Category: Business News

The recent revelations about tax avoidance schemes and the use of offshore tax havens, has, once again, shone a light on the issue of personal tax management , and the lengths that some people will go to in order to avoid paying tax.

Yet amidst the undeniable outrage at the antics of the rich and famous, and calls from politicians, journalists and the arbiters of public opinion for increased regulation and a clampdown on such practices, there is an essential element that is being lost. Many of the schemes exposed are actually legal, either under local or international law, and, more fundamentally, there is no moral or ethical obligation to pay more tax than is legally required.

As the famous American jurist Learned Hand opined: “there is nothing sinister in arranging one’s affairs to keep taxes as low as possible….nobody owes any public duty to pay more than the law demands….to demand more in the name of morals is just cant”.

There is no doubt that some of the worst excesses highlighted by the Panama Papers are either against the spirit or the letter of the law. However, the vast majority of people who employ tax havens are doing so perfectly legitimately, using the existing law to minimise their personal tax burden accordingly. There is actually nothing wrong with this if you can afford to pay for the proper professional advice to set-up an appropriate offshore tax structure.

Unfortunately, these people, and the accountants, lawyers and tax experts who advise them, run the risk of being demonised for just doing what every citizen has the right to do, and that they will become victims of the politics of envy.

At the same time, the demand from the authorities and regulators to “do something” about the perceived abuses will force many offshore centres to radically curtail their activities, which will cause irreparable damage to local economies heavily dependent on financial services for the bulk of their income.

It also might have another unintended consequence.

Whilst proponents of increased regulation and transparency will argue that the net result of the Paradise Papers will be that more people will be forced, or shamed, into paying their fair share of tax, there is also the strong possibility that the incidence of tax evasion will increase, as tax avoidance or minimisation loopholes are closed. As a result, the total tax take will fall, not increase.

There is also a wider debate to be had about the fairness of current personal tax rates, especially when put into the context of the wider burden of taxation imposed on citizens – VAT, sales tax, capital gains tax, inheritance tax etc.

Unfortunately, there is a real danger that this debate will get lost in the noise about the dishonest practices of a few advisers and their clients, with the inevitable consequences of tighter regulation and scrutiny of one’s tax affairs.  As a consequence, it might be that we look back in a few years’ time, and realise what further control we have ceded over our own tax affairs to national governments and regulators.

If that is the case, it might truly be Paradise Lost.

 

 

Introduction

Speaking at the Fortune Global Forum on November 5^th, JP Morgan’s Jamie Dimon dismissed Bitcoin’s long-term chances of survival, stating that, in his view, there will be no non-controlled currencies in the world, because no governments can, in the long-run, tolerate the existence of methods of payment they cannot control

This is not the first time that Dimon has been sceptical about Bitcoin. In September he threated to fire any of his traders who attempted to deal in it after declaring the cryptocurrency a fraud.

He is not alone. Legendary investor Warren Buffett has warned for years that Bitcoin has no intrinsic underlying value and that the current price bubble will soon burst in spectacular fashion, whilst billionaire Saudi investor Prince Al-Waleed bin Talah has predicted a forthcoming implosion of the digital currency because of the lack of regulatory control.

On the other hand, part of the reason for the recent Bitcoin price surge was due to strong interest from investors on both Wall Street and in the Far East, whilst the news that the CME (Chicago Mercantile Exchange) plans to trade Bitcoin futures would indicate that, at least some elements of the investment community are anticipating a long and bright future for the cryptocurrency.

Who is to be believed?

Is there a Bitcoin Bubble right now?

It would be hard to argue with those that contend that the current Bitcoin price of over US $6,400 a coin – it was above US $7.500 before falling back – appears to have all the characteristics of a bubble, given that it started the year around the US $1,000 level. As such it would appear, on the face of it to resemble some of the famous bubbles in history, such as the Tulipmania of the 17^th century, the South Sea bubble a century later, and, most recently, the dot com boom around the turn of the Millennium.

The problem with this is that the classic definition of a bubble is when an asset is traded at a price that strongly exceeds its intrinsic value. However, if Buffet is to be believed and Bitcoin has no intrinsic value, what is a reasonable price for it?

At this point it is also worth pointing out that a regular fiat currency – such as a dollar, euro or sterling – also has no intrinsic value. Since countries abandoned the gold standard – when every unit of currency issued was backed, at least in theory, by the equivalent in gold – the value of a currency is determined more by the backing and support of government and financial regulation than by any physical equivalent.

It is here that Dimon and bin Talah may have a strong point. Conventional currencies have value because there is a government to support it when they come under pressure. This is why financial authorities and regulators step-in when a currency comes under threat or there is a run on a bank to prevent economic disorder and financial hardship. In other words, it is government support and backing for a currency that legitimises it, rather than the inherent value of the currency itself.

With Bitcoin there is no such safety net. The only thing currently driving its price is market sentiment, which is why there is often such dramatic volatility in its value from one day to another. That would make it vulnerable to a sudden and dramatic loss in value if market sentiment were suddenly to turn against it.

Will Bitcoin become regulated?

There are signs that Bitcoin may, at some point in the future, become subject to government regulation. Already trading in the currency has become banned in China and is coming under increasing government regulation in Russia. At the same time, the SEC in the US has issued a warning to investors that trading in digital assets is subject to Federal Securities laws, whilst both the Bank of England and the Financial Conduct Authority in the UK are monitoring current cryptocurrency developments very closely.

Of course, there are purists who argue that regulating a digital currency is the antithesis of the original concept of Bitcoin – as a decentralised and deregulated peer-to-peer payment system. However, it might be a price that Bitcoin and other similar digital currencies have to pay for their long-term survival.

Certainly if major e-commerce retailers like Amazon, eBay and Alibaba begin to accept Bitcoin and other digital currencies as means of payment, it can be expected that consumer protection laws will be expanded to cover it.

To a certain extent then, a regulated Bitcoin would have the supervision and monitoring that the current coinage lacks, although many of the other principles that underpin a traditional currency – such as an underlying banking system and financial infrastructure, supporting checks and balances, and complete market transparency, would still be lacking.

Bitcoin has its supporters

It should also be said that the views of Dimon and Buffet are not the only voices in the debate. There are equally respected investors who believe in the long-term future of Bitcoin, and that the underlying price will continue to rise. Jeremy Lew, for example, one of the first investors in Snapchat predicts Bitcoin will be worth US $500,000 a coin by 2030, whilst Facebook investor and financial guru Chamath Palihapitya urged his 70,000 Twitter followers to invest in the currency as a “defense against value destruction”.

The Blockchain will survive

Even if Bitcoin were to collapse in value altogether, there are elements of the cryptocurrency concept and technology which will go on to survive and prosper, most notably the concept of the blockchain. Even Dimon himself admits this, saying “the technology will be used, it may even be used to transport currency but it will be US dollars”.  He has also previously said that his bank has much to learn from the concept of disruptive payment systems like Bitcoin, in terms of real-time systems, better encryption techniques and a reduction of costs.

 

 

Conclusion

It is impossible to state with any certainty the probability of Bitcoin surviving. Certainly its many critics would argue that it is merely an asset with no intrinsic value, whose current price is being driven by a wave of market sentiment that is creating a bubble that will shortly burst spectacularly. On the other hand, there are other investors and market analysts who predict that the currency, although subject to short-term volatility, is on a long-term upward curve.

Probably the answer lies somewhere in the middle. Bitcoin will survive, but not in its present form, and the concepts around it will change. It is likely that the crypto-community is going to have to accept some form of government regulation and monitoring of the currency at some point in the future. Whilst this may be anathema for the purists, this might be the price of longevity and mainstream acceptance.

However, whatever else happens, the concept and application of blockchain technology will not only survive but will prosper and finds its way into an increasing range of applications and industries. In the end, then the enabling tool may prove more valuable than the core concept.

 

On 3^rd November of this year, a historic milestone was reached when the cryptocurrency market capitalisation passed the US $20 billion mark for the first time in its history. This was hard on the heels of Bitcoin reaching a high-water mark of US $7,461 the previous day.

Although it has since dropped back a little, Bitcoin now has a market capitalisation of nearly US $122 billion. Even Ethereum, which has struggled recently whilst market support has piled behind Bitcoin, has rallied, and is now trading at nearly US $300 a coin, which represents a market capitalisation of US $28.3 billion.

What is driving the current cryptocurrency surge and is it sustainable?

In truth, the current price surge is really all about Bitcoin. Not only does it account for more than 60% of the cryptocurrency market in terms of market capitalisation, the volumes traded dwarf that seen for other cryptocurrencies, with Ethereum a very distant second. Essentially, other altcoins are now trading on Bitcoin’s coat tails, so that is where most attention needs to be paid to understand the current market position.

There are many who argue that what we are seeing in the market now is just a bubble and that a crash will occur sooner rather than later. That is certainly the view of legendary investor Warren Buffet who recently advised his Berkshire Hathaway investors to stay away from Bitcoin because the price is being driven by speculation, and cannot be valued properly because it is “not a value-producing asset.”

This is not the first time that Buffet has criticised Bitcoin. Back in 2014 when it traded around US $400 a coin, he stated that it was a joke to think that cryptocurrencies have any intrinsic value because they are just a way of transmitting money. Three years later, with the price of Bitcoin at record levels, we are still waiting for the predicted crash, although there has been plenty of volatility in the intervening period.

Buffet is not alone in being a naysayer. JP Morgan boss Jamie Morgan called Bitcoin a fraud in September, and promised to fire any trader at his investment bank caught dealing in the currency. Meanwhile billionaire investor Howard Marks has called it pyramid selling, whilst Saudi Prince Al-Waleed bin Talah predicts that Bitcoin will soon implode because it is not regulated.

Ironically, in the light of these views, one of the reasons for the current rise in the value of cryptocurrencies is because certain parts of Wall Street, at least, are now starting to take them seriously. Data recently published by financial research firm Autonomous Next showed that, since the start of the year, 90 hedge funds focused on digital assets have been launched in the US alone.

At the same time, the world’s largest options and futures exchange, the Chicago Mercantile Exchange, has announced plans to offer Bitcoin futures by the end of the fourth quarter, subject to regulatory approval.

This is seen as another step in the development of Bitcoin as a more established asset class, and potentially gives institutional investors a way of buying into the digital currency market.

There are other factors behind the current rise of Bitcoin as well.

In November the Segwit2X hard fork is planned, which, at least in the short-term, has a positive impact on the Bitcoin price. Those investors that do not expect Segwit2X to become the majority blockchain are investing in Bitcoin; paradoxically, those who are expecting it to become the majority are also investing in Bitcoin because that is the only way they will be able to buy the Segwit2X coin when it becomes available.

A further reason for the increased demand for Bitcoin and other cryptocurrencies is because of interest from Japan and the Far East. Bitcoin and digital currencies have now become mainstream assets on Japanese markets, and high profile institutional and retail traders have started to engage in Bitcoin and cryptocurrency trading. The Japanese Bitcoin exchange now accounts for 61.2% of global Bitcoin trading, more than double the trading volume of the US.

Questions may be asked as to why Ethereum has not seen the same rise in value as we have seen with Bitcoin, and, to a much lesser extent, with currencies like Litecoin.

One reason certainly is that Bitcoin has become such a big story that it has sucked demand away from other digital currencies. There are also ongoing hacking and security concerns about Ethereum. Last year an online hack saw US $53 million drained from one of their networks, and there are continued concerns that the blockchain is still vulnerable to online attacks.

There is also an argument that says that the Ether coin is actually less important to the Ethereum project than the blockchain itself and the concept of the smart contract. That makes the currency less subject to wide fluctuations and market sentiment.

On the positive side, some market analysts predict that it is a matter of time only. Wait a year or so and we will see Ethereum start to rise strongly in value like Bitcoin.

The current market boom for cryptocurrencies is all driven by Bitcoin. Whilst there is clearly evidence suggesting that institutional investor interest in the US and the Far East is now making digital currencies a mainstream asset, there is still plenty of speculation that the current price surge is a bubble and a crash may be imminent. Certainly it will be interesting to see what happens after the Segwit2X hard fork and whether that has any impact on the long-term price of Bitcoin and the market as a whole.

Whatever happens, this is likely to be a fascinating market to follow in the weeks and months ahead.

One of the fastest growing sectors of the FinTech revolution is RegTech, a phrase coined as recently as 2015 by the UK’s Financial Conduct Authority (FCA). RegTech is a portmanteau word which describes how technology is being applied in the financial services sector to address the challenges associated with increased regulation and compliance requirements.

The need for RegTech has its antecedents in the 2008 global financial crisis. In the wake of the events that saw the world’s financial markets on the verge of a total collapse, governments and regulators were determined to try and make sure that such events could not happen again. New rules and regulations were introduced, and sanctions for non-compliance on banks and other financial institutions became much tougher. Compliance, previously a secondary, back-office function, began to play increasing a leading role in banking strategy and operations.

Faced with a raft of new regulatory measures and with the financial risk of non-compliance increasing exponentially, banks and other such financial institutions began to look to technology as a way of the meeting the new challenges they faced. At the same time, with the rise of new agile FinTech rivals starting to encroach on their traditional markets, these banks also looked to technology as a way of reducing the cost of their business processes, allowing them to compete with these newcomers.

Regulation applies equally to all organisations – pension funds, hedge funds, asset managers, insurance companies, as well as banks – irrespective of their size, scale or scope of operations. The volume and pace of regulation means that even the best-resourced firms are struggling to cope – which is where RegTech comes into the picture.

RegTech aims to drive down costs and improve processes by harnessing technology. It provides a way for institutions to respond to rapidly changing regulatory obligations more cheaply, effectively and accurately than they have ever managed before.

Many RegTech providers use the word agility to describe how their products use techniques like advanced analytics and assessment to teach systems how to “learn” and support both new and emerging regulation, with neural networks helping predict customer behaviour and fraud.

RegTech solutions tend to be cloud-based, which means that data is remotely stored, managed and backed-up.

Examples of RegTech tools include Tableau, Hadoop and Pentaho, which all are designed to organise vast amounts of data, and allow the creation of bespoke reporting which is flexible enough to meet the needs of both current and future regulatory requirements. Tableau, for example, is a visualisation tool which makes it easier to look at data in order to identify trends, and, from a compliance viewpoint, identify anomalies, even down to the individual customer transaction level. Hadoop is an open-source software platform for the distributed storage and processing of very large sets of data, whilst Pentaho is a data integration solution which aims to turn information into insights.

In the short-term, RegTech will help firms automate the more mundane compliance tasks, and reduce the operational risks associated with compliance and reporting requirements. However, longer-term its proponents hope it will empower compliance functions to make informed choices about the risks they face and how to manage and mitigate those risks.

Irish MPs are amongst the many politicians and legislators who have reacted angrily to French President Emmanuel Macron’s proposal to introduce a single European corporate tax rate. Macron has domestically been calling for a single-bloc rate, but such a plan has little support outside France.

Irish MEP, Brian Hayes, is one such opponent, saying “Marcon’s new corporate tax rate band may go down well in Paris, but there is overwhelming opposition in most of Europe to harmonisation of tax rates.”

Hayes also pointed out that corporate tax rates are not in the gift of the EU, but are for Member States to decide.

Macron has been accused of a conflict of interest, with critics citing the difference between the French corporate tax rate of 30% and the 12.5% rates which prevail in Ireland and Cyprus, with the President seen as trying to prevent smaller countries in the European Union from being able to attract foreign direct investment (FDI).

Hayes commented” Tax competition between countries is good for Europe and good for European investment. Tax competition keeps Europe on its toes and makes sure that business stays in Europe”.

This is not the first time that Irish politicians and the EU have found themselves in conflict over corporate tax policy in recent weeks. Last week, Irish MP, Michael Fitzmaurice, accused European Commissioner Jean-Claude Juncker – who he described as an unelected bureacurat – of acting like a dictator when it comes to tax, saying that, under no circumstances should he be “allowed to dictate what should happen with regard to tax rates in Ireland or anywhere else for that matter“.

Ireland has also reacted angrily to last week’s decision to refer the country to the European Court of Justice for its failure to recover €13 bn. in back taxes from Apple, whose European headquarters is based in Dublin. They contend that the EU does not understand Irish law, that the interference by the EU, in what they regard is a domestic tax matter, is an infringement of national sovereignty, with a spokesman for the Finance Ministry in Dublin previously commenting “Ireland does not do deals with taxpayers”.

At least it appears that Macron’s proposals do not have much current traction, with Vanessa Mock, the Commission’s spokesperson for taxation and the customs union declaring “when it comes to taxation, tax rates are an area of national sovereignty, and the Commission has no intention of interfering with that. Neither do we plan a harmonisation of corporate tax rates.”

 

The EU is proposing a major overhaul of European VAT rules to combat tax fraud which is reported to cost the bloc €50 billion annually (although Europol, the EU crime agency, estimates that the figure could be double this).

The isting EU VAT rules were introduced in 1993 at the time of the creation of the single market, and were intended to be a temporary fix until such time as rates could be harmonised across member states – a project now long abandoned. However, the result is a hotchpotch of differing rules and provisions, with the need to make any meaningful reform complicated because all changes at a European level need unanimous approval, which is very difficult to achieve in reality. This leaves the existing VAT system open to abuse and fraud.

EU Commissioner for taxation, Pierre Moscovici said “VAT rules are a quarter of a century old and no longer fit for purpose. Fraud today is not something citizens can accept any more, particularly when it finances organised crime and terrorism”.

The new rules will have two broad objectives – to prevent fraud and to simplify the lives of companies in the EU, with Moscovici estimating EU companies will save up to €1 bn. a year in administrative costs with the new rules.

One practice that the EU in particular wants to target is the scam known as the “missing trader fraud”, which involves cross-border sales of high value portable products such as mobile phones, computer chips and even credits on carbon dioxide emissions.

The fraud enables a trder to buy goods from a supplier in one country, VAT-free, and then sell those goods at full price, including the VAT in another country. The trader then “disappears”, taking the VAT with them. Meanwhile, the original supplier of the imported goods is able to reclaim the full VAT from their government.

The logical extension of such practices are the creation of so-called “carousel schemes” where criminals create a network of suppliers and traders which continuously indulge in such trades, stealing millions of VAT payments which are due in the process.

The proposed reforms, which the EU hopes to have in place by 2022, will see suppliers charge VAT on all EU sales.

These proposals are part of wider global efforts to reduce tax avoidance, and aggressive tax evasion, and forms part of a broader programme by governments and regulators to promote greater transparency and harmonisation when it comes to tax, including initiatives such as BEPS, CRS and new rules on transfer pricing.

 

Both Amazon and Apple were the subject of a fresh crackdown by the European Union on Wednesday over the amount of tax they pay on their European operations.

In the case of Amazon, the company has been ordered to pay €250 million in back taxes, following the decision of the European Commission that the technology giant had been given an unfair tax deal in Luxembourg.

Apple meanwhile was hit by the news that the Commission plans to take Ireland to the European Court of Justice (ECJ) for failing to recover 13 billion in back taxes from the US corporation.

European Competition Commissioner Margrethe Vestager said that under their agreement with Luxembourg, Apple had arranged to pay substantially less tax than other companies in Luxembourg, which is illegal under state aid rules. Under the 2003 agreement, Amazon was allowed to move a substantial part of its profits from Amazon EU to Amazon Holding Technologies, which was not subject to tax. In doing so, they ensured that almost three-quarters of the profits earned in Luxembourg were not taxed. Vestager commented “Member States cannot give selective tax benefits to multinational groups that are not available to others”.

The case is slightly embarrassing for the European Commission because its current president, Jean-Claude Juncker, was the prime minister of Luxembourg back when the deal was struck.

Amazon for its part denies receiving an special tax benefits from Luxembourg, with a spokesman commenting that the company was studying the ruling of the Commission and was evaluating the legal options available to it, including an appeal.

Meanwhile the decision to refer Ireland to the ECJ is the latest salvo in an ongoing dispute which has seen the European Commission arraigned on one side, with Apple and the Irish Republic on the other.

The European Commission argues that Apple’s tax arrangements in Ireland, where the company has its European headquarters, are illegal, in as much as the company pays tax at an effective rate of only 1% there. Apple contend that it is not an issue of what tax it pays, but where the tax is paid; as most of their products and services are “created, designed and engineered in the US, that is where they pay most of their tax.

Ireland, for its part, has always claimed that this is a matter of national sovereignty, and that the European Commission has misunderstood the relevant facts and Irish law”.

The Irish government have said that they are extremely disappointed with the Commission’s decision and intend to vigorously defend the case, although, in reality, it may be several years before the matter comes to court.

However, whatever the rights and wrongs of the individual cases, the message from the European Union is clear, with Ms. Verstager commenting “I hope that both decisions are seen as a message that companies must pay their fair share of taxes, as the huge majority of companies do.”

All individuals employed in Cyprus – both employed and self-employed – are obliged to make Social Insurance Contributions based on their earnings; monthly in the case of those employed, and quarterly for those self-employed. One feature of this system, up to this point, has been the manual nature of the process. Individuals, employers or their representatives have been required to physically present themselves at the relevant Government office in order to make the relevant cash, cheque or card payment, together with the presentation of the necessary documentation. It is, therefore, welcome news that finally there are plans to move everything online.

Cypriot legislation requires employers to calculate Social Insurance Contributions based on the monthly emoluments of their employees, and pay them within a month of the applicable contribution period i.e. within one month retrospectively. In the case of the Employee, their share is deducted automatically from their earnings by the employer, and paid on their behalf to the Government.

The current Social Insurance Contribution rates are as follows:

	Employer	Employee
Social Insurance	7.8%	7.8%
Redundancy Fund	1.2%	NIL
Industrial Training	0.5%	NIL
Social Cohesion	2%	NIL

In addition, there is a holiday fund of 8% which most businesses can claim exemption from by proving that they offer their employees paid leave as part of their conditions of employment.

The Social Insurance, Redundancy Fund and Industrial Training contributions are restricted to €54,396 annually (equivalent to €1,046 per week or €4,533 a month). However, the Social Cohesion Fund part is unlimited and is not regarded as deductible for the purposes of calculating corporation tax.

Failure to pay contributions on time leads to penalties which range from 3% to 27%, depending on the period of time that the payment has been delayed, and the amount of the contributions due.

Self-employed contributions are paid on a quarterly basis as follows:

• January to March – must be paid by the following May 10th;
• April to June – must be paid by the following August 10th;
• July to September – must be paid by the following November 10th; and
• October to December – must be paid by February 1oth of the following year.

There are minimum limits of annual income on which self-employed people must pay social insurance contributions, and these vary by profession such as:

Occupation	€
Persons exercising a profession: ·       For a period under 10 years ·       For a period exceeding 10 years	19,949 40,351
Wholesalers, estate agents, insurance agents, manufacturers and other businessmen	40,351
Clerks, typists, cashiers, secretaries	19,496
Shopkeepers	18,589
Designers, computer users, marine engineers	19,949

This list is not exhaustive, but AJD Consultants can advise if a particular occupation is not covered above.

Despite all this, the intensively manual nature of the Social Insurance payment system has made this a very ineffective process hitherto. This is why the announcement that the whole system is going to be automated so that payments and monthly submissions can be made online is very welcome. Launched under the joint auspices of the Ministry of Labour, Social Insurance and Welfare, and the Social Insurance Services, the new system aims to improve the productivity and effectiveness of both the private and the public sector, whilst aiming to eliminate the waste of productive time.

Under the slogan “Do It Electronically”, a special website has been created, giving taxpayers more information and allowing them to register for the scheme (http://www.kepa.gov.cy/yka/).

Unfortunately the website is currently only available in Greek, so AJD Consultants has contacted the department responsible, asking when an English version will be available.

 

A recent report published by HMRC in the UK – research report 433 – has looked at the causes of small and medium-sized businesses to evade tax, and has sought to identify if holding particular beliefs or attitudes makes people more likely to indulge in tax evasion.

The report “Understanding evasion by small and mid-sized businesses” was conducted on a relatively small sample size (40 small and 5 mid-sized businesses), so may not be indicative of more widely held beliefs. Furthermore, as it focused on those businesses which were actually engaged in tax evasion, the findings do not mean, statistically, that such practices are common.

Nevertheless, the report does identify a number of differing attitudes which distinguish evading from non-evading businesses, including:

• Sense of citizenship – an individual’s core beliefs and values;
• The ability to distinguish and respect the difference between business and personal assets – the extent to which what belongs to a business is kept separate from what belongs to an individual;
• The perception of risk – both in terms of the risk itself and the ability of the business to manage that risk;
• The prospective financial incentive or reward (the amount of tax which could be evaded); and
• The willingness to actively seek or create opportunities for tax evasion; the degree of strategic planning which goes into evading activities.

From there, the report links these attitudinal variances to external influences, such as social norms, media coverage, and market forces, to identify four main types of tax evader.

• The Unthinking Evader – those who habitually indulge in low level tax evasion without conscious thought almost;
• The Invested Evader – businesses which regard themselves as driven by financial necessity to evade tax in order either to survive or grow;
• The Lifestyle Evader – those who regard tax evasion as a way of having a lifestyle that they could not otherwise afford, and justify their actions by pointing to the tax that they actually do pay; and
• Systematic Evader – as the name suggests, those who actively contemplate tax evasion and make it an integral part of their business model.

The sort of evasion recorded in the report ranges from businesses who deal in cash in order to under-declare income, to others which “employ” teenage children who do not really work but whose personal allowances are used to save tax. Then there are those business owners who claim personal expenditure items as business expenses, and others who have bought assets for the business, such as computers, and then taken them home for personal use.

Many of these examples are small in themselves; however, added-up they can represent a large tax loss to the economy. And, while the HMRC report is focused on the UK, such practices are common in many other economies and may be even more rife.

According to the ICAEW (Institute of Chartered Accountants in England and Wales) the body regulating solicitors in the UK, the SRA (Solicitors Regulation Authority), has published an official warning to its members, cautioning that any who are involved in promoting and implementing aggressive tax avoidance schemes may be subject to disciplinary action.

The SRA’s concerns apparently have been fostered by some law firms and individuals who have been promoting aggressive tax strategies that “go beyond the will of Parliament”.

In the warning, solicitors are reminded of the principles they should maintain when giving clients advice on tax planning. These include upholding the rule of law, ensuring the proper administration of justice, acting with integrity and in the best interests of the client. The SRA then goes on to say that solicitors should behave in a way that engenders public trust, and that when they have advised on schemes that subsequently turn out to be illegal, then it will, prima facie, be regarded as evidence of misconduct.

The sternness of the warning has come as a surprise to some observers, particularly the use of language that cautions that advising a client on a tax avoidance scheme that fails “will leave yourself open to the risk of disciplinary proceedings as well as committing a criminal offence”.

Back in 2015, the government challenged the tax profession in the UK to stop aggressive tax avoidance schemes by strengthening their professional rules. In response, an updated PCRT (Professional Code of Conduct in relation to tax) was published in March 2017 by the ICAEW and six other professional regulatory bodies, introducing new standards to supplement existing fundamental ethical principles. These clarified what was expected of members when providing tax advice, and made it clear that the endorsement and promotion of certain aggressive tax avoidance schemes was not acceptable.

Whilst the SRA is not one of the PCRT bodies, its latest warning is a stark reminder that solicitors are expected to adhere to a certain level of conduct, and that law firms and solicitors have an important role in ensuring that taxpayers meet their legal obligations, and ensure that the public has trust in them.

More widely, it is further illustration of the way the whole regulatory climate around tax planning has changed. Not only is tax evasion now a crime; aggressive tax planning is also being outlawed. Professional advisors and clients need to acknowledge and accept this.