THE STORY BROKEN by Accountancy Age that MPs have exempted themselves from tax avoidance legislation has caused quite a stir. The general consensus is “one rule for them, and one for everyone else”.
Although understandable, this sentiment is true only to an extent. Yes, there is one rule for them – clause 554E (8) of the Finance Bill, to be precise – but the problem lies in the 59 pages of rules for everyone else.
The disguised remuneration legislation is a “monster headache”, according to tax experts, who are having trouble understanding it themselves. But if it is tough for the people dealing with it day in day out, it is nigh on impossible for businesses and employees who do not know whether their salary schemes are caught by the legislation.
The legislation was initially meant to capture two offshore vehicles identified by HM Revenue & Customs that were set up by high net worth individuals: Employee Benefit Trusts (EBTs), which paid interest free non-repayable loans in lieu of salary without incurring PAYE costs; and Employer Funded Retirement Benefit Schemes (EFRBRS), set up to avoid pensions allowance rules.
Few argued with the intention, as these schemes were set up with the sole intention of avoiding tax. But in drafting the wide-ranging legislation for the Finance Bill consultation in December, the profession pointed out that the rules captured far more than was intended, including perfectly innocent salary schemes where the worker is paid by a third party.
John Whiting, tax director of the Office of Tax Simplification, pointed out in passing to the Treasury select committee that one of these innocent schemes was the payment of expenses for MPs themselves. As part of the aftermath of the MP expenses scandal, members of the House of Commons are paid by a third party – the Independent Parliamentary Standards Authority (IPSA) – to ensure transparency.
No-one is suggesting this is a form of tax avoidance and, even in the post-expenses scandal environment, not many would expect MPs to explain themselves to the taxman for simply being paid. But, as many accountants have made clear, there are many people who fall under the legislation who have no intention to avoid tax – unfortunately, they do not get to write legislation.
In fairness to the MPs, their method of payment is statutory and so they cannot simply change their method of payment if they wanted. Furthermore, as Deloitte head of tax Bill Dodwell has pointed out, the first draft didn’t provide for payments by group companies – which was the equivalent of the IPSA scenario – but this has been dealt with in the Finance Bill.
But the central point in this is that a fundamental principle of tax legislation – indeed, all law – is that government should only dictate what you cannot do, not permit what you can.
If the government struggled with plan A to draft tight legislation that automatically rules out innocent schemes – which it obviously did, hence the need for the MP clause – then it should have focused on intention without addressing the technical aspects. Whiting suggested it would take “five or so pages” to make clear that the only schemes being banned were deferred payment schemes that had the sole intention of tax avoidance.
Of course, there are problems with this – even more discretionary power for HMRC, for a start.
But perversely, it creates some certainty – if the scheme has not been set up for tax avoidance, you are safe and you know this is the case for similar schemes. On HMRC’s side, it must use the legislation to capture genuine tax avoidance schemes. As it stands, there are many clauses that allow for HMRC discretion – through wording such as “scheme X is allowed, unless it has been set up for tax avoidance purposes”. But workers in schemes that are not mentioned within the 59 pages of explanatory notes will be even more nervous and even those that are mentioned will have trouble working this out.
By drafting lengthy legislation that explicitly states the few salary deferral schemes that are permitted, such as the MP salary scheme, we could be in a position where workers will be lining up to have judgement passed on whether they are on the Treasury’s safe list. MPs, who employ the Treasury bouncers, were able to get to the front of the queue. As we all know, the British hate queue jumpers.
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