Avoiding tax: fair enough?

Accountants give their views on "rule interpretation".

The news that high-profile individuals, including an unfortunate figurehead in the person of comedian Jimmy Carr, were avoiding millions of pounds in tax by channelling money through off-shore schemes caused public outcry and brought condemnation from David Cameron.

But when it comes to corporation tax, there are billions rather than millions at stake in the tax avoidance arena. Should the outrage be similarly multiplied?

When news broke in early June that mobile phone giant Vodafone paid no UK corporation tax last year despite having its headquarters in Newbury, it provided a predictable feeding frenzy for the media. Vodafone’s chief executive Vittorio Colao launched a robust defence, saying there was nothing illegal in what it had done – write off its corporation tax contribution against capital expenditure of £575m Ð and the business had paid some £700m in payroll and other taxes.

Ian Young, international tax manager at ICAEW, says this is just one example of how a company can, quite legitimately, minimise its tax liability. “Tax is clearly a cost to business but it be can’t be treated in the same way as any other expenditure. Corporates are making decisions about how they run and structure their businesses in the context of the economic situation, competitors, how they think the market is going to change and the tax systems in which they operate.”

The CBI has been riled by the current witch-hunt against corporations perceived as not paying their fair share of tax, prompting it to produce its Tax and British Business: Making the Case report, which found that British companies paid more than £163bn in taxes to HMRC in 2010-11, constituting more than a quarter of the total tax revenue of £551bn. The report highlighted a number of reasons why UK corporations may genuinely pay less corporation tax than expected. As well as offsetting capital expenditure, which is designed to reflect the reality of operating in certain parts of the economy (such as telecoms), these included group relief, where losses can be transferred among businesses; losses from previous tax years being carried forward; and tax credits for investing in innovation or research and development.

Both the CBI and Young broadly welcome the tightening up of regulations around tax avoidance, including proposals for the new General Anti-Abuse Rule (GAAR). “We’ve had a disclosure regime in place since 2004 and the major banks have signed up to a code of conduct about the way they behave in relation to the tax system,” says Young. “The government has also had an enforcement programme for the last five or six years and HMRC has a good record of taking cases to court and winning the argument.”

Ultimately, a simpler tax system would be welcomed by businesses and the accountancy profession, says Young, who admits that the complexities of the current system can cause problems.

Where clients have heard about a scheme to reduce their tax liability, advisors should take caution. “You have to identify what appetite your client has to enter into what could be a risky situation,” he says. “If they’re investing in unquoted trading companies to get the tax relief, are they comfortable if they lose all their money? There are difficult issues that need to be addressed when you are advising clients in what are otherwise quite straightforward circumstances.”

Stephen Herring, BDO:

The vast majority of UK companies pay their fair share of tax and are intrinsically inclined to avoid anything that might create unpleasant surprises further down the line, says Stephen Herring, a senior tax partner at BDO. "A lot of larger companies are very conservative, and telling bad news if something doesn’t work is far worse than the good news if it does," he points out.

Yet in a global market, failing to fully examine the potential to minimise tax liabilities could leave UK organisations at a disadvantage. "If someone is buying a new subsidiary in another country, part of how much they can bid will be dependent on the after-tax returns," he says. "So if a UK company is bidding against a German and Dutch one it has to anticipate the right mixture of debt and equity to reduce the incidence of tax."

The GAAR should stop "egregious or outrageous tax proposals that have no commercial basis whatsoever," he says, such as the recent case involving Eclipse Film Partners No 35 LLP.

But Herring argues businesses should also do a better job of defending their position in looking to minimise their tax bills. "Tax planning is right, proper and necessary and it’s not benefiting the management as much as the shareholders, which are pensions, SIPP investments, investment trusts, ISAs and insurance policies.

"It benefits all of us that management is properly looking to reduce its tax liabilities," he adds. "Are we really asking managers to say that they had five routes available for taxation and that they took the most expensive?"

Vince McLoughlin, Russell New:

The current mood around tax means organisations risk being stigmatised for looking after their own best interests, believes Vince McLoughlin, a partner at West Sussex-based Russell New.

"If the law allows you to arrange your affairs in the best way, then doing so should not be seen as anything other than sensible planning," he says.

"If the belief is that the law is wrong then change it, but don’t criticise individuals and companies for benefiting from it."

A fairer and simpler tax system would remove the need for companies to go to extreme lengths to reduce their liabilities, he adds. "The majority of taxpayers – both individuals and companies – are prepared to pay taxes and accept that it is a necessary cost in a developed society," he says.

"If HMRC can create an environment in which companies believe they are paying a reasonable amount of tax, that they will not be attacked for any attempt to carry out an investment proposal and that HMRC understands how businesses operate, then the tax avoidance industry will essentially operate by self-regulation."

The government’s policy of having different rates of tax for smaller and larger enterprises is antiquated, says McLoughlin, who expects a single, uniform rate to be introduced in the next five years.

He has concerns, however, over the introduction of the GAAR. "The risk is that, in order to make it work, many planning opportunities that even the greatest moralist would deem to be acceptable will be caught under a general rule," he warns.

Mark Simpson, Simpson Burgess Nash: 

The UK tax system has always lacked a set of underlying principles and has evolved in a piecemeal fashion with too much political interference, says Mark Simpson, director, tax saving, at Manchester firm Simpson Burgess Nash.

As a result, larger companies – and the pre-crisis financial institutions in particular – have, over the years, devoted vast resources to devising schemes to radically reduce their tax bills, he says. This has been made easier by the increasingly globalised nature of organisations and business as well as the emergence of ecommerce, which has made it easier to operate in low-tax jurisdictions.

"The danger of this is that it is to some extent becoming the case that the bigger a company you are and the more profit you make, the lower your effective tax rate, which is morally unacceptable," he says.

The financial crisis, though, has changed not just public awareness of tax avoidance but also the attitude of the vast majority of the accounting profession to what Simpson describes as the "unacceptable nature of large-scale tax avoidance using artificial, non-commercial arrangements".

Simpson has high hopes that the introduction of the GAAR will provide a platform for a more credible tax system, and help accountants deal with the relatively few requests from clients to advise on such morally dubious schemes.

"I would be delighted to be able to tell clients that from April 2013 there is no point considering such schemes as they would almost certainly be caught by the GAAR," says Simpson.

Chris Morgan, KPMG  :

Chris Morgan, head of tax policy at KPMG, makes the point that there is a "massive black line" between tax avoidance and tax evasion. "The thing that’s being blurred is the distinction between mitigation that works and avoidance, which is where you try and do something which is totally legal but either there’s a piece of legislation that says it doesn’t work or a court says you made the wrong interpretation," he says.

Accountants have an important role in advising clients on the implications of the approaches they wish to take in this area, says Morgan. "If a company is saying it is not going to do any planning at all, how do you get benefit for the public for that?" he asks. "Equally, if a company says shareholders want it to push it as far as possible, how would it then communicate that in such a way that it’s not seen as acting against the interest of society?"

The introduction of the GAAR is a good idea in principle, says Morgan, but the dangers will lie in individual decisions made by courts over what constitutes abusive transactions. "If you could get a ruling upfront, as you can do in many other circumstances, you’d have certainty as to whether or not the rule would apply," he says.

There is a risk that companies assessing whether to invest in the UK or overseas could be put off by the vagaries around the GAAR until sufficient cases have come to court and been challenged on appeal, he adds.

Andy White, Carter Backer Winter:

The government has launched a "deliberate and concerted campaign to characterise tax avoiders as pariahs," says Andy White, a tax partner with mid-tier accountancy firm Carter Backer Winter.

"This has been achieved by tacking the word ‘abusive’ in front of the phrase ‘tax avoidance’ and by calls for citizens to pay ‘the right amount’ of tax, as if that were something that could be defined," he says. "If the government were to concentrate more on having a cohesive tax policy and not over-complicating the system, they may have more success."

There are, however, a number of practices which some organisations use to minimise their tax payments, he admits. Chief among these is the use of offshore group companies. "This might be by setting their head offices offshore or by ‘transferring’ income offshore," says White.

"Favoured techniques for the latter might be for an offshore subsidiary to own the intellectual property of the group and for UK companies to pay royalties or licence fees, which are tax-deductible. Another is for the UK company to be financed by large loans from offshore group members, on which tax-deductible interest is payable."

Legislation already exists to counter such abuse, in the form of transfer pricing and thin capitalisation, he says. "What is unclear is why this legislation is apparently not being used fully," says White. "HMRC needs to be sufficiently resourced to be able to distinguish those companies that are abusing the legislation from those that have little or no UK tax to pay because they are making legitimate use of the various reliefs offered by the tax code."

Brian Lindsey, HW Fisher & Company: 

Many companies that pay different rates of tax do so simply by virtue of the sector they happen to be in, with those involved in research and development likely to benefit from tax breaks, points out Brian Lindsey, corporate tax partner at HW Fisher & Company in London.

"Just because companies pay taxes at a different rate doesn’t mean they are arranging their taxes in a particular manner to reduce their tax liability," he says.

There are, however, organisations that have decided to take advantage of the tax rules as they stand, and accountants have to be sensitive to this. "We wouldn’t countenance any form of evasion but clients would like us to ensure they are paying the correct amount of tax, based on what the legislation says, so we will always advise on what allowances are available," he says.

He admits, though, that the current climate means there is a greater emphasis on what is perceived as fair, and clients are increasingly having to factor this into any decisions they make.

The introduction of the GAAR should provide a greater degree of certainty in the long run, he says, although in the short term there is the potential for greater confusion.

"All parties would prefer a simpler system that would not put us out of work," he adds. "But every time there is a new Budget the legislation gets more complex. A system with fewer rates of tax where everyone knows where they’re heading with their tax position would be helpful."

This story first appeared in economia.

Jimmy Carr. Photograph: Getty Images
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Calais Jungle: What will happen to child refugees when they leave?

Hundreds of unaccompanied child asylum seekers are being taken to Britain where they face an uncertain future.

Hundreds of unaccompanied child asylum seekers are being taken to Britain, moved from a camp in Calais, northern France, as its closure begins. There were 387 unaccompanied minors in the French refugee camp known as “the Jungle” with links to the UK and they are arriving in England in groups of 70.

Upon arrival, the children are taken to a secure unit for 72 hours, before being reunited with families already living in the UK. They are from a group of more than 1,000 children who have been living in the camp in recent weeks. And now, some of those without links to Britain, but who are regarded as particularly vulnerable, are now also being taken across the English Channel.

The youngsters were granted asylum under the Dublin Regulation. The children’s move to Britain has stalled twice already, over delays in accommodation and establishing proof of age. Migrant children have been subjected to intense media scrutiny upon arrival in recent weeks. Calls for dental checks to verify the true ages of youngsters who looked older were called for, but the UK government branded such a practice as “unethical”.

For a long time, the minors living in the camp faced an uncertain future, but the move to take some children to the UK signals a change of tack by the British and French governments. Britain has been criticised for its lack of humanity, but it now seems that the pleas of these children at least have been heard.

Impact of war

While the youngsters may have escaped serious physical injury, the conflicts in the Middle East will have taken a psychological toll on them. Living in the midst of war, many have witnessed unspeakable horror, losing family members in brutal circumstances. Consequently these youngsters are now incredibly vulnerable to mental illness, with research indicating that more than 80 per cent are likely to develop issues such as post-traumatic stress disorder (PTSD).

It is important to remember a child’s trauma extends far beyond the experiences that resulted in them fleeing their homes. The children going to the UK now endured prolonged exposure to stress-inducing conditions in the Calais camp, and will now need to adjust to their new cultural surroundings.

War directly affects millions of children everyday. Exposure to conflict and acts of terrorism can lead to the development of acute or chronic stress reactions. Research also indicates that the psychological impact of war on children is likely to have long-term effects – they don’t simply “grow out” of their stress-related symptoms. Continued exposure to traumatic events, as these children have experienced, carries a cumulative impact too, that can worsen the severity of post-traumatic symptoms.

Funding challenge

The children going to Britain will need the right sort of trauma-based therapeutic support so they can successfully move forward before chronic conditions take hold. However, mental health services in the UK are desperately underfunded. More than 850,000 children and young people have a diagnosable mental health disorder, and half of all lifetime cases of mental illness begin by the age of 14. But just seven per cent of the total mental health budget is allocated to child and adolescent mental health services, with one in five young people refused treatment because they do not meet the criteria for care.

A recent poll of specialist nurses found 70 per cent thought child and adolescent mental health services in England were inadequate due to historic under-investment. The government is under growing pressure to invest more, and it is hoped that the arrival of these children will see additional money allocated to the services. When, or even if, this will happen, remains unclear.

Post-traumatic growth

While many of these children are likely to suffer form long-lasting psychological symptoms, there is a possibility that some may emerge stronger than they are now, benefiting in some way from the experience resulting in positive post-traumatic growth, or PTG. PTG is possible in children who have been affected by war trauma, particularly if they are young, as they are more open to learning and change. Interestingly, research has revealed that even the negative aspects of PTSD do not “block” growth when children are placed in a supportive environment – found to be the most conducive thing for PTG.

Receiving the proper social support will play an important role in helping these children deal with the psychological effects of war trauma. The complex situation that the young and unaccompanied migrants have faced calls for help that addresses both the trauma and grief, and will secure continuity in their new lives in the UK.

Losing loved ones is just one of many extremely traumatic experiences these children may have faced, and it could prove quite difficult to disentangle the effect of the loss from other stresses and changes. Time does not simply heal the long lasting scars of prolonged stress that they have experienced. However, it is vital that society does not write these children off as ill or broken. With the right support they can lead full lives and make strong contributions in their new homes.

Leanne K Simpson, PhD Candidate, School of Psychology | Institute for the Psychology of Elite Performance, Bangor University

This article was originally published on The Conversation. Read the original article.