Thirdly, and actually more important than all this, though, is the fact that ministers have never done anything to address the obvious problems of tackling small business activities through the use of limited companies that were designed in the Victorian era and are obviously unsuited to modern needs, most especially when much of the tax and corporate case law surrounding their use was established for large entities.
The Victorian era being so well known as a time of vast corporations, right? Rather than lots of small and medium sized? Can’t remember how late it was but certainly to the edge of Victoria’s reign if not well beyond that the Royal Navy plus the Dockyards was by far the largest economic organisation in the country.
The so-called loan scheme tax charge imposed by HM Revenue & Customs mainly on those who had, in my opinion, undoubtedly engaged in tax avoidance whilst supplying services as sub-contractors through limited liability companies has attracted much attention in the last couple of days, not least because of the alleged involvement of Douglas Barrowman, husband of Tory peer Michelle Mone, in the promotion of such schemes.
‘in my opinion’ – In the immortal words of Roger Daltrey: ‘Who are you? Who, who, who, who?’ – of course he is entitled to his opinion, it’s the presumption both that we also are entitled to it and that it has any more validity than some denizen of the Darkest corners of the Dark Web of equivalent evil to Murphy (if such a person exists?) that is so irksome.
Let me stand back from the political heat. Let me also stand back from the emotions around the charge, which represents an honest attempt to recover tax from those who set up structures to avoid it, however innocent or mistaken their actions might be claimed to be.
Because blocking 20,000 people onTwitter suggests cool, rational considerations are your forte.
Instead, let me suggest three things. The first is that it has always been appropriate for HMRC to seek to recover tax in these cases, and since the biggest savings went to those they are now seeking to recover tax from, it is appropriate that they pay most of the tax due.
As far as I’m aware the tax arrangements were legal – although possibly unethical. I’d really far rather the government concentrated on reducing public expenditure by around 50% by shutting universities and closing down sockpuppet charities and reducing the level of grants issues to fringe cranks with phoney qualifications and a penchant for getting barred from hostelries
Second, let me add that HM Revenue & Customs was and still is incompetent in the management of these cases. It should have acted more quickly because the problem was apparent by about 2005. It should have acted more decisively.
And it should, when its own inaction became apparent, have been decidedly lenient with penalties and interest on people who were, to be candid, too often conned into using these schemes.
They should have also looked for recovery, at least of the employer’s NIC, from the employers who obviously also benefitted from these arrangements.
It would have been very different had he been in charge I am sure. We have the understanding that he could have been at Dachau to prove that
I first said so in August 2007 after a case on a not-terribly unrelated issue. What I said then was that the whole structure of small business taxation needed reform to make it suitable for the twenty-first century. In 2009, I was told HMRC had seriously considered my proposal but deferred it because of the global financial crisis. No one has ever been back to the issues, but I offer the following written in 2007 again because I still think that urgent reform of small business taxation in the UK is required to make it fit the economic facts of what happens in these concerns, which it does not at present.
They probably looked at the unhinged nature of the blog output of the person providing the suggestion – queried whether someone unfamiliar with concepts such as ‘double entry’ (other than maybe on deleted files in his laptop) or depreciation was right to be used as some kind of ‘taxation oracle’, before the revelations about his qualifications and encounters with Downham Market pubwatch
If action had been taken when I proposed it, most of the loan charge issues would not now exist. I think that is worth noting.
He must have been watching ‘On the Waterfront’ over the festive season
According to his tuberousness, no one has ever changed his behaviour to reduce his tax bill – but then we have the situation where sole traders and partnerships became ltd companies and themselves directors to avoid paying nics .
“HMRC – should have acted more quickly because the problem was apparent by about 2005. It should have acted more decisively.”
It might not have been apparent to Spud until 2005 but the firm I worked for in London had been doing such schemes for a decade by then.
And until law changes in FA 2011, there was bugger all HMRC could do anyway which is why the rules were changed.
He also suggests rules would be necessary so that LLPs distributed profits ‘properly’. So no 99% /1% split between husband and wife as happened in Spud’s LLP.
You are (as ever) missing the point. The point being that (as with so many things in life) a bit of something can be good, but too much of it can be bad, very bad in fact. So introducing the concept of a LLC into an economy that has no such concept can indeed have a positive impact. People can invest money into ventures, safe in the knowledge of what they can lose. It enables the risk level to be upped across the economy, which increases the growth rate of the economy. Great. But then you fall foul of the economists trap ‘If a bit of X is good, then loads of it will be great!’. Fast forward to today and you can see that the use of the LLC is now not to allow people to invest new capital into risky investments that otherwise might not take plac,, its to allow the owners of mature businesses to basically wash their hands of the running of them, and hand them over to paid employees, who can then behave precisely as they like. Everyone is protected (apart from the poor schmucks at the bottom of then pile, consumers, workers etc) from their own folly, owners of businesses and senior paid employees. They can between them drive a perfectly decent business into the ground, causing misery and financial loss to millions maybe, and just walk away from it. This creates (as economists seem to remember occasionally) incentives. Bad ones. Rather than run a business conservatively, make steady profits, and grow organically, its far more sensible to load up on debt, start risky ventures and basically act like you’re at a casino. Because if it comes off the owners and management get the profits, but if it crashes and burns they walk away unscathed.
The whole system of modern capitalist could be designed to bring itself into disrepute. Its no surprise the young flirt with socialism, when they look at what we call capitalism today, which is designed to favour narcissist psychopaths, and give them a playground to play in, with no risk to themselves. Look at the way the heads of these global corporations are treated. Like Gods basically. Its despicable, all on the back of LLCs. If the likes of Musk et al had their own money down to the last penny at risk from their businesses they would behave far more conservatively, and take a lot more care with what they do, and how they treat people.
Musk basically hassle his money invested in his ventures…
“Musk basically hassle his money invested in his ventures…”
No he doesn’t. If they all go bust no-one is coming after him for his personal cash and assets. He’s made for life regardless of what happens to the businesses. His neck should be on the line. If one of his businesses goes bust the creditors should be able to take him for every penny to make good their losses. He might then a) take more care, and b) probably wouldn’t have such huge corporations in the first place because its impossible for one man to keep an eye on everything when things get that big. Getting rid of LLCs would make the economy was forced to be more human scale. Allowing LLCs is what allows there to be global mega-corporations, with all the downsides to that.
VP – thanks – this caused me to get the Kleenex out to wipe my screen…
someone unfamiliar with concepts such as ‘double entry’ (other than maybe on deleted files in his laptop)
“ According to his tuberousness, no one has ever changed his behaviour to reduce his tax bill – but then we have the situation where sole traders and partnerships became ltd companies and themselves directors to avoid paying nics .”
He should talk to his wife about Consultants and even GPs.
No one changes behaviour to avoid tax. Except those who followed Murphy’s advice to incorporate their businesses or their nannies:
https://www.theguardian.com/money/2001/jan/14/childcare.observercashsection
https://www.theguardian.com/money/2003/feb/16/tax.observercashsection
Then Murphy claimed he wrote the articles to expose these schemes not to promote them:
https://www.t*xresearch.org.uk/Blog/2010/08/22/petty-pedantic-and-also-wrong/
Until Tim revealed that Murphy had been using the schemes himself for several years after writing the articles:
https://www.timworstall.com/2010/08/in-which-we-are-challenged-by-richard-murphy/
We’ve gone from Mr know-it-all Murphy to Jim, who knows how Musk invests all his money. The billionaires of this world have proportionately, far more invested than ordinary folk. My wife’s business has about one twentieth of our wealth. Musk does not have a Scrooge McDuck vat with 19-20ths of his.
Can you imagine a rule whereby you must put all your money into any LLC? That would mean you would be broke, even if you were worth billions. It’s a totally Murphy-like not thinking through even secondary effects.
Van_Patten said:
“ As far as I’m aware the tax arrangements were legal ”
Wasn’t the problem with the loan schemes that they were basically a sham, that people didn’t really mean what they said they were doing?
The company makes a ‘loan’ of its profits to the shareholder, but if there was never any intention that the loan would be repaid, was it really a loan? And since the borrower controlled the lender, neither the borrower nor the lender really regarded it as a loan.
Chester: We’ve gone from Mr know-it-all Murphy to Jim, who knows how Musk invests all his money.
Yes, we must scrap limited liability companies because a farmer says so. This is an industry in which it’s possible to enjoy an income courtesy of the taxpayer without doing a hand’s turn. To be a farmer in the UK is like being a civil servant working from home but with added whingeing and more space.
Don’t take this as advice, but while the loan scheme might work in theory, ie each single step is logical, isn’t there some overarching provision that strips away “artificial” structures, where the divisions between steps need a purpose beyond sheltering tax liabilities?
Um, no – no LLCs before mid-80s, maybe 90s, but lots of big global corporations – Ford, Standard Oil, IBM, Rolls Royce, Siemens, Daimler, HKSB… They were all mega-corps of their day
The earliest global megacorp that comes to mind is the Vereenigde Nederlandsche Geoctroyeerde Oostindische Compagnie, as Wiki calls it.
But perhaps someone can think of an even earlier one.
Isn’t this a guy who uses a personal corporation to get paid through?
The loans weren’t made to shareholders. That would be caught by s455 CTA 2006 (And its predecessors) “loans to participators”.
Payments were typically made to a trust. The trust made the loan.
It was the insertion of an intermediate entity that got round the then legislation.
FA 2011 tackled this, although there were lots of schemes advanced after this date which supposedly got round the new legislation although to my knowledge none that made it to court were found to work. But that was the problem, the endless court cases.
So the very blunt “loan charge” legislation was passed which effectively deemed any such loans outstanding at 5-4-19 either had to be repaid or would be treated as income on 5-4-19.
Which is why – despite being introduced to counter past schemes, HMRC were able to say it wasn’t retrospective.
“Can you imagine a rule whereby you must put all your money into any LLC? That would mean you would be broke, even if you were worth billions. It’s a totally Murphy-like not thinking through even secondary effects”
Did I say that you have to put all your money into a LLC? No I didn’t. I want LLCs abolished, so that all business owners are liable for the company’s losses if it goes bust. Its immoral that people can extract millions out of a company in profits, then when it goes bust the creditors can’t touch the owners. It enables shady and downright criminal behaviour, because the owners know their other assets are never on the line. I’ve lost count of the number of limited companies I know that have gone bust owing thousands, while the former owners are still living the high life in big fancy houses and the creditors (often small traders) lose out, and are often bankrupted themselves. People who behave like that should be taken out and shot, they are scum. And having LLCs enables them to behave like it.
So you’re not against (just) LLCs, then, but against the concept of limited liability? I’m afraid the advantages of ready capital formation easily outweigh the risk to lenders or suppliers. Lenders can (and do) extract security, including personal guarantees, to ensure recovery – I shed no tears for them. Small traders sometimes lose out – but the enterprises created by limited liability are usually what provides them with their market.
You’re throwing three or four babies out with the bathwater on this one, Jim
“You’re throwing three or four babies out with the bathwater on this one, Jim”
Yeah, coz Western economies are doing soooo well these days…….
@boganboy – wasn’t the British east india company set up in 1600 and lasted to 1874, the earliest global megacorp ?
Without limited liability how are pension schemes meant to work? It’d be like the bad early days of urban dairy supply, when untreated milk from many suppliers got mixed together and if just one source was contaminated then a lot of people would get very sick. Every single asset in your portfolio would potentially be a ticking bomb – how would people get the benefit of diversification?
“Yeah, coz Western economies are doing soooo well these days” is a complete non sequitur of a response. If you think Western economies are crap now because growth, particularly productivity growth, has been relatively slow* then why do something which is going to blow up investment and make growth even slower? Wouldn’t you want more investment, not less?
* Compared to most of post Industrial Revolution history, growth today really is slow, so that’s a fair enough criticism. But pre-IR the growth rate was much lower even than what it is now.
@moqifen
The Dutch East India Company or VOC (https://en.wikipedia.org/wiki/Dutch_East_India_Company) was basically contemporary with the British East India Company but the Dutch one was far more “mega” in the earlier years of its existence. The British one was a very, very distant second. Which I presume is @boganboy’s point.
At the very least limited liability should not be as freely available as it is. You shouldn’t be able to start up an LLC for tuppence ha’penny down. It just encourages sharp practice, fraud and other criminal behaviour. Limited liability has a huge value to the owner of the company, so they should have to pay for it. A deposit of £50k should do it. Held in escrow, if your company goes bust it can be used to pay your creditors, if you just close the company you get it back.
If you can’t raise £50k to start your business then you’ll just have to trade as a sole trader without limited liability until you can raise it. Might teach people a bit of self discipline. Allowing every Joe Shmoe to have access to a LLC is like giving every person who passes their driving test a Ferrari. Great for a few who could cope, most are going to wrap it around a tree.
Alternatively, make it easy to see which companies have directors or major shareholders that have had previous companies go bust owing money. Make it as ubiquitous as the “Scores on the Doors” eatery system. Then it’s easy for potential suppliers to at least do a bit of due diligence, and if no-one will do business with someone with a poor record then that becomes an incentive in itself.
Let’s compare over the period where some regimes allowed (and even promoted) the idea of limited liability, while others didn’t. As a reasonable starting date, I think we would look back to about 1600 CE, and since then, economies that allowed capital formation through limited liability have vastly outperformed the ones that didn’t.
If it’s fraud or criminal behaviour, then prosecute the fraud or criminal behaviour. If it’s a genuine but failed attempt to create a new business – that’s just the way it goes. We tolerate the (frequent) small failures because the successes add so much value to the economy. It’s the entity that has just been started with tuppence in capital that is most likely required to provide personal guarantees for loans, and be on a cash-only basis with suppliers – both of those provide the protections you think we need, without some arbitrary capitalization or escrow requirement. If a small trader frequently gets burned by bad debts on failures of his customers then maybe they should be a little more careful about who they are doing business with, and how (and to whom) they provide credit.
“If it’s fraud or criminal behaviour, then prosecute the fraud or criminal behaviour.”
But it doesn’t get prosecuted does it? As ever we allow something on the promise the State will deal with those who abuse it, and then the State does SFA.
” We tolerate the (frequent) small failures because the successes add so much value to the economy.”
There were nearly 800k new companies formed in the Uk in 2022. Are you telling me that every single one of those was a legitimate business start up that added value to the economy? All those thousands of companies all registered to the same address in some random residential street? Nonsense, the whole process is riddled with fraud, often of the taxpayer., and much of it reduces GDP.
Limited liability is a legal fiction that makes some individuals winners (those whose companies go bust but retain all their other assets) and some losers (those who end up losing money to failed LLCs), nominally for the benefit of society as a whole. But one that makes no attempt to make the winners contribute anything towards the losers. If society wants the benefit having LLCs provide, it should make sure the system ensures the losers (particularly private individuals trading as sole traders) are made good in the event of a LLC collapse.
No – are you telling me that “every single one of those” was a fraud, or intended to enable a fraud? BTW, that comes to what, one in every 80 people in the UK setting up a new company – maybe one in every 40 adults? That doesn’t seem like an inordinate rate, but I have no idea what the “correct” rate of business formation might be – and neither do you, nor do the bureaucrats who would administer whatever “secured company formation” scheme you seek to impose.