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KEY POINTS:
- Regulations prevented online filing incentive claims where there was an 'impermissible purpose'.
- Assurance that this would be interpreted narrowly was withdrawn by a press release of 31 January.
- Was this because the regulations were defective for pre-existing companies?
- Press release itself withdrawn 1 February, with no further explanation.
MY SON ASKED for a copy of the complete Sherlock Holmes stories for Christmas — over a thousand pages, from A Study in Scarlet through to His Last Bow. There are the well-known stories, like The Hound of the Baskervilles and the lesser-known ones, such as The Adventure of the Blanched Soldier, which sounds as if it should have been written by a cannibalistic Jamie Oliver. Nowhere, however, will you find The Mystery of the Missing Press Release.
On 31 January, a day when most tax advisers are known to be at a loose end and spend their time idly surfing the HMRC website … a press release was posted by HMRC about the £250 online filing incentive. This was a subject on which we have previously reported the reactions of Rufus, the Hound of the Curtises, in 'Pavlovian Tax', (Taxation, 9 March 2006, page 573). Rufus could not understand why there was such surprise when the number of online PAYE filers rose from 85,000 in 2003-04 to 935,000 in 2004-05; it seemed obvious to him that a £250 cashback offer was going to have the same effect on humans as the sight of a running rabbit did on Rufus and his friends.
Amending regulations
Anyway, in 2005 regulations were introduced (SI 2005/826, amending SI 2003/2495) which were intended to restrict the payment of the incentive when one of three things had happened wholly or mainly for 'an impermissible purpose'. These were:
- the establishment of the employer,
- taking on employees, and
- the payment of PAYE income.
The regulations included some definitions, of which the important ones for our purposes are:
'a small employer is established for an impermissible purpose if it is established for the purpose of —
(i) obtaining an advantage in relation to income tax, corporation tax or National Insurance contributions …'
'advantage … in relation to income tax and corporation tax, has the meaning given by section 318 of the Finance Act 2004 (interpretation for the purposes of Part 7: tax avoidance schemes)'
So advantage is interpreted widely, and if (in particular) your business was incorporated because you got a tax advantage from doing so, that was an impermissible purpose! Surely that was too wide — it would mean that if you incorporated several years earlier as a legitimate piece of planning to reduce your income tax liability, you would not be able to claim the incentive payment? Indeed, arguably very few small companies would have been able to claim, since tax is almost always a very significant factor in the choice of business vehicle.
Wise guidance?
Recognising this, the Inland Revenue, as it then was, gave taxpayers and their agents some reassurance in Tax Bulletin 76, issued in April 2005.
'The provision is widely drawn to ensure that those abusing the incentive provisions cannot readily circumvent the new provision by making small changes to their artificial arrangements. We do not intend to use the provision to deny incentive payments to businesses that appear to have incorporated mainly to take advantage of wider tax breaks.'
So that's all right then. Oh, you'll always get some Jeremiah like the editor of Taxation saying that it's wrong to have widely-drawn legislation that is limited only by guidance on when it will be applied, because you can't appeal against the failure to follow guidance, but surely the Revenue will stick to what they have said?
About turn
The thing to remember about Jeremiah, as all those who paid attention during Scripture lessons will know, is that he was right — his predictions of doom and gloom proved only too accurate. So let's go back to that press release on 31 January. It said that, having taken legal advice:
' … we have been advised that HMRC's previously stated policy is not consistent with the intention and scope of the anti-avoidance regulations. All references to HMRC's earlier interpretation of the regulations are hereby withdrawn. HMRC will apply the regulations in accordance with its legal advice and, in particular, will withdraw or prevent payment of the online filing incentive where an Officer of the Board considers that the “impermissible purpose” test applies.'
Why would HMRC want to do this? The real cynics will say that it is to do with the cost of the incentive, which appears to have increased significantly from what was originally expected, though we have had some difficulties in pinning down the figures. As one who takes a more Panglossian view of the world, I would not impute such motives to those who govern us. I do, however, wonder whether HMRC have started trying to apply the regulations and discovered a glaring hole in them.
Elementary errors
I have already set out the three potential triggers which, if they occur wholly or mainly for an 'impermissible purpose', result in the incentive being unavailable. For one of those triggers, the 'establishment' of an employer (which includes incorporating a company), the impermissible purpose is set out in the regulations, as given in the extract above. However, there is no definition of 'impermissible purpose' for either of the other two triggers — employing employees, or making payments of PAYE income.
So suppose I formed a company five years ago, to incorporate my business as a sole trader. The incentive for online filing had not been thought of then, so I would have incorporated simply because I wanted to take advantage of the lower total tax rate that would apply to my profits. Because of that, I might well have paid myself a salary equal to the personal allowance, and not had to bother with PAYE.
Then I read that there is to be an incentive for online filing for 2004-05 onwards. Wanting to take advantage of this, I increase my annual salary by a few pounds, thus giving myself a very small PAYE liability, and a requirement to file an annual return. By filing online I can pick up a £250 incentive in 2004-05, the same for 2005-06, and progressively reduced incentives until I fall within mandatory filing. At that point I might well keep my salary below the limit again, though I might equally reflect that for a few pounds in PAYE I am also building up a nice state second pension.
HMRC conclude that I am trying it on, and artificially creating a requirement to file so that I can get my incentive. They are right, but where in the legislation does it say that is impermissible? In order to deny me my incentives they have to show that I have done one of the three things 'wholly or mainly for an impermissible purpose'. I incorporated with a view to taking advantage of the wider tax breaks, something which is specifically permitted by Tax Bulletin 76. The same is true, as it happens, of my being an employee; it is the increase in my salary to create PAYE income which has been undertaken wholly or mainly to get the incentive. But the only definition of impermissible purpose concerns the establishment of an employer. The other two triggers are therefore completely ineffective, in my view, because there is no 'impermissible purpose' spelt out for them.
A step too far?
So perhaps at that point HMRC decided that they might try to use the wider interpretation of impermissible purpose for establishment of employers. Rather than deny me my £250 for paying PAYE income, which was the real artificiality, they would say that I had originally incorporated for an income tax advantage, because the total tax I paid operating through a company would be less than the amount payable as a sole trader. That, strictly speaking, seems to come within the definition of an impermissible purpose for establishing an employer.
But would that interpretation be accepted? The regulations give a right for those who are refused the incentive to appeal in the normal way. Presumably the regulations would be interpreted purposively on appeal, and it would be permissible to introduce at least the material in the explanatory note when the regulations were passed. These, unfortunately, do not give any detail about how the regulations are intended to work, but simply say:
'This instrument amends the regulations that provide financial incentives for electronic filing of returns by small employers to insert a provision to counter artificial arrangements designed to exploit the incentive provisions.'
As often seems to be the case with purposive interpretation, it probably depends on how those deciding the case phrase the purpose. If the regulations are looked at as a whole, then it might be argued that they should be interpreted widely in order to rectify what seems to be a lacuna in their drafting. However, it is very difficult to come up with an interpretation of the regulations which is going to catch those who were intended to be caught without also catching any business which incorporated for tax reasons, even though it already had several employees and should, on policy grounds, be able to claim the incentive.
The better purposive approach, it seems to me, is to look at the purpose of the rules relating to the establishment of an employer separately, and conclude that — despite their breadth — their purpose was intended to cover only those situations where an employer was established as part of a scheme to claim the incentive. On that approach it would not be possible to catch those who incorporated for completely different, although equally tax-advantageous, reasons.
… now you don't
However, before any of this could be taken any further, the press release mysteriously disappeared less than 24 hours after it was first posted. Although we understood initially that it was planned to publish revised guidance promptly, none has yet appeared at the time of writing over a week later.
It is understandable if a release has to be withdrawn because a mistake has been made. But the problem here is that no-one is admitting any mistake, indeed no-one from HMRC is commenting substantively on the previous existence of the release at all. There are comments from the profession of course — we published those from Peter Penneycard of PKF in our news report last week — but so far as HMRC are concerned there appears to be nothing to say.
Which really is not good enough. To begin with, anyone hearing about this will want to see the original press release, and it is simply not there to be seen. It will, however, be available to subscribers on our website as a pdf file, linked from the electronic version of this article. We also have no idea whether its removal should be taken as meaning that the original Tax Bulletin 76 guidance is now to be taken as reinstated or not. Above all, we have no idea of the reason why it was taken down, nor of when the issues concerned will be addressed.
I fully understand that it may not be possible to address the substantive issues at this point, and perhaps that the original release was issued in error. But it is not possible to pretend that nothing ever happened. An amended release should be issued, giving the full text of the original one, with a statement that it has been withdrawn, some idea of why, and an indication of the likely timescale for a revised statement. Not to do so is to treat the tax profession with disrespect.
