Flip-Flops anyone?

Surely the most annoying and pointless footwear ever invented – these rubber abominations, with their trademark whoosh and slap, as rubber hits heel, dig into the tender parts between your big toe and the one next door in ways that the architects of the Geneva Convention surely had in mind when outlawing cruel and unusual punishments. Yet, I have noticed the increasing tendency for grown men wearing flip flops around town, no matter what the weather or the season. While such crimes against fashion can be put down to innocent but misguided motives I am afraid that the same cannot be said for the government's frequent policy flip-flops on taxation.

For instance, the government announced, with many trumpets, on 1 August a "tax treaties anti-avoidance" strategy. This was designed to prevent both resident and non-residents from relying on provisions within our tax treaties to avoid UK tax (despite the fact that the whole purpose of tax treaties is to avoid double taxation). I wrote about this strategy at the time – in most unflattering terms. Anyway, just a month later we receive another announcement (this time with no trumpets) stating that the new strategy has now been binned. Flip-flop! Apparently, the government didn't think this through properly and, when they had the chance to discuss this matter with some responsible adults, realised that the measure, if enacted, would act as a serious disincentive to people wishing to trade with or invest in the UK. Bearing in mind the state of our economy at present, that outcome would clearly be undesirable.

Can we expect an ever bigger flip-flop on the issue of the general anti-avoidance rule (GAAR)? The government's own working party has apparently said it's a good idea and even had a go at drafting some legislation. But, surely, at some point we need to get a sanity check on the whole idea - after all there are very good reasons why so few countries have introduced a GAAR.

What a GAAR will do is make it much more risky to invest in or trade with the UK as the tax outcomes will be so much at the discretion of HMRC. Without a properly resourced and responsive clearance procedure we are left with the equivalent of a taxation lottery, with the odds heavily stacked in favour of HMRC. My hope is that the GAAR will follow the tax treaties idea into the bin.

Attacking Non-Doms

What the above suggests is that the government isn't thinking through its taxation policy properly. It is also inconsistent. Remember the statement in late 2007 by Dave Harnett (who was and still is HMRC's Grand Wizard) when talking about non-doms? He said that those who paid the £30,000 remittance basis charge would not have to disclose their foreign assets or unremitted income or gains. Effectively, he said, they would be left alone.

I wonder, then, how Dave will explain the massive increase in the use by HMRC of Code of Practice 9 (COP 9) against non-dom tax payers. For the uninitiated COP 9 is HMRC's code for dealing with cases of suspected serious tax fraud. This rather scary process should only be used where HMRC has real evidence that the taxpayer has committed a fraud. Effectively it is the taxpayers 'last chance saloon' before HMRC prosecute you. I must emphasise that we are talking suspected fraud here – that is deliberate evasion of tax, not mere negligence or carelessness. Yet, we have been involved in a few cases recently where it is abundantly clear that HMRC has no evidence of fraud at all – it is just going on a high-powered fishing expedition in the hope of finding some irregularities. This is not what COP 9 is there for and it is notable that all the clients we have seen so far are all non-doms. Other firms have reported similar experiences. So, what's going on? We'd love to know but it appears that HMRC are simply trying to put the frighteners on non-doms. Another flip-flop...

So what do you do if you or your client is invited to participate in a COP9 process? It is worth noting that if the client does agree to participate then the process will not end without a complete disclosure of all the client's assets and sources of income and gains worldwide. We are therefore advising clients that, if they are sure they are not guilty of any fraud or other serious irregularities, then they should decline to be involved in the COP9 process. Now, this will make many people feel faint as HMRC will say – if you don't agree to cooperate we may have to prosecute you. But this can only be a bluff if the client is, in fact, innocent of fraud.

What we do is try and find out what evidence HMRC actually has on the client. Most often they won't tell us, but they sometimes give us a clue. If after receiving some clues we are still clueless why our client is being investigated then, at that point, we may tell them to put up or shut up. This means HMRC may issue as assessment which we, of course, will then appeal. Eventually, in order to uphold the assessment, HMRC will have to disclose the evidence they think they have. Or, they could prosecute. Either way, it's a bit stressful for the client - but then standing up to a bully nearly always is. However, the alternative – months and months of detailed reports and a full disclosure of all assets – isn't nice either.

One thing is clear – don't attempt to deal with these cases without an expert on your side. We know exactly what HMRC can ask for and what they can't. We also know what strategies to employ to block them, make them back down or go away. If you need help, let us know.

This month's household tip

Here's a handy one for the office. If you get an ink stain on your shirt (or blouse, if you are that way inclined) then go and soak it in milk. You will find some in the fridge, next to the mouldy sandwiches someone left there two weeks ago and forgot about. Yes, there are some in every office fridge.

Best wishes

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