A gem from the past:
Alice in Primarololand
By Robert Maas
Alice went through the little door. It was very misty but Alice saw a chair in front of her so she sat on it. She could hear a voice. Suddenly the mist cleared and Alice saw that she was sitting beside a huge desk and sitting at the other side was a very fierce-looking man.
"I do beg your pardon", said Alice "I don't think we've been introduced. Where am I?".
"Not introduced?", said the fierce-looking man. "I'm Hector the Inspector, this is Primarololand, and you are in deep trouble my girl". "Trouble?" said Alice questioningly. "Yes, trouble, Alice" said the fierce-looking man, "you have seriously underdeclared your income for 2001/02.
"Oh dear", said Alice, who did not have the faintest idea what the fierce-looking man was talking about.
"Let me recap", said Hector - for he was not fierce at all but like most tax Inspectors was really very helpful. "You, Alice are a computer programmer. You obtain work through your service company, Alice Associates Ltd, which you use to avoid tax".
"I have never avoided tax", Alice heard herself say (although she could not work out why, as she did not know what a computer programmer was and did not think that little girls had to pay tax), "I set up the company purely to obtain work. Computer companies are reluctant to take people on as employees and where they need staff for a project they will not engage casual staff direct but insist that they contract through a company".
"Be that as it may" said Hector, you have avoided tax". "But I didn't" said Alice. "No?", said Hector, questioningly, "but surely you accept that there needs to be legislation to stop people avoiding tax". "Of course", said Alice politely. "And I'm sure", said Hector "that you would agree that during the year to 5 April 2001 you worked on eight different assignments in different parts of the country. And that you incurred heavy travelling expenses to get to those jobs which you charged to Alice Associates Ltd. "Of course" said Alice, a little puzzled, "how could I do the jobs if I did not incur travel costs". "Well," said Hector, "if you had contracted direct you would not have been able to claim a deduction from your earnings for those costs".
Who pays the expenses?
"But I couldn't have contracted direct", retorted Alice, "the clients would not employ me direct, and in any case a law that does not allow travel costs when someone has to work hundreds of miles away from home is stupid".
Hector ignored Alice. "And Alice Associates Ltd. has spent hundreds of pounds on courses for you and thousands of pounds on the latest equipment". "I have to keep up to date", Alice heard herself say. "Why?", said Hector, "If the clients wanted you to be up to date surely they would pay for the courses". "Not at all", said Alice, "they would engage someone else instead". "Well" said Hector, "getting tax relief for your travel expenses and your course fees sounds like tax avoidance to me".
"In any event", he continued, "Alice Associates Ltd earned 60,000 during its year to 5 April 2001. It paid you 500 a month. It spent 3,000 on your fares and 4,000 on course fees. This produced a profit of 47,000 which you took out as a bonus on 8 June 2002 when your accountant worked out the draft figures".
"Yes" said Alice. "Then you admit it", said Hector, "you drew a bonus of 47,000 during 2001/02 which you did not declare on your tax return".
"Of course not", said Alice, "I put it on my 2000/01 return". "Oh no you didn't" said Hector, picking up a form with a pretty pink strip along the top and placing it in front of Alice. "Here it is", said Alice pointing, "Alice Associates Ltd. 60,000". That is 12,000 salary and 48,000 under the personal service company rules.
Notional earnings
"What has that got to do with it?" said Hector. "That is your notional earnings up to 5 April 2001". "That's right" said Alice. "The 60,000 of income, less five per cent and less the travel expenses allowable under section 198 and less my monthly salary". Alice was really very impressed with herself. She had not realised that she knew these things.
"What has that got to do with the 47,000 bonus?" asked Hector. "It's the same thing", said Alice. "I am taxed on a notional figure and having paid the tax the net amount must belong to me. That's just common-sense", she added triumphantly. "Must nothing", said Hector, common-sense has nothing to do with it. The law does not allow you not to pay tax on the bonus". "Then it's a silly law" said Alice. "Primarololand law is never silly", said Hector, "it is fair". "How can it be fair to demand tax twice on the same thing?", asked Alice. "It's not on the same thing" retorted Hector. "You are taxed on a notional bonus and then you are taxed on your real bonus. They're different things. If you don't agree you can always appeal to the Red Queen".
"There's only been one lot of income" said Alice angrily, "of course I'll appeal" and she stamped her foot with rage.
At that the walls of the room fell in and the desk disappeared, and poor Hector with it and Alice found herself sitting in a garden. And then she saw a funny-looking man who was flat like a playing card.
Enter the Red Queen
"All rise for the Red Queen" intoned the man and Alice saw a small procession approaching. When it came near to Alice they all stopped and looked at her.
"Is someone challenging my fair laws", said the Red Queen indignantly. "Off with her head" and she glared at Alice. Alice saw that the White Rabbit was beside the Queen and heard him half whisper "You have to hear the case first Ma'am". "Very well" said the Red Queen and, turning to Alice, she said "Explain yourself". "There must be something wrong" said Alice tearfully. "I have never tried to avoid tax but it cannot be right to tax me on the earnings of Alice Associates Ltd. under the personal service company rules and then tax me again on the same earnings when they are paid to me. That's double taxation. And I do like my head", she added, "my neck would look quite strange without it".
"Of course, it's not double taxation" thundered the Red Queen. "We tax you once on a notional amount and then we tax you again on the real amount. Notional and real are not the same thing. If we tax you once each on two different things how can that be double taxation? Didn't they teach you anything at school".
Alice burst into tears. The White Rabbit said very diffidently to the Red Queen "Ma'am remember that much of her education was under the thirteen years of Tory misrule" and he explained to Alice that the country had been governed for eleven years by a wicked witch and then for two years by a grey man who's name nobody could remember and then happily the boy King, King Tony, with the Commons High Chancellor (of the Exchequer), Gordon - who strangely was more important than the Red Queen - and the Red Queen had taken control and transformed the economy and the tax system and had turned the country into a realm of peace and happiness.
Fairness
"Oh of course", said the Red Queen and she turned to Alice and spoke more kindly. "It's called fairness" she explained. "In Primarololand fairness in the tax system is very important. For example it wouldn't be fair to tax some people at twice the rate as others". "No" said Alice, before realising that she had interrupted. The Red Queen glared at her. "But if we use a single set of transactions to calculate a real sum and then use that same set to calculate a notional sum we can collect twice as much tax in a fair manner".
"That's not fair", said Alice. "It's unreasonable". At the word unreasonable everyone looked uneasy. "Oh dear", said the White Rabbit to Alice, "I fear that you have upset her now. The personal service company rules are a pet project of Gordon and he put the Red Queen in charge of their implementation. She won't be happy if someone thinks she has been unreasonable".
"Unreasonable!!" thundered the Red Queen "it's perfectly reasonable to tax the notional amount and tax the real amount, two lots of tax from those who try to avoid tax is perfectly fair and reasonable". "But I haven't tried to avoid tax", said Alice miserably. "I haven't taken a dividend from Alice Associates Ltd, I haven't tried to accumulate profits, I'm happy to pay tax on my earnings; but how can I pay two lots of tax on one lot of earnings?" "You can get two lots of deductions" said the Red Queen. "But that's no help", said Alice "as the company has no other income and no need to accumulate money". "You can draw dividends instead of a bonus", retorted the Red Queen. "We will then give you relief by not taxing the dividend as you will have already been taxed on the notional earnings". "But that would be National Insurance avoidance" said Alice. "How can it be fair to give relief against double taxation when people try to avoid tax but to tax them twice when they don't". "Appeal dismissed" said the Red Queen curtly, "Off with her head". At that a whole pack of card-men swarmed around Alice and carried her off. Alice fell asleep. Suddenly she awoke lying in her own little bed. Gingerly she slid a finger up her neck and was relieved to find her head still on top of it.
For real? Surely not
Fortunately for Alice, Primarololand is an imaginary country. Surely that couldn't happen in England? Or couldn't it? The Inland Revenue have confirmed to me that the UK personal service company rules work just as I have described for Primarololand. Like the Red Queen, they say it is not double taxation; the notional earnings are a different thing from the real earnings and in any case they will allow the company a deduction for both the notional salary and the real salary.
They were at pains to tell me that this does not mean that the Inland Revenue are not fair and reasonable. It is simply that that is the law. In other words, it was not the Revenue's decision to deny relief; that was the decision of Parliament. The above problem was pointed out to the Revenue, not only by me but also by a number of other people, last April.
The above is by no means the only area where the rules seem to me to be blatantly unfair. The Finance Bill Standing Committee spent four and a half hours discussing Schedule 12, which is quite a lot of time as compared with the rest of the Bill. There were five divisions, all on opposition amendments and all heavily defeated. It accordingly seems fair to attribute responsibility for the Schedule to those who consistently voted not to change it, namely Graham Allan (Nottingham North), Harold Best (Leeds North West), Roger Casale (Wimbledon), Michael Clapham (Barnsley West & Penistone), Tony Colman (Putney), Barry Gardiner (Brent North), John Healey (Wentworth), Fraser Kemp (Houghton & Washington East), Jackie Lawrence (Preseli Pembrokeshire), Christopher Leslie (Shipley), Kali Mountford (Colne Valley), Nick Palmer (Brextowe), Chris Pond (Gravesham), Dawn Primarolo (Bristol South), Bill Rammell (Harlow), Joan Ryan (Enfield North), Stephen Timms (East Ham), Bill Tynan (Hamilton South) and Rose Winterton (Doncaster Central)
Barry Gardiner is my own constituency MP. He strikes me as a fair and reasonable person. He has been helpful to me in the past. I will therefore send him a copy of this article and ask him to explain why two lots of tax on one lot of income appears fair to him. If your MP is on the above list you may care to do likewise.
Alice in Primarololand
By Robert Maas
Alice went through the little door. It was very misty but Alice saw a chair in front of her so she sat on it. She could hear a voice. Suddenly the mist cleared and Alice saw that she was sitting beside a huge desk and sitting at the other side was a very fierce-looking man.
"I do beg your pardon", said Alice "I don't think we've been introduced. Where am I?".
"Not introduced?", said the fierce-looking man. "I'm Hector the Inspector, this is Primarololand, and you are in deep trouble my girl". "Trouble?" said Alice questioningly. "Yes, trouble, Alice" said the fierce-looking man, "you have seriously underdeclared your income for 2001/02.
"Oh dear", said Alice, who did not have the faintest idea what the fierce-looking man was talking about.
"Let me recap", said Hector - for he was not fierce at all but like most tax Inspectors was really very helpful. "You, Alice are a computer programmer. You obtain work through your service company, Alice Associates Ltd, which you use to avoid tax".
"I have never avoided tax", Alice heard herself say (although she could not work out why, as she did not know what a computer programmer was and did not think that little girls had to pay tax), "I set up the company purely to obtain work. Computer companies are reluctant to take people on as employees and where they need staff for a project they will not engage casual staff direct but insist that they contract through a company".
"Be that as it may" said Hector, you have avoided tax". "But I didn't" said Alice. "No?", said Hector, questioningly, "but surely you accept that there needs to be legislation to stop people avoiding tax". "Of course", said Alice politely. "And I'm sure", said Hector "that you would agree that during the year to 5 April 2001 you worked on eight different assignments in different parts of the country. And that you incurred heavy travelling expenses to get to those jobs which you charged to Alice Associates Ltd. "Of course" said Alice, a little puzzled, "how could I do the jobs if I did not incur travel costs". "Well," said Hector, "if you had contracted direct you would not have been able to claim a deduction from your earnings for those costs".
Who pays the expenses?
"But I couldn't have contracted direct", retorted Alice, "the clients would not employ me direct, and in any case a law that does not allow travel costs when someone has to work hundreds of miles away from home is stupid".
Hector ignored Alice. "And Alice Associates Ltd. has spent hundreds of pounds on courses for you and thousands of pounds on the latest equipment". "I have to keep up to date", Alice heard herself say. "Why?", said Hector, "If the clients wanted you to be up to date surely they would pay for the courses". "Not at all", said Alice, "they would engage someone else instead". "Well" said Hector, "getting tax relief for your travel expenses and your course fees sounds like tax avoidance to me".
"In any event", he continued, "Alice Associates Ltd earned 60,000 during its year to 5 April 2001. It paid you 500 a month. It spent 3,000 on your fares and 4,000 on course fees. This produced a profit of 47,000 which you took out as a bonus on 8 June 2002 when your accountant worked out the draft figures".
"Yes" said Alice. "Then you admit it", said Hector, "you drew a bonus of 47,000 during 2001/02 which you did not declare on your tax return".
"Of course not", said Alice, "I put it on my 2000/01 return". "Oh no you didn't" said Hector, picking up a form with a pretty pink strip along the top and placing it in front of Alice. "Here it is", said Alice pointing, "Alice Associates Ltd. 60,000". That is 12,000 salary and 48,000 under the personal service company rules.
Notional earnings
"What has that got to do with it?" said Hector. "That is your notional earnings up to 5 April 2001". "That's right" said Alice. "The 60,000 of income, less five per cent and less the travel expenses allowable under section 198 and less my monthly salary". Alice was really very impressed with herself. She had not realised that she knew these things.
"What has that got to do with the 47,000 bonus?" asked Hector. "It's the same thing", said Alice. "I am taxed on a notional figure and having paid the tax the net amount must belong to me. That's just common-sense", she added triumphantly. "Must nothing", said Hector, common-sense has nothing to do with it. The law does not allow you not to pay tax on the bonus". "Then it's a silly law" said Alice. "Primarololand law is never silly", said Hector, "it is fair". "How can it be fair to demand tax twice on the same thing?", asked Alice. "It's not on the same thing" retorted Hector. "You are taxed on a notional bonus and then you are taxed on your real bonus. They're different things. If you don't agree you can always appeal to the Red Queen".
"There's only been one lot of income" said Alice angrily, "of course I'll appeal" and she stamped her foot with rage.
At that the walls of the room fell in and the desk disappeared, and poor Hector with it and Alice found herself sitting in a garden. And then she saw a funny-looking man who was flat like a playing card.
Enter the Red Queen
"All rise for the Red Queen" intoned the man and Alice saw a small procession approaching. When it came near to Alice they all stopped and looked at her.
"Is someone challenging my fair laws", said the Red Queen indignantly. "Off with her head" and she glared at Alice. Alice saw that the White Rabbit was beside the Queen and heard him half whisper "You have to hear the case first Ma'am". "Very well" said the Red Queen and, turning to Alice, she said "Explain yourself". "There must be something wrong" said Alice tearfully. "I have never tried to avoid tax but it cannot be right to tax me on the earnings of Alice Associates Ltd. under the personal service company rules and then tax me again on the same earnings when they are paid to me. That's double taxation. And I do like my head", she added, "my neck would look quite strange without it".
"Of course, it's not double taxation" thundered the Red Queen. "We tax you once on a notional amount and then we tax you again on the real amount. Notional and real are not the same thing. If we tax you once each on two different things how can that be double taxation? Didn't they teach you anything at school".
Alice burst into tears. The White Rabbit said very diffidently to the Red Queen "Ma'am remember that much of her education was under the thirteen years of Tory misrule" and he explained to Alice that the country had been governed for eleven years by a wicked witch and then for two years by a grey man who's name nobody could remember and then happily the boy King, King Tony, with the Commons High Chancellor (of the Exchequer), Gordon - who strangely was more important than the Red Queen - and the Red Queen had taken control and transformed the economy and the tax system and had turned the country into a realm of peace and happiness.
Fairness
"Oh of course", said the Red Queen and she turned to Alice and spoke more kindly. "It's called fairness" she explained. "In Primarololand fairness in the tax system is very important. For example it wouldn't be fair to tax some people at twice the rate as others". "No" said Alice, before realising that she had interrupted. The Red Queen glared at her. "But if we use a single set of transactions to calculate a real sum and then use that same set to calculate a notional sum we can collect twice as much tax in a fair manner".
"That's not fair", said Alice. "It's unreasonable". At the word unreasonable everyone looked uneasy. "Oh dear", said the White Rabbit to Alice, "I fear that you have upset her now. The personal service company rules are a pet project of Gordon and he put the Red Queen in charge of their implementation. She won't be happy if someone thinks she has been unreasonable".
"Unreasonable!!" thundered the Red Queen "it's perfectly reasonable to tax the notional amount and tax the real amount, two lots of tax from those who try to avoid tax is perfectly fair and reasonable". "But I haven't tried to avoid tax", said Alice miserably. "I haven't taken a dividend from Alice Associates Ltd, I haven't tried to accumulate profits, I'm happy to pay tax on my earnings; but how can I pay two lots of tax on one lot of earnings?" "You can get two lots of deductions" said the Red Queen. "But that's no help", said Alice "as the company has no other income and no need to accumulate money". "You can draw dividends instead of a bonus", retorted the Red Queen. "We will then give you relief by not taxing the dividend as you will have already been taxed on the notional earnings". "But that would be National Insurance avoidance" said Alice. "How can it be fair to give relief against double taxation when people try to avoid tax but to tax them twice when they don't". "Appeal dismissed" said the Red Queen curtly, "Off with her head". At that a whole pack of card-men swarmed around Alice and carried her off. Alice fell asleep. Suddenly she awoke lying in her own little bed. Gingerly she slid a finger up her neck and was relieved to find her head still on top of it.
For real? Surely not
Fortunately for Alice, Primarololand is an imaginary country. Surely that couldn't happen in England? Or couldn't it? The Inland Revenue have confirmed to me that the UK personal service company rules work just as I have described for Primarololand. Like the Red Queen, they say it is not double taxation; the notional earnings are a different thing from the real earnings and in any case they will allow the company a deduction for both the notional salary and the real salary.
They were at pains to tell me that this does not mean that the Inland Revenue are not fair and reasonable. It is simply that that is the law. In other words, it was not the Revenue's decision to deny relief; that was the decision of Parliament. The above problem was pointed out to the Revenue, not only by me but also by a number of other people, last April.
The above is by no means the only area where the rules seem to me to be blatantly unfair. The Finance Bill Standing Committee spent four and a half hours discussing Schedule 12, which is quite a lot of time as compared with the rest of the Bill. There were five divisions, all on opposition amendments and all heavily defeated. It accordingly seems fair to attribute responsibility for the Schedule to those who consistently voted not to change it, namely Graham Allan (Nottingham North), Harold Best (Leeds North West), Roger Casale (Wimbledon), Michael Clapham (Barnsley West & Penistone), Tony Colman (Putney), Barry Gardiner (Brent North), John Healey (Wentworth), Fraser Kemp (Houghton & Washington East), Jackie Lawrence (Preseli Pembrokeshire), Christopher Leslie (Shipley), Kali Mountford (Colne Valley), Nick Palmer (Brextowe), Chris Pond (Gravesham), Dawn Primarolo (Bristol South), Bill Rammell (Harlow), Joan Ryan (Enfield North), Stephen Timms (East Ham), Bill Tynan (Hamilton South) and Rose Winterton (Doncaster Central)
Barry Gardiner is my own constituency MP. He strikes me as a fair and reasonable person. He has been helpful to me in the past. I will therefore send him a copy of this article and ask him to explain why two lots of tax on one lot of income appears fair to him. If your MP is on the above list you may care to do likewise.
