Interviewing Lindsay Pentelow: Is taxation too political?

Lindsay Pentelow has been working with Mazars since 1990, rising through the ranks to earn his place as a tax partner. He has been involved in various aspects of the business over the years, but more recently has been involved in the private client sector.  He now leads the tax practice in Mazars.

“Policies can be driven by politics and lobbying – and reach a conclusion that is far more complex than what we started with.”

In recent months, it seems discussion has continued to be driven by politics, as the government attempts to navigate the murky waters of a potentially very unstable future.

Lindsay Pentelow says: “There is a group that thinks tax is evil and everything should be driven towards lowering tax rates. And there’s another group that is more in favour of higher tax. The debate tends to be very politicised, and there’s no real debate about what incentives the tax system creates – are they actually in line with what we want to do economically, and, if not, how can we bring those things in line?”

We should focus on “longer-term thinking”.

Of course, the upcoming Autumn Budget on Monday 29 October features heavily in our discussion. Pentelow points out that “Entrepreneurs’ Relief is one that people talk about every Budget” – it may get some kind of mention later this month, too.

Lindsay Pentelow provides a brief outline of what this means: “It’s basically a relief that allows a business owner, usually a shareholder, to sell their business and only pay 10% tax on the gain. It was introduced several years ago, and it has widened in scope gradually as we went along.”

When considering this in the face of the upcoming Budget, Pentelow adds that “there are many people saying the regime will be restricted – I personally doubt it. There’s talk about restricting that tax break and the money being redirected elsewhere, like to the NHS. I really doubt it will happen. I think it should, though.”

“Lots of people talk in the UK about our productivity problems, and about how our productivity has declined compared to others,” Pentelow says. “It’s a really big issue, economically. Many people say, ‘Why can’t we have a midmarket like they have in Germany with the Mittelstand? Why can’t we have more long-term investments? Why can’t we do those things?’

“And one of the reasons is because the tax system disincentives it. To have long-term investment in something – particularly long-term investment in people which tends to have a a long-term payback period – you need the tax system to be incentivising rather than disincentivising that.

“Applying this to Entrepreneurs’ Relief, if an entrepreneur builds up a company over a short period and sells it, they’ll pay 10% tax on any gains that they make. If, on the other hand, you have a family-run company, where the view is that they want to hold this for the long-term, they want to invest. If those shareholders then want to take value out of the company as a dividend, they will pay 38% tax.

“That’s a huge incentive for people to build up a company short-term – not to make long-term investments into its people – and then sell it. I personally think it would be good to see those rates equalised – so you don’t create this huge disincentive for long-term investment – which would then help to improve our productivity. It’s an example of an area where the incentives that are built into the tax system don’t seem to be economically rational.

“If you compare our set of tax incentives with the situation in some mainland European countries, there isn’t the same tax incentive for short-term behaviour. This isn’t discussed or debated – and it should be.”

“[T]he tax system has grown up in an irrational way.”

In recent months there has been increasing public discussion around HMRC powers.

When asked about this, Pentelow replies: “What has happened historically is that the tax system has grown up in an irrational way. In every Budget there’s a few tweaks to it that makes it more complicated and not necessarily fairer.

“Everyone – the government included – seems to take the view that there is a great pot of money to be had, if people simply fulfilled their tax obligations. Politically, they want to say that tax rates are low, but, equally, they need to raise tax revenue. That creates a gap HMRC has to get increasingly strong powers to try and fill. Over the last several years, there have been a lot of additional powers given to HMRC that arguably give them too much power.

Lindsay Pentelow highlights the example of Follower Notices. These were originally introduced to combat ‘packaged’ tax avoidance schemes which were being employed by multiple taxpayers. However, this has developed so that HMRC broadly has the right to issue a Follower Notice for any case that seems similar to an existing judicial decision. Taxpayers issued with a Follower Notice by HMRC have to either concede or risk significantly higher penalties if they continue to dispute the amount due.

“Arguably, that tilts the balance of power too far towards the revenue,” says Pentelow. “That’s a valid debate to have, and I’m glad people are now recognising that.”

HMRC has a “resource issue”.

HMRC’s ability to effectively communicate with firms and businesses has been cited as an issue that causes later complications.

Pentelow emphasises, however, that HMRC does try to communicate through “various forums that people from the profession are invited to attend.” He says that there appears recently to be a “resource issue”, with resources apparently being diverted to Brexit preparations within HMRC.

He continues: “The last thing I want in tax practice is to have a truly adversarial approach to HMRC. I think we should try to collaborate and find our way through this incredibly complex architecture of tax legislation, and to jointly help taxpayers to navigate it.

“Over the course of my working life, there have been various efforts with tax simplification and all you ever end up with is an annual Budget that adds to the complexity. It’s almost like people have thrown up their hands and said, ‘This is too big a problem.’”

“The UK is an attractive option for inbound investment.”

 Moving on to corporate tax rates, and whether these really will change post-Brexit to help businesses remain attractive to outside investment, Pentelow says: “If we step back a bit and consider what government has done – not just this government, but previous governments, too – they have tried to ensure that the UK is an attractive option for inbound investment. They’ve taken the view that the best way to do that is to have low corporate tax rates and make up for that on the tax take from VAT increasing—PAYE increasing—because they are employing people.”

Although no government will want to discourage inbound investment, Pentelow argues that this also “leads to issues such as Google or Amazon – because the incentives have become too unbalanced in a particular direction. And, in any event, this does disadvantage UK business. If an overseas company can do business in the UK and only pay very small amounts of tax, but UK companies pay the full rate, even if it’s a low rate, then that is a competitive disadvantage.”

The Brexit-factor

Pentelow continues: “What happens after Brexit is going to be interesting. If you listen to people like the European Research Group, it would seem they’re suggesting that the way we should be going – when it comes to economic incentives that are set up by the tax system – is to have lower tax rates still, and reduced regulations.”

In the long-term, Pentelow believes that investment from international businesses cannot be the complete solution, since this can lead to “more relatively low-paying jobs”, which goes against the UK’s need to invest in skills, infrastructure, and other capital investment that increases the country’s productivity. Post referendum he says  “there is a lot of evidence to date that the US has bought a lot more into UK businesses since sterling fell, just because they’re cheaper.” In contrast, EU companies investment into the likes of UK M&A’s has fallen by 5%.

“I think the UK, once it leaves the EU, is going to have a choice as to which way it goes,” the tax partner claims. “Do we continue to take that dogmatic line of low tax, low regulation, trying to attract inbound investment?” Pentelow asks. “Or is there another path that we can take that acknowledges the fact that there are going to be skills shortages and that we really have to invest long-term to improve productivity and at least make that one good thing to come out of Brexit?”

The future of the tax industry

The future of the UK’s economy is still looking to be rather unpredictable – the tax industry is certainly not exempt from this. However, as Lindsay Pentelow points out: “Every time there is any sort of economic change, it has a knock-on effect on business and therefore how business needs to interact with the tax system.”

For example, Brexit is likely to bring an end to “frictionless trade” with Europe, which is a fairly conclusive assumption that can be made – unless a mutually beneficial deal is reached in the next few months. As a result, many companies will need to restructure their international supply chains and think about new tax issues arising from this.

Lindsay Pentelow concludes: “Both for the reason of growing complexity and general changes in the economy bringing about changes in tax – accountants are going to continue to be needed. The thing I like about the way things have developed over the last several years is that we have to really understand each individual circumstance, and to try and create the best solution.

“There is always a unique solution, as every circumstance is different, rather than what we had in the past, which was the tendency to think of tax planning as a packaged product.”