It appears that we\’ve an efficient system for deciding between tax compliance and tax evasion

The Chancellor said he is changing tax laws to prevent companies making the claims, which involve seeking tax relief on money spent not by them but by their customers.

Such claims are “completely unacceptable”, Mr Osborne said.

The utility firms’ controversial claims for capital allowances relate to changes or improvements made to gas or electricity supply lines to businesses.

Suppliers typically require customers to pay towards the cost of such changes. But the Treasury said that some energy companies have been making claims for tax relief on costs met by customers.

Since January this year, companies have sought to make new capital allowance claims worth £50 million, the Treasury said. If those claims had succeeded, the firms might have been able to claim up to £900 million on historic projects, the Treasury said.

None of the claims have yet been accepted, meaning taxpayers have not yet incurred any costs.


People attempt
to avoid and then get told whether that attempt will be allowed or not. All such attempts therefore become either tax compliance (obeying the law) or tax evasion (not obeying it).

Seems pretty simple really.

13 thoughts on “It appears that we\’ve an efficient system for deciding between tax compliance and tax evasion”

  1. QUOTE: People attempt to avoid and then get told whether that attempt will be allowed or not. All such attempts therefore become either tax compliance (obeying the law) or tax evasion (not obeying it). ENDQUOTE

    If the attempt is not allowed, it becomes ineffective avoidance, and more tax has to be paid, leading, if the tax is paid, to compliance.

    Ie, not all failed attempts are evasion, as might be implied by the quote (evasion is where there is, eg, deliberate understatement of income, etc)

  2. This is way over my pay grade but…

    1. Utility gets customer to pay for infrastructure but then takes ownership.
    2. Customer can’t get capital allowance because they don’t own said infrastructure
    3. Utility can’t claim allowance as they didn’t spend the money.
    4. HMRC has big grin on face.

    Is this right?

  3. The Thought Gang

    @ bif

    I think commercial customers would deduct the expense in their corp tax computations.

    That said, if the utility has the asset (debit) then it must also have the liability (credit) somewhere. Logically, it must be a revenue item.. upon which they would, logically, be taxed.

    So, actually, maybe you’re right.

  4. @BiF:

    Yes, that’s the basic shape of it. To get allowances you need to:
    – Spend money
    – On kit you own
    – That you use for your business

    I’ve seen it happen within a group of companies: parent company pays for some plant, the property company owns it, the trading subsidiary uses it; HMRC say none can claim allowances because no single entity has all three qualifications. Even though if you take the group as a whole it clearly does (I spend most of my working life trying to avoid traps like this, where the letter of the law denies relief that the spirit clearly intends).

    Presumably the situation being reported on here isn’t quite as clear-cut, as the existing rules would already deny allowances if the power company charged the customer the actual cost of the works. If the company spends

  5. @BiF:

    Yes, that’s the basic shape of it. To get allowances you need to:
    – Spend money
    – On kit you own
    – That you use for your business

    I’ve seen it happen within a group of companies: parent company pays for some plant, the property company owns it, the trading subsidiary uses it; HMRC say none can claim allowances because no single entity has all three qualifications. Even though if you take the group as a whole it clearly does (I spend most of my working life trying to avoid traps like this, where the letter of the law denies relief that the spirit clearly intends).

    Presumably the situation being reported on here isn’t quite as clear-cut, as the existing rules would already deny allowances if the power company charged the customer the actual cost of the works. If the company spends 100 on the kit and then increases the standing charge by 10 a year, though, then economically the cost has probably been covered but for tax purposes the capital expenditure hasn’t been directly met and so one could easily argue that the utility company should get the allowances.

    The root cause of the problem though is that the rules are set up such that you can have genuine business expenditure for which no-one gets tax relief. This therefore seems to be the sort of “avoidance” that consists of not getting yourself penalised by over-harsh rules.

  6. @ TTG

    What I suspect has happened is either:

    – Utility pays 100 for kit
    – Customer pays 10 in standing charges
    – Utility receives 10

    In which case the standing charges are taxable and deductible, but the utility may well have not claimed allowances in the past as they didn’t realise they could. In that case the utility is out of pocket.

    Or:

    – Utility pays 100 for kit
    – Customer pays 100 as a connection fee

    In which case either the customer is out of pocket as it can’t claim allowances on the connection fee as it doesn’t own the kit; or maybe the connection fee has been treated as revenue so the customer gets a deduction and the utility gets taxed on it, but the utility doesn’t get allowances on the cost and so is out of pocket again.

    I thik it highly unlikely that the utility would be trying to claim allowances twice on the same bit of kit, as that would never fly. It looks much more likely that they’re trying to recoup allowances that no-one’s ever had. HMRC’s argument is therefore probably along the lines of “you can’t be entitled to claim those, because if you were you’d have done so already”. Which is not a strong one, in my view.

    Of course the situation may be more complex, but there’s a trend at the moment to go back and claim allowances that have been missed in the past, so a simple explanation which fits in with current practice seems reasonable to me 🙂

  7. OK, I’ve managed to track down the relevant rules.

    What happens is that there is a specific section (s536 CAA2001) which says that if you buy an asset and someone else contributes to the cost, you can still claim capital allowances if the contributor wasn’t able to claim any tax relief themselves. This means that the overall tax position follows the economic position: 100 is spent, 100 of tax relief is available (subject to all the other rules, naturally).

    So the current position is clearly that no-one has so far had tax relief for the money laid out, and the utility companies are saying that as they’re the ones who laid the cash out they should be the ones to get the relief. I struggle to find that unreasonable, to be honest.

    The new amendments aim to make it much more obvious that the contributor could get allowances, which will therefore deny the allowances to the utility company (as double allowance are already ruled out). This effectively moves the goalposts: instead of a few large companies being able to claim fairly large amounts of tax relief, the relief is now available in lots of small chunks to lots of small business that have probably never heard of contribution allowances.

    So in theory the total tax relief is unaffected, but in practice it’s going to be much less likely that it will be claimed. The large businesses who’ve now realised that they’ve lost out on a technicality will continue to lose out, and the small ones are being an opportunity that they probably won’t realise that they’re able to take advantage of.

    Tim adds: Sounds like there’s an excellent get rich quick scheme in there for an attentive tax accountant.

    Trapise round the companies being charged these fees by the utilities, take a percentage of the tax they can reclaim.

  8. Tim, agreed, someone should make a killing.

    On your evasion/compliance split: how about “dedcution shown not to be due, so the claim becomes a mistake in the return”. So not exactly strictly compliant, but certainly not evasion.

  9. @Ironman:

    Absolutely. When HMRC have successfully disputed claims I’ve made on behalf of clients, the end result is always an amendment of the return to show the treatment that we now agree is the correct one, followed (or often preceded) by the payment of the tax.

    But I think there’s a difference between an “attempt to avoid tax” as currently portrayed in the media, on the one hand, and “arguing that a relief should apply when it’s not clear whether or not it does”. The latter is the norm, in my experience.

  10. Pellinor @ #8 – that’s a really useful explanation. I had assumed that the energy company would claim capital allowance on cost, get taxed on revenue recharge, and the customer would claim the revenue P&L expense. Ie, net nil when all has passed through as per your 100/10 example. I hadn’t realised this would be capital to the customer.

    Separate issue, but it’s worrying just how much drivel both politicians and papers increasingly conjure up with some of their announcements & headlines on these issues – yet again we have the “it’s not fair” nonsense from Osborne. I actually thought he was brighter than that.

  11. @Tim

    My firm doesn’t really do the ambulance-chasing thing 🙂 I’m making sure people are aware for our own clients, and I’ll certainly add it to the armoury of “have you considered this?” questions for pitching to new ones, of course.

    But I’m sure the CA boutiques will be on it 🙂

  12. I must take issue with this. One of the fundamental principles of good government is the separation of powers: legislative, judiciary, and executive. Here we’re letting HMRC behave as all three. Doesn’t seem right to me.

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