 2003, Mr X would have no earnings (and no deemed earnings under the disguised remuneration rules). Given the sheer breadth of the concept of ‘earnings’ following Rangers [2017] UKSC 45, it is hard to see how there is room for the GAAR to apply in a case such as this without casting aside proper analysis, thereby undermining legal certainty and the integrity of the tax code.

What’s your view on NICs?

The trouble with NICs is that it discriminates against businesses with a large workforce, as compared with the growing number of online or digital businesses, and those which are increasingly automated. Merging NICs with income tax seems to have been consigned to the ‘too difficult’ pile, but a number of other approaches are being talked about now and deserve consideration. These include, for example a robot tax, or a more general welfare tax payable by all companies, not based on payroll/number of employees, and these all need to be considered against the background of current initiatives to impose fair taxation on digital businesses. It is a particular issue for the Scottish government, of course, because Scotland has control over the income tax rates, but not over NICs.

Is there a recent tax case that has caught your eye?

The Lomas case ([2017] EWCA Civ 2124) is interesting, in particular the general comments about whether interest is short or yearly. Given that interest is often calculated at a yearly rate (even on short term loans), the ‘intention-based test’ that the Court of Appeal referred to will be key in determining whether interest is short or yearly. There could be difficulties in attempting to apply this test retrospectively to loans which are not recorded in a written agreement and/or in relation to which it was not clear at the outset when they were intended to be repaid. Some intercompany loans could fall into this category. One could argue that in respect of a great many loans, and as a matter of fact, interest may be or become payable yearly, but that is not the same as saying that the parties intended at the outset of the loan that the interest would be or become payable yearly. Given the sums involved, there must be a high chance that this case will be appealed to the Supreme Court.

A turning point in the last few years for the tax profession?

Stepping up to the mark with the revised professional conduct in relation to taxation (PCRT). We faced criticism in the press and by politicians but also by wider society. Seven professional bodies worked together to react to that criticism and to adapt PCRT to address it. Now the audit profession faces criticism, and I think we have a model for reacting to that as well: listen to the criticism, take time to fully understand it and then react where necessary to address it.