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Tax Planning & Tax Management – Background
The weekend saw VE Day celebrations.
Despite reports of social distancing busting conga lines, commemorations were generally low key.
However, this month also marked 80 years since Winston Churchill became Prime Minister of the UK.
Of course, Churchill was the man that grabbed the war by the scruff of the neck when the country was in its ‘darkest hour’.
But by this time, Churchill had lived many full lives already. He had led a turbulent political career and, following the disaster of the Dardanelles campaign, left this job in Government to serve on the front line on the Western Front. He had already been involved, and taken prisoner, in the Boer War.
As well as being a man of action, Churchill also had a lot to say about most things.
Tax was no exception.
He once stated that:
“Taxes are an evil—a necessary evil, but still an evil, and the fewer we have of them the better”.
Famously, he also opined that:
“the idea that a nation can tax itself into prosperity is one of the crudest delusions which has ever fuddled the human mind.”
Perhaps surprisingly for a man from a family of significant wealth and social standing, he believed that earned income should be taxed more lightly than wealth. It is interesting that calls for a shift from taxes on income to wealth and capital still bubble away hotly.
However, it must be said that Churchill had a very interesting relationship with the tax man.
His ‘problems’ with the tax man appear to surface following the end of the first world war, when income tax reached the rate of 50%. Churchill at the time made most of his money as an author (as he continued to do for most of his life). At that time, authors were allowed to spread their payments of tax over three years.
However, this, combined with Churchill’s profound ability to spend money, meant he essentially ran his own Ponzi scheme. Spending the advances he received quickly and having to find other paying writing jobs to cover the tax due on them.
I know many self-employed people who will sympathise with this predicament!
The wheels finally fell off when he was appointed as Chancellor of the Exchequer in 1925 and had to ditch his side hustles.
By this time he owed the equivalent of £400k in back taxes.
Today, we would perhaps try and arrange a time to pay with HMRC. However, as Chancellor, you don’t need to phone HMRC’s helpline and wait patiently in a queue listening to Greensleeves.
Instead, Churchill summoned the chairman of the Inland Revenue, a chap called Richard Hopkins, and asked for his advice.
As you would expect, Mr Hopkins decided it was proper to speak to his technical staff.
After doing so, Hopkins then wrote to Churchill and pointed out a nice little wheeze. Quite simply, if he retired as an author he could treat any hereto uncollected fees as a receipt of capital and, as such, there would be no tax.
And that was that.
Except it wasn’t.
Churchill’s spendthrift ways came back to bite him on his derriere. He found it was quite impossible for him to live on his Government salary. So once again, it was time to reignite his writing career.
Hopkins was called for again.
The question was whether Churchill could come out of retirement without unsettling the previous accord.
Hopkins said it would be fine.
Income from Churchill’s stop start writing career continued to grow (as did his unpaid tax liabilities) and he played the retirement trick a couple of other times.
At one point, the Inland Revenue did bare its teeth and raised an assessment on his side projects.
Although, despite this being in the midst of the second world war, Churchill appealed the assessment at a tribunal and found a sympathetic judge who upheld the appeal. The Revenue decided not to appeal.
Of course, we don’t all have Churchill’s skills or, indeed, the head of HMRC on speed-dial. However, effective dialogue with HMRC can help progress and resolve issues in a more satisfactory manner. If you have had one of those dreaded brown envelopes, then please do not hesitate to contact us.
If you have any queries about this article, or tax matters in general, then please do get in touch.
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