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Key points
- Crises and their positive and negative consequences.
- The role and relative pay of essential workers.
- Will future tax policies emphasise fairness?
- What will be taxed, at what rate and will there be a role for tax planning?
- Balancing tax collection and compliance.
Covid-19 has encouraged predictions on how it will change our world. Bearing in mind Darwin’s observation that ignorance more frequently begets confidence than does knowledge, I wondered how it might affect the interaction between taxpayer and state.
If we look to history for hints of what a post-Covid world might look like, our problem is to which period of history we should turn. Commentators have suggested a range of options: the 2008 financial crisis; World War II debt; the Spanish flu of the early 20th century; the Black Death of the 14th century; the Justinian plague of the 6th century. Although there may be no one ‘correct’ era to look at, the comparison with these major historical events at least indicates the scale of Covid.
In any event, when we consider the consequences of such events, these varied from place to place. While in England the Black Death is generally thought to have given bargaining power to a peasant class leading to agrarian capitalism replacing feudalism – possibly a ‘good’ consequence – in Spain and Russia it led to an aristocratic doubling down to retain privileges and perhaps extending the life of feudalism – a ‘bad’ result. Perhaps there is no pre-ordained consequence from Covid; the effects will be what we make them.
The demise of ‘economic man’
Even before Covid, much economic theory was moving away from the idea of ‘economic man’ – that our actions are guided by rational self-interest with a focus on material gain. If, instead, we focus on what we put into society as well as what we can get out of it, that is likely to influence public policy. Such an idea-switch could be strengthened by the Covid experience. Many have pointed to ‘essential workers’ as an example of those whose primary motivation is what they can put in to society and that such people are often relatively poorly paid.
On the question of pay, Covid has meant many professional people can work from home while social distancing. They have been less affected than those whose work is more manual and involves physical interaction. Of course, the latter are often less well rewarded and so the existing financial differential has been exacerbated.
Tax and ‘fairness’
These perspectives are part of the general public debate about what life might or should look like, post Covid. Integral to the debate is the question of fairness. The present comments will not settle the question of what a fair society should look like. However, the Covid debate is likely to influence how people think of a fair society and that will include questions on how people should be rewarded for their efforts and how these rewards should be taxed.
Over the past decade, many gallons of ink have been spilt on arguing about what paying the ‘correct’ amount of tax means. Who decides? And is it a legal or a moral issue? Wherever one stands on that debate, after Covid it seems certain that the state will be heavily involved in the attempt to resuscitate national economies. And it will be surprising if tax policy is not a central plank in that effort. Politics being politics, it will be surprising if the tax policies put forward do not invoke the idea of being fair.
Three taxing options
With apologies to purists, there are three main considerations in deciding how to move monies from the pockets of taxpayers into state coffers: (i) the income or assets to be taxed; (ii) the rates that are applied; and (iii) the tax planning that is allowed.
On the first question of what the state taxes, there is a range of options and opinions. The debate on inheritance tax will no doubt receive a further airing and voices are calling for a wealth tax. The state monies provided to the self-employed in mitigating Covid seem likely to be at the expense of reducing some of the tax advantages of that status. And special windfall taxes as well as taxes on FAANG businesses (Facebook, Amazon, Apple Netflix, and Google) are being discussed.
On tax rates, it seems likely that the argument will continue over the benefits of low tax to generate growth and thus wealth contrasted with the view that those with the most wealth should contribute to society at the highest rates of tax. As in recent announcements on a stamp duty ‘holiday’, the former argument may predominate in the early stages of recovery with increasing competition from the latter as recovery starts and the focus begins to switch to social priorities.
However, while views on what should be taxed and what are the most appropriate tax rates will vary widely, there is likely to be more unanimity on the third aspect as to what constitutes acceptable tax planning. If paying the correct amount of tax is a moral issue, and especially if times are hard, then those who fail to pay the correct amount are at risk of being viewed as modern lepers infected by the virus of tax avoidance.
Tax avoidance
Of course, the phrase ‘tax avoidance’ carries some baggage. In the tax profession, many accept that some tax schemes became embarrassingly ambitious. Prime factors in the growth of tax schemes were the high tax rates of the 1960s and then the large profits made after ‘big bang’. Even if tax rates do rise substantially, it seems unlikely that there will be a significant resurgence of aggressive tax planning. New legislation aimed at serial avoiders and promoters of tax schemes is in place to make this more difficult and there are systems to identify it early. The advantages of ‘going for it’ have been reduced by innovations such as accelerated payment notices and the adverse consequences if such arrangements do not work have increased exponentially both for taxpayer and adviser.
On the other hand, there is little doubt that the concept of tax avoidance has been subject to mission creep. Over the past 12 years a torrent of legislation has been introduced as a crusade against tax evasion which morphs into tax avoidance and, in the detail, turns out to affect those who, for a variety of reasons, are eventually adjudged to be non-compliant. When I joined the old Inland Revenue in 1990, there was an idea that there was a balance of rights and obligations between taxpayer and state. There has been a massive shift in that balance.
The recent report on JJ Management Consulting LLP (Taxation, 2 July 2020, page 6) referred to the Court of Appeal judgment that HMRC had the right to make assessments based on information gained during so-called informal enquiries. While this means that the balance of rights under a formal enquiry notice is lost, the court pointed out that it is HMRC’s function to collect the correct amount of tax. It is empowered to do anything that is necessary, expedient, incidental or conducive to the exercise of that function. The department has wide discretion on the best means of collecting the right tax.
There is not much sign of a balance of rights and obligations in there. Of course, if an enquiry is informal there is no obligation to provide answers. That said, if information requested is not volunteered and some non-compliance is subsequently established, that is likely to influence any subsequent debate on the taxpayer’s culpability.
HMRC’s powers
Apart from what HMRC may or may not do on an informal basis, it has been granted considerable new formal powers under recent legislation: strict liability with automatic criminality irrespective of intention; huge civil penalties both financial and reputational; substantial information powers; and enabling legislation, with limited clarity about when enabling is triggered, aimed at professionals. In all these, HMRC has provided assurances that such powers will be used proportionately. But if such powers are used vigorously against social lepers tainted with that tax avoidance virus, perhaps this could hardly be seen as disproportionate.
Now, the concern is not what happens for taxpayers who indulge in what we might term ‘old-style tax avoidance’ – with clear elements of it being egregious, aggressive, artificial and the like. The concern is what happens if there is a mismatch between the self-assessed tax and a subsequent tax liability as established by agreement or litigation. HMRC’s default position is that since there is a duty to self-assess correctly, failure to do so is at least careless and so merits a penalty. Depending on the degree of culpability, and apart from substantial financial penalties, naming and shaming to harm reputation can follow. If the taxpayer’s actions are deemed to merit a penalty, there is legislation to penalise the professionals involved – accountants, bankers, trustees, lawyers – both by financial penalties and the reputational damage.
These consequences will affect people trying to work their way through complex new legislation in what are often complicated and shifting personal and business situations. Much of the legislation is written in a way which means that getting tax right does not rely on black-letter law. It often involves a consideration of motive and a judgment on what is reasonable. Even assuming competent advisers and taxpayers acting in good faith, the tax return will sometimes be successfully challenged and non-compliance will therefore be established. In normal English usage, tax will have been avoided.
The future
I started by comparing Covid-19 and Spanish flu, but there is another potential comparison. Imagine a world where HMRC uses its substantial powers to collect the correct tax and exercises its wide discretion on how to penalise the non-compliant against a swell of public indignation concerning the virus of tax avoidance. Might we compare the righteous drive to ensure tax orthodoxy with a similar effort to maintain religious doctrine. If so, our worry should not be a return to the Spanish flu but to the Spanish inquisition.
Covid 19 has taught that there is a balance to be struck between absolute health and safety and some form of economic and social life. In the future, it seems likely that it will be more important than ever to strike a similar balance in tax planning between prudence and an unnecessarily high tax bill.
