Penalties and Companies

Richard Murphy looks at a consultation document by HM Revenue & Customs and asks why the tax penalty regime seems to be biased towards limited companies.

Richard Murphy

I do not object to the existence of limited companies. I might have done in the mid-19th century when they first became readily available. That is because I find it completely conceptually baffling why a group of people (or these days, just one person) can sign a piece of paper, pay a small fee and be protected from their creditors. If ever there was a licence to abuse, this is surely it. And as a matter of fact the abuse has gone on ever since. But it’s far too late to object now.

Anyway, I know all the advantages well run companies can bring. Its ability to conglomerate capital with limited risk to those who put their capital at the disposal of others in the hope of making an economic return was one of the great inventions that transformed this country, and others. But that’s not the way most limited companies are these days.

As almost anyone knows, a UK limited company can be purchased at almost any time of the day or night, without any proof of identity being required and for well under £100. For the tax evader it is the best investment they can make. Of that sum just £15 makes its way to HM Treasury.

Why is it so good a deal for those who want to abuse? Let’s start at the very beginning. A limited company does not suffer penalties for failure to notify its existence to HM Revenue & Customs. Companies House does it for them. It even provides automatic notification of a change of address. Immediately one penalty that afflicts the self employed is instantly avoided.

Then, of course, the Revenue write to ask for details regarding the company, its proposed trade and who might be running it. But if you ignore form CT41G nothing happens. No penalty arises.

And so it continues. Of course the limited company must register for VAT, PAYE and make its payments on time. But who knows if it does not?

In theory the company must, as do the self employed, submit its tax returns and accounts to the Revenue. But in the case of the company the accounts must also be submitted to the Registrar of Companies, with risk of further penalty if omission occurs. It seems an onerous regime.

Except that is not true for the tax evader. For those who wish to persistently avoid their obligation to pay tax there is in the case of a limited company the perfect ‘easy exit' option. This is provided by form 652a, readily available for download from the website of Companies House. What this form asks the officers of the company (all two of them at most) to confirm is that the company has not changed its name in the three months preceding submission, that it has not traded in that period and that it has no outstanding liabilities. It is unlikely that the tax evader will have any problem signing so innocent a declaration, and on doing so in exchange for the princely sum of £10 they can, for all practical purposes, then be exonerated from all further liabilities or risk of taxation on any activity they might have undertaken.

In my practising career I have never known an application for striking off submitted within a year or so of incorporation, and where the entity has never registered for any tax, be subject to objection from HM Revenue & Customs. It seems they take a simple view: striking off removes another potential non-compliance issue by removing the statistic from their file.

The individual, of course, has no such luck. And as is apparent from the Revenue’s proposals, those who choose to avoid their obligation in an individual capacity will soon face fixed penalties for failing to notify, failing to submit on time and failing to pay on time, with all of them to be followed by relatively penal interest charges and tax based penalties for allowing the matter to progress. Leaving aside for the moment the obvious risk inherent in these proposals from multiple punishment being imposed for a single offence (and I think that considerable, even on occasion when no loss has arisen to HMRC) it is wholly unjust that the fraudster using a limited company can avoid all risk of such penalty by incorporating.

Worse, I find it offensive that the law positively assists the fraudster in this pursuit. I am amazed that it is impossible to register for any form of financial advice within the private sector in the UK without proving who you are, where you live and (so it would sometimes seem) what your inside leg measurement is. And yet a company can be bought from the government with no proof of identity required. A person can also be recorded as its director with no proof of identity required. And a registered office can be recorded where the only check is that a valid postcode has been used.

Worse, nominees are allowed to be used for all these roles. And bearer shares which can forever hide the true identity of ownership of the entity are still legal in the UK, against the advice of all money laundering authorities the world over.

If this gave rise to an isolated occurrence of striking off I could forgive it. But it does not. About 100,000 companies are struck from the Register each year: from my experience a considerable number will do so having traded and without having settled their liabilities. Indeed, I have seen the Revenue seemingly encourage the process on occasion to help them close a file on a taxpayer who has no hope of paying.

But let’s be clear: there is nothing to stop the person owning the company having swapped its name to a new entity a few months before striking off, and so continue trading with just the company number changed, and without almost anyone (their bank included) being aware for many years and in that way stay quite beyond the attention of any tax authority.

This is absurd. The Revenue cannot seek to extend the penalty regime on individuals who put their own assets at risk, and accept unlimited liability for doing so in the way that they are proposing whilst the government they serve provides the perfect mechanism for those wishing to evade their responsibility, to which HM Revenue & Customs turn a persistent blind eye.

All tax advisers could raise objection to this oversight. Penalty reform could be reappraised as a result. It’s up to you.

Article Added Friday, 08 August 2008

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