Thursday, December 31, 2009

Review of TaxBuzz blog 2009

The TaxBuzz blog is now over two years old and contains over 200 posts covering a wide range of tax related topics. As 2009 draws to a close, you may be interested to see this summary and review of my posts over the last 12 months.

At the start of 2009 I set myself a target to add at least two topical tax related commentary or policy related posts to the blog each week. I've tried to steer clear of trying to achieve the impossible - ie: commenting on every tax related story highlighted by the media. Equally I did not want this to become a series of posts about tax planning. So how would I decide what to write about? And could I identify a consistent style or approach?

How did I do?
Well, in 2008 there were only 86 posts. In 2009 we moved up to 113 including this one. So, on average I exceeded my target although I didn't manage 2 posts every single week. Looking back I can see that some of the posts are much longer than I would have liked - and longer than I had anticipated. As Abraham Lincoln is reputed to have said: “I'm sorry I wrote such a long letter. I did not have the time to write a short one.” One of my ambitions for 2010 is to write shorter pieces for the TaxBuzz blog.

As you might expect from the note at the top of this blog many of the posts were inspired by tax related stories in the media. In some cases I simply offered support, clarification and, where appropriate, balance. More frequently though I questioned, challenged or disputed news reports that had the potential to mislead; I sought to offer a more informed view. This was particularly evident when I posted 3 items by reference to the TV programme 'Taking on the Taxman' last April. Here's a reminder of some others:
There were 4 other key areas of focus in 2009:
  • Forecasts, predictions and insights - Anticipating the impact and behavioural changes that will follow from tax developments and announcements;
  • MPs expenses - I first started writing about the tax related issues in a post on 11 February 2008, then in January and March 2009 before a series of posts in May 2009 when the Telegraph revelations were published. I've returned to the subject a couple of times more recently too.
  • Hard to believe - a number of posts highlighted bizarre but true topical stories about our tax system.
  • Tax avoidance - even I'm surprised by how often I have written about this subject. Many posts highlight the commonly overlooked risks and downsides of structured schemes; others refer to misunderstandings as to what the system allows; and others refer to changes in the tax rules that affect the likely success and penalties for abusive tax avoidance and tax evasion.
Many thanks to all those who have read, linked to, retweeted, ticked the reaction box at the end of a post or added comments to posts on the TaxBuzz blog this year.

It was quite instructive to look back at all the posts made during 2009. Many stood out and some I had forgotten. One of these amused me especially. It's from February and was titled: Instead of customers, why doesn't the taxman call us...? Having considered many options, including those suggested by others, my conclusion was that we should be known as CBI (Companies, Businesses and Individuals).

Please feel free to add below your thoughts and perceptions of the TaxBuzz blog 2009.

Wednesday, December 30, 2009

Inheritance tax - Who's right? Who is really at risk?

The two main parties are arguing as to the impact of inheritance tax and who would benefit if the rules were changed.

Back in October I posted an item here: IHT receipts FALL under Labour - what's going on? This followed a report in the Guardian that Inheritance tax drops to all-time low under Labour. Exploring the issue further I concluded that the number of estates paying IHT would fall in the immediate future. My conclusions were drawn from HMRC's data and the impact of recent changes to the IHT rules.

I suggested that the number of estates paying IHT would fall, probably to something around 4% which accords with the Chancellor's later assertion in his PBR that "fewer than three per cent of estates will pay inheritance tax." Leaving aside arguments as to whether the tax is wholly "avoidable" if one is very wealthy and employs top tax experts, this is not going to affect 'Middle-England'.

The Tories have now extrapolated data from the Office of National Statistics that seems to show that over 4 million adults have non-pension wealth above the current inheritance tax threshold of £325,000. And this leads to the conclusion that one in five families and one in 10 people above the age of 18 are potentially liable to IHT.

It's simply not true however to suggest that "More than 4million face inheritance tax bombshell under Labour." Over and above the £325k per head exemption the rules also provide further exemptions (in effect) for qualifying business and agricultural assets.

These exemptions also mean that some very wealthy people are not currently subject to IHT as there is no cap on the value of qualifying assets that can escape IHT.

In any event, it seems fair to review the Government's data to which I referred above. If it is wrong the Tories' plans will benefit Middle-England as they assert. On the other hand, if the data is reliable, the Tories' plans will simply improve the well being and perceptions of Middle-England as they are not really at risk of a substantial liability to IHT.

The real issue is the soaring value of houses (homes) owned by people when they die and the disparity in such values across the UK. The average price of a home is now £162k so to many people only the very wealthy own homes worth £800k (which together with other assets could take an estate upto £1m). However in parts of London and the South East this is not uncommon. And I assume this is why the Tories want to raise the headline threshold so high. It might be less contentious to do something I think John Major suggested in the 1990s and John Redwood proposed, to a degree, in 2007. To exempt the main home from IHT?

The key issue for both parties is to shift the fear of inheritance tax from the consciousness of average families - wherever they live. If this requires changes to the tax rules, and I think it does, then such changes should be welcomed.

And this would also lead to a consequential and welcome development. The end of inheritance tax avoidance seminars run by promoters of standard trust-based 'solutions' - many of which are dubious in the extreme - especially in so far as they purport to reduce the IHT payable by reference to the value of your main residence.

I've heard stories of how slick presentations result in long queues of audience members who sign up and pay for a supposedly legal document there and then. They are encouraged to do this without any real regard for their personal situations and without the benefit of any qualified tax or legal advice. That's NEVER a good idea. If you have any IHT concerns do speak to a suitably qualified and independent tax adviser.

Thursday, December 17, 2009

Tax Tangle - "a vague and very likely muddled arrangement"

This tax tangle was apparent from the decision of a recent VAT tribunal case. Balkwill v Revenue & Customs [2009] UKFTT 314 (TC) (19 November 2009)

The case concerned a plumber who claimed that he sold his business and retired in 2001. He deregistered from VAT but continued to declare profits from the business on his personal tax returns. HMRC noted that the turnover being disclosed was just above the VAT registration threshold and claimed that he should have remained registered until 2004.

The evidence pointed to a most unusual arrangement between the ‘retired’ plumber and the Mr Smith to whom the business was sold in 2001. According to the Tribunal Judge "it very much sounded as if no accountant or solicitor had been involved in clarifying the form of what at best may have been a vague and very likely muddled arrangement".

At the time of the Tribunal hearing in July 2009, the plumber was over 80 years of age, in poor health and recently out of hospital. The taxpayer contended that he was living off the state pension and was unable in any case to pay a VAT assessment for over £19,000 plus interest.

The Tribunal judge accepted that HMRC had acted in proper manner and had evidence that VAT was properly due. However, it was not evident that the taxpayer made false claims but rather significantly misunderstood his filing requirements.
"we suspect that whatever the arrangement was it will have been vague and entirely capable of being misunderstood."

"this is not a case where we have fundamentally dis-believed all the Appellant's evidence. We frankly do not know what happened in this case, but we believe that there was probably some vague arrangement between the Appellant and Mr. Smith, and that the current confused state of affairs probably results from misunderstandings, rather than simply from a false claim by the Appellant who appreciates that he was trading at all times until 2004."

"we very much hope that HMRC will not proceed to try to collect any of the tax in dispute. "
As will be apparent from these quotes the taxpayer's appeal was dismissed but was accompanied by a strong plea from the Tribunal Judge that HMRC show considerable restraint in seeking payment of the assessment and penalties due and not proceed to collect any tax due.

Sadly I fear that the Tribunal Judge's plea will fall on deaf ears. We know that HMRC consider that they have no power to exercise such discretion. Recently they even planned to end their long standing practice to only pursue an 'equitable liability'. What chance they will agree not to pursue a liability that has been confirmed by the Tribunal.

The lesson for all is to avoid informal, muddled business arrangements. They invariably lead to trouble with the taxman.

Tuesday, December 15, 2009

Why so few people comment on this blog

I'm very conscious of the relatively low number of comments that this blog attracts as compared with many others that I look at on a regular basis. I have tested a variety of invitations in my blog posts and have written on a variety of contentious subjects. I am of course very grateful to those who take the trouble to comment and reply.

Last month I asked the following question as part of a survey of users of the Tax Advice Network. The majority of respondents were accountants.
"Have you ever tried to add your comment to any of the items on the TaxBuzz Blog?"
[I'm sorry that some browsers do not show the pie chart graphic here]
To assist those unable to read the key let me clarify:
  • Yes, my comments are on the blog: 4% (orange)
  • Yes, but I couldn't work out how to do it: 1% (sky blue)
  • No, I don't have any interest in this facility: 39% (lilac)
  • No, I don't think anyone would be interested in my view: 43% (red)
  • Other: 13% (green). All of the other's answered 'no' and gave alternative reasons to the two main ones above)
I have to admit that the two most common responses did not surprise me.

If anyone else is reading this post and would like to share their views on this issue, please feel free to do so. In particular if you want to encourage more readers to share their views. Are we interested in them? Of course!

Monday, December 14, 2009

What is meant by 'the spirit of the law?'

Many people feel that there is little merit in MPs arguing that their more outrageous expenses claims were within "the rules". Even if the rules were lax (and I've addressed that in earlier posts here) we tend to feel that what matters is the 'spirit of the rules'. And, as with the proverbial elephant, we can easily recognise what is within or outside the spirit of the rules in this case.

By arguing that the letter of the rules takes precedence over the 'spirit' I think MPs have lowered the bar as to what is acceptable behaviour. Certainly they would be hypocritical if they argued that we should all abide by the spirit of the law when it comes to tax planning and tax avoidance. Most tax experts are quite clear that what matters here is the letter of the law.

Regular readers will know that I am uncomfortable with the idea of aggressive avoidance schemes. These tend to rely on a strict interpretation of the letter of the law. As is commonly pointed out in the professional press, the contrary argument, to avoid breaching the spirit of the law, is not easy due to a lack of clarity as to its definition. To date it has been assumed that, in the context of tax laws at least, the spirit of the law equates with the intention of Parliament. This then leads to the observation that such intentions will rarely be clear when it comes to the issues under debate even in the context of tax avoidance.

Well, now there is a new definition of the spirit of the law. It was contained in one of the documents published on the day of last week's Pre-Budget Report.

Protecting Tax Revenues 2009 explains HMRC’s methodology for estimating the shortfall in revenue between the tax collected and the tax that which should be collected (the theoretical liability), commonly referred to as the tax gap.

At para 3.2 we are told that:
“The theoretical tax liability represents the tax that would be paid if all individuals and companies complied with both the letter of the law and HMRC’s interpretation of the intention of Parliament in setting law (referred to as the spirit of the law).”
This phrase, which is repeated later in the document, is an important admission and clearly differs from more traditional definitions of the spirit of the law as simply being in accord with “Parliament’s intention.” That is often difficult to discern. On the other hand HMRC's interpretation can often be gleaned or will be well publicised.

I note also that a similar point arose in the Consultation document on a Code of practice on taxation for banks. According to the response document published last week, many argued that:
"the interpretation of “spirit of the law” and “intention of Parliament” should remain with the courts. HMRC should not become responsible for legal interpretation, as this confers a quasi-legislative and judicial function on them that contravenes the principle of separation of powers."
HMRC's response was to agree that they:
"should not become responsible for legal interpretation. Banks [and once presumes all taxpayers] will continue to be taxed in accordance with the law."
The Code of Practice on Taxation for Banks itself now requires compliance:
"with the spirit, as well as the letter, of tax law, discerning and following the intentions of Parliament"
I predict that there will be more debate about this phrase and approach in the coming months.
What do you think?

Saturday, December 12, 2009

Bank Payroll Tax - designed to create a pre-election distraction?

Maybe it's just me. On the one hand there is plenty of evidence to suggest that the announcement of a bank payroll tax is a genuine attempt to penalise the payment of "bankers' bonuses."

So much so that the tax has been widely welcomed by the media, the public and by most commentators. The provisions include a targetted anti-avoidance rule that effectively denies banks the facility to find ways around the tax. And the tax will apply to UK resident banks, building societies and "financial trading companies" as well as to foreign banks and financial trading companies with a UK permanent establishment.

So far so good.

On the other hand there are a couple of ENORMOUS let outs in the Bank Payroll Tax. I can't call them loopholes as those tend to only become apparent after the event and are rarely an integral and clearly stated element of new legislation. Here however we have both draft legislation and a detailed technical note that explains the provisions contained therein.

1 - Why is the starting point for the tax so high?
It will only affect bonuses that exceed £25,000.
I understand that some lower paid bank employees may be entitled to performance related bonuses. However such employees are outside the definition of "relevant banking employees."

So I suspect that the starting point was set sufficiently high to enable some favoured "relevant banking employees" to secure their discretionary bonuses without any penalty.

2 - Why is the affected period so short?
The bank payroll tax only applies to bonus payments made in the period from 9 December to 5 April 2010. (Although the press statements accompanying the PBR indicate that the Government will consider extending the period of the charge so that the tax remains in place until the provisions of the Financial Services Bill dealing with remuneration policy come into force).

For the moment though only discretionary bonuses paid during a four month period are to be penalised. Those that are awarded after 5 April 2010 will be subject to the new top rate of 50% income tax but will escape the bank payroll tax itself.

I can appreciate that there could have been problems in framing a penalty that applied to bonuses paid before the date of the PBR.

There is also to be an exception where the bank has no discretion as to the amount of the bonus due to a contractual obligation in place at the time the Pre-Budget Report was delivered. Again I assume that there was a good reason for such an exclusion.

But why do we have a cut off period just 4 months away? I suspect that this proposal was drafted earlier in the year and that the Government held it back so as to present it as a key measure in the PBR. In the event this was itself postponed by a few weeks and the window for penalising bankers' bonuses has been accordingly reduced.

In his PBR speech the Chancellor estimated that the tax would raise a little over £500m. This infers a figure of around £1bn bonuses which is much below those in previous years when they were in excess of £5bn. The more generous explanation is that the measure is expected to have the desired effect of discouraging discretionary bonuses over the next few months.

And that I suspect is the real intention. Once the cut-off date has passed, bankers bonuses will once again hit the headlines next April and May just as the real pre-election campaigns begin. The Government will then take the opportunity to note that bankers traditionally vote Conservative - the hope being, I assume, that this will discourage swing voters from being seen to do the same as those 'bad bankers'.

Or maybe I'm being too cynical.

The alternative view is that the the bank payroll tax has simply been designed to create headlines rather that to collect much in the way of tax. The furore over what constitutes a "taxable company", as defined in the draft legislation, could also be the result of a deliberate ploy to distract us all from the two issues highlighted above.

Time will tell.

Wednesday, December 9, 2009

Company car tax perk to return

I say this following the Chancellor's announcement in the PBR that Employees and Directors who are provided with an electric powered company car for their private use will pay no tax on the benefit from 2010/11 through to 2014/15.

There will also be no Class 1A National Insurance Contributions (NICs) on the taxable benefit of such company cars which must be propelled solely by electricity.

I admit I'm not a petrol-head but you'd have to be very keen on 'real' cars to choose to pay thousands of pounds of tax on a conventional company car or to run your own car when there's an option of a free to use company car - with no tax charged thereon.

And the absence of Employer National Insurance Charges will make the idea popular with employers too. Remember that the effective tax rate on high earners will be 50% next year and NI rates are going up too so the savings in prospect can be quite significant.

The range of electric cars available in the UK is growing all the time. Many currently have only 2 or 3 doors but Mondeo Man won't have to wait long for larger electric cars especially given the likely increase in demand after today's announcement. Earlier this year the Government announced that Motorists will be offered subsidies of up to £5,000 to encourage them to buy electric or plug-in hybrid cars.

I would admit that the potential attraction of electric cars is probably limited to those for whom a company car is a 'perk'. Electric cars currently have a limited range of less than 100 miles thus making them less than suitable for sales reps and others who drive long distances for business purposes.

This new facility to have a tax free company car, will need to be factored into the decision making process for businesses trying to decide which is the most attractive business structure going forwards. Other related PBR announcements include the deferral of the 1% increase in small companies rate of CT, forthcoming hikes in employer's NICs and the freezing of personal allowances.

Live PBR twitter updates re impact on x-factor personalities

Having been asked to tweet a live commentary during the PBR I chose to avoid simply replicating what ever other commentator would be doing.

Indeed the twitterstream for #PBR09 was awash with various accountants repeating much the same thing at the same time. And there's not exactly much scope for adding instant analysis or comment given the contraints of twitter.

So instead I chose to make my comments more specific......

Will this be the year that Alastair Darling shows he has the #Xfactor? I doubt it. #PBR09

Does the #xfactor house count as commercial premises that will be exempt from business rates once it's emptied after the final? #PBR09

"No one under 24 needs to be unemployed for more than 6 months before being guaranteed work" - Even if they don't win #Xfactor #PBR09

Stacey on #xfactor will lose out if no increase in tax credits and if she doesn't get a record contract after the finals #PBR09

Danyl the ex-teacher from #xfactor should be ok as "A short spell on unemployment is not turning into a lifetime of unemployment" #PBR09

Chancellor is talking about spending money he doesn't have (yet) #PBR09 Guess he'll be taking more from the rich like Simon Cowell #xfactor

Chancellor #PBR09 predicts UK econonmy will grow by between 1% and 1.5% during 2010. Didn't he also predict Jedward to win #xfactor?

Investment in super fast broadband (to secure more votes on #xfactor ?) will be funded by 50p tax on landlines. Deathknell for BT #PBR09

#PBR09 - 10,000 low income undergrads to take up internships for careers that they might not have considered - like popstars? #xfactor

Will 50% tax on bankers bonuses over £25k really only hit banks - or all businesses paying big bonuses - such as Syco? #xfactor #PBR09

Chancellor taking tough decisions "from a position of strength" - In the same way as Jedward had a strong chance of winning #xfactor #PBR09

Will #xfactor winners be less generous with gifts to family etc once they join top 2% and become subject to IHT on gifts over £325k? #PBR09

#xfactor losers will be ok as No one earning under £20,000 will pay any more NI contributions #PBR09

No free school meals for Stacey's son if she wins #xfactor - only for primary school children of low income working parents #PBR09

Will the new 10p CT rate for companies exploiting patents in the UK include income from image rights for winners of #xfactor? #PBR09

Didn't hear any announcements in #PBR09 re non-doms. All those on #xfactor should breathe a sigh of relief (incl Dermot, Louis and Danni)

George Osborne provides a Simon Cowell #xfactor type "Can I be honest with you?" critique of the Chancellor’s performance #PBR09

Osborne: "Absence of a spending review is the massive missing piece in #PBR09 " - Like running #xfactor comp'n without a finals programme

Osborne challenges Chancellor who is pitching one part of country against the other in #PBR09 - same as #xfactor finals !

"Every Labour Gov't ignores basic rule - if u keep on spending more than you earn, you will run out of money" #PBR09 Like #xfactor wannabees

Dr Vince Cable is 2nd judge to speak - the Louis Walsh of the Chamber, as compared with Osborne's Simon Cowell approach #xfactor #PBR09

Vince Cable says Gov't assumes economic growth based entirely on optimism - sounds like #xfactor wannabees assuming they can win #PBR09

Audience after #PBR09 in the Chamber of House of Commons is dwindling due to lack of continued interest - not like xtrafactor after #xfactor

Sunday, November 29, 2009

When did or will Zac Goldsmith cease to be a non-dom?

It's been revealed that Zac Goldsmith has been claiming that he is not domiciled in the UK for tax purposes. Zac is the green adviser to David Cameron and a prospective Tory MP for Richmond Park.

Non UK domiciled taxpayers are not required to pay UK income tax on income that arises overseas as long as it is not remitted to or enjoyed in the UK. If they are resident here non-doms are fully taxable on their UK source income. As of last year any UK residents who claim the tax benefits of being non-doms are liable to pay an annual £30,000 charge in lieu of the tax on their overseas income.

The article in the Sunday Times contains extensive reference to trust assets made available to Zac as a result of late father's largess. What the article doesn't do however is to explain the justification for Zac's (admission that he) claims to be domiciled outside of the UK.

His status would seem to be derived from his father's non-dom status at the time that Zac was born. This is commonly the case and would mean that Zac has a domicile of origin in a specific overseas country. However this is not the end of the story. Zac has spent most of his life in the UK. So he might be thought to have established a domicile of choice here - and thus have forsaken his non-dom status. Indeed a spokesman is reported to have stated that Zac:
"has already taken the decision to relinquish his non-domicile status.”
I'm sorry? Either he has established a domicile of choice here or he hasn't. As HMRC's own guidance says in HMRC 6:
Broadly, to acquire a domicile of choice you must leave your current country of domicile and settle in another country.
The booklet goes onto confirm that it's a lot more complex than this and there are a series of useful flowcharts (on pages 25-28) that are intended to help people understand their domicile status. I fear that Zac has already established a domicile of choice in England.

I hope he has already filed his 2008/09 tax return. Otherwise he will be hard pushed to claim non-dom status on it if he has already decided to accept that he is domiciled here in future. Indeed HMRC could question the legitimacy of the claim on previous tax returns as there has to be a date from which someone's circumstances change and from which they are to be treated as domiciled here. Would that have been the date on which he was elected as the local Conservative Parliamentary candidate in March 2007?

Lesson? Tax rules are complex - never allow your spokesman to make statements that could impact your tax position unless they understand the implications of what they are saying and this accords with the facts.

Tax Tease of the week - resident or non-resident?

There's a story in the Sunday Times today headed: Taxman targets exiles who keep UK toehold.

This qualifies for inclusion on the TaxBuzz blog as a 'Tax Tease' as there's nothing really newsworthy in the story. Tax advisers have been aware of a shift in the way HMRC treat claims to non-UK resident status for some time. It has become particularly difficult to be confident of a securing non-UK resident status if you continue to spend time in the UK since Robert Gains-Cooper first lost his claim to non-resident status in 2006. He has since lost his appeals to the High Court and to the Court of Appeal as I reported in a posting last year: Gaines-Cooper loses in Court of Appeal - Residence rules revisited.

HMRC meanwhile withdrew their guidance booklet IR20 which had previously been considered the 'bible' for advising clients as to what they needed to do to secure non-residence status. Revised guidance was published on 31 March 2009 in the shape of: HMRC6 - Residence, Domicile and the Remittance Basis.

HMRC's FAQs for Non-Residents continue to suggest that you can achieve non-UK resident status if you 'leave' the UK and spend a sufficient amount of time abroad. Indeed the day counts listed in FAQ 3 are the same as they have ever been. As indicated in HMRC 6 (section 8) the real emphasis is now on whether or not you can evidence that you have really 'left' the UK. And it's likely that plenty of amateur tax advisers are unaware of HMRC's views on the subject.

And it is examples of traps in this regard that the current Tax Tease addresses. Tax advisers with expertise in this area have long been cautious about allowing would be tax exile clients to think they have achieved non-UK residence until and unless their status has been examined by HMRC. As the top rate of income tax in the UK rises to 50% next year so it will be even more important to be sure of whether or not someone has retained their UK resident tax status.

Bottom line. Nothing has changed here for months. The so-called new 'high net worth unit' in HMRC is simply the 'Complex Personal Returns' teams after many less complex taxpayers have been removed. These teams were originally established in 2002.

If you previously understood that you could become non-UK resident simply by ensuring that you limit your visits here to less than 90 days a year - think again. Would be tax exiles will need to decide how far they are prepared to go to justify a claim to non-UK resident status, to chance a long-winded expensive HMRC challenge or whether they are prepared to remain resident here.

Having said all that, if you are preparing a tax return for the year ended 5 April 2009 and want to check whether you can legitimately claim non-UK resident status, do get in touch with one of our expert tax advisers.

Friday, November 27, 2009

Tax avoidance scheme of the week 27 Nov

I wasn't intending to make this a weekly feature but circumstances have intervened!

This week though we're back in the UK - well almost. The scheme in question was one intended to avoid Stamp Duty. The amount of Duty at stake? £54 million.

This was the amount of Stamp Duty that would otherwise have been payable in 2003 when HBOS undertook a transaction with AIG. HBOS set up of a holding company in the Cayman Islands and, surprise, surprise, HMRC argued that this set up was nothing more than a “ruse to avoid tax”.

In April, Britain's first-tier tax tribunal allowed the bank to keep the proceeds of its "highly artificial" transactions. HBOS is of course now owned by Lloyds Banking Group, which is 43% state-owned.

The judge presiding over the case last month did not accept HBOS argument that setting up the overseas company was for commercial purposes. Instead he said that all the evidence shown to him confirms that the project arose from a marketed tax avoidance scheme.

I don't know but I suspect that this evidence includes correspondence and emails that refer to the tax advantages of using a Cayman Islands holding company.

Of course the promoters and probably the tax advisers and maybe even the auditors would all have been complicit in attempting to focus attention on supposedly business rather than tax reasons for basing a holding company in the Cayman Islands. It would be interesting to know how seriously anyone takes that assertion. And, even if it makes sense in the banking world it's hard to imagine any arguments that would sustain such a position in the the normal commercial world.

Some will say that this doesn't matter as tax motives are not (yet) enough to deny a taxpayer from the hoped for benefit of a tax avoidance scheme. We don't have purposive tax rules here. The Duke of Westminster rules (this being the classic case which established that a taxpayer may organise his affairs in any legal way he wishes so as to minimise tax. And that tax avoidance is perfectly legal.

The corollary is the more recently well established principle that, in any case where a predetermined series of transactions contains steps which are only there for the purpose of avoiding tax, the tax is to be calculated on the effect of the composite transaction as a whole.

The key question has become therefore, how does HMRC and the Courts know whether any steps have been inserted only for the purpose of avoiding tax? Well, clearly they will want to see all related correspondence including emails, paperwork and agreements related to the transactions in question. Many a tax avoidance plan can be quickly and easily struck down by examining such paperwork.

And I've long believed that the day was coming when we would see greater publicity given to the impact that such paperwork has on the outcome of tax cases. No doubt some promoters of tax schemes are explaining away the absence of marketing materials as a necessity to avoid(!) their scheme being struck down due to it's overt tax avoidance motives. As long as the promoters are slick salesmen or otherwise convincing professionals such an approach may work.

Of course it means there will be even less cause for complaint or recourse in the event that the scheme is blocked or the hoped for tax savings are reversed.

My final comment on this case is to flag, once again, the time scale involved. The transactions in question took place over 6 years ago. I wonder for how long all the parties thought the scheme had been successful......?

Friday, November 20, 2009

Tax avoidance scheme of the week

This week we highlight reports of the latest turn of events of a non-UK tax scheme as the amounts involved are just so huge. The scheme involves Switzerland's No. 1 private bank, UBS, which, in February agreed to pay $780m (£547m) to the US authorities to avoid a criminal prosecution for helping thousands of wealthy Americans avoid tax by hiding their money in secret bank accounts.

SwissInfo today contains a report titled: Spotlight falls on shadier tax evasion scams.
"The murky and sophisticated world of tax avoidance has been glimpsed in the details of a treaty to turn over UBS bank clients to the United States authorities."
In the summer, UBS agreed to reveal the names of thousands of UBS's rich U.S. clients to Washington to settle the tax-avoidance dispute. The request for such information was first reported around a year earlier in the New York Times: U.S. seeks client names in UBS tax evasion case.

Under US law, Americans are supposed to declare all foreign bank accounts containing more than $10,000. According to prosecutors, some 20,000 Americans had private accounts at UBS containing $20bn between 2002 and 2007. Some 17,000 of these accounts were concealed from the tax authorities.

So the scheme here was clearly more in the way of fraud in that taxable income was not being disclosed.

SwissInfo reports that:

UBS clients who used sham shell companies, disposable mobile telephones and credit cards to funnel cash into Switzerland will also come under the scrutiny of the Internal Revenue Service (IRS).

The Swiss government agreed a deal with the US authorities in August to hand over the names of 4,450 UBS clients following a confession from the bank that some staff had actively helped US citizens evade taxes.

Details of which names would be disclosed were kept under wraps until the end of a recent US tax amnesty.

A prime example, covered by the treaty, would be indirect ownership of accounts. In other words, clients who hid their identity behind overseas trusts, corporations or foundations – sometimes fronted by third parties – that sifted assets into Swiss bank accounts.

A US lawyer is reported to have warned that:
"even the most sophisticated methods of disguising identities and salting away undeclared cash could prove paper thin given the level of cooperation between the Swiss and US authorities."

"All codes are breakable and recent events [such as the UBS investigation and the Swiss-US disclosure deal] have shown that these holding agencies are extremely vulnerable," he said.

In the UK there is no exemption for any foreign bank accounts. Indeed HMRC's current New Disclosure Opportunity is intended to provide a final opportunity for any UK residents to tell the taxman about previously hidden foreign bank accounts. The deadline for notifying HMRC of your intention to make a disclosure is 30 November.

Monday, November 16, 2009

Equitable liability to become a statutory right

One of the challenges of writing this blog is that I'm unable to cover all areas of tax policy. One development that I chose not to address earlier this year concerns the concept of equitable liability.

What is it? It's a concession that can be applied by HMRC such that a taxpayer need only pay what is fair and reasonable despite legally owing much more than this. Thus, in certain tightly defined circumstances HMRC will, by concession, accept that only an ‘equitable liability’ be settled rather than the full amount of income tax or corporation tax that is legally due from a taxpayer. In agreeing an 'equitable liability' HMRC normally accept the evidence of time-barred returns, accounts, claims etc where there is a tax debt but no longer any legal right to adjust the liability. The amount of the legal liability is not actually amended, but HMRC will not pursue the difference between the original liability and the revised amount.

In May 2009 HMRC announced that they intended to withdraw this concession. Numerous representations were made in an effort to persuade HMRC and the Government that this was a bad decision. Taxation magazine published hard hitting arguments to this effect by Barrister Keith Gordon and by editor Mike Truman. The ICAEW Tax Faculty and the CIOT also made the point strongly.

I'm delighted to confirm that the protestations have been heard and that legislation is to be introduced such that the concept of equitable liability will become a statutory right. Earlier today I received a press release stating that the Government have told the CIOT that they will be legislating “at the earliest opportunity” to retain the practice.

Why am I now making reference to the issue? Partly it's a public admission that I should have addressed this earlier in the year. My mistake. It's also an opportunity to note that some campaigns are worthwhile and can effect revisions to decisions that appear to be fixed in stone. That's what has occurred on this occasion. I would expect however that the turnaround has occurred because of patient diplomacy by the professional bodies and the heavyweight articles in professional publications.

Wednesday, November 4, 2009

Wives of promoters of Vantis tax scheme also facing charges

I was shocked to note that the wives of the two Vantis directors who are accused of organising a multi-million pound tax scam appeared in Court yesterday along with their husbands. The wives are accused of involvement in their husbands' dealings.

This follows the reports last month about which I wrote on the TaxBuzz blog here: Vantis tax advisers to face charges of “cheating" re tax scheme.

Now it just so happens that I used to work with two of the accused when we were all at what was then WJB Chiltern plc (which is now owned by BDO). Although I haven't spoken to either of them for some years I know that, based on the way that they dealt with things in my day, I wouldn't anticipate that they knowingly instigated, arranged or become involved in anything illegal. In those days the idea of their wives being involved in their tax advisory affairs would have been fanciful. I should stress that I can pass no comment on what may have happened in the lead up to this case.

As regards the tax scheme, scam or evasion of which they are accused however I can make some reasonable assumptions. I am, for example, pretty sure that they would only have proceeded with promotion of this scheme if they had first secured a solid Counsel's opinion. Possibly more than one. I would expect that they had disclosed everything necessary for those Opinions to be worthwhile and sufficient for them to advise clients by reference thereto. Such Opinions are routinely sought and highlighted by the promoters of schemes to evidence the legality of the plans and to ensure that the promoters and those involved should be safe from prosecution for tax evasion. I also doubt that the accused went 'Opinion shopping' as some promoters do in an effort to find a Counsel who will give the desired Opinion.

Indeed the two Vantis directors know more about tax and the issues relevant to schemes on which they might advise than many promoters I have encountered over the years. So what has happened here?

For the moment I tend to hope that they are simply the victim of a more aggressive stance taken by HMRC.

For the same reason I'm sure that this prosecution is one which the promoters of other aggressive structured tax avoidance schemes will dismiss whilst they continue to promopte their own structured tax avoidance schemes.

Other promoters will suggest this is simply an HMRC tactic intended to scare people away from the arrangement of aggressive tax schemes. They will argue that HMRC are exceeding their powers and that this is a one-off never to be repeated case.

Promoters may also seek to cast aspersions as to the technical competence and ability of the accused in this case. And yet, as I have indicated above, unless they have changed, they cannot be dismissed as loose cannons, novices or crooks who recklessly promoted a fraudulent scheme.

Finally, of course, some promoters of structured tax avoidance schemes will distinguish theirs as not being so aggressive as to ever warrant such a prosecution. I would imagine that the accused in this case would have said exactly the same thing had they put their minds to it when advising clients when they first started promoting the scheme back in 2004.

I have to say that even if I were bullish about such schemes generally (and evidently I'm not) the prospect of my wife being dragged into any legal proceedings would have the, no doubt, desired effect.

What say the readers of this blog?

Monday, November 2, 2009

Offshore bank accounts - HMRC warning video

Remember, remember the 30th of November. That's the deadline for notifying HMRC that you intend to come clean if you have any previously undeclared income from offshore investments.
I referenced this "New Disclosure Opportunity" (NDO) in an earlier post on the TaxBuzz blog: 5 tax facts and advice if you have an offshore bank account.

HMRC had originally provided a similar opportunity to come clean and pay reduced penalties in 2007. This followed from the access HMRC had secured to information about offshore bank accounts held with the five main high-street banks in the UK through their offshore subsidiaries.

The NDO is now targeting UK residents who have offshore accounts operated by over 300 banks and other financial institutions which also have an onshore presence in the UK.

A separate and distinct procedure has been announced in recent weeks that is only relevant to those who held accounts with banks in Liechtenstein. HMRC have not ruled out other similarly targeted arrangements with other specific territories. It would be a brave or stupid person who planned to await any such announcement before coming clean - and in so doing ignores the NDO.

Here's the top HMRC man, Dave Hartnett, to explain their position in stark terms.

Tax Investigations specialist members of the Tax Advice Network are well placed to advise and assist you if you have any worries on this issue. Simply choose one near you or whose profile you like and give them a call.

Sunday, November 1, 2009

How much should you disclose in the 'white space' on tax returns?

Most people are keen to minimise the prospect of HMRC opening an enquiry into their tax affairs. A recent case may make this more difficult in the future.

Where, as is often the way, the tax return or the underlying accounts include the use of any judgment a question arises if there is any possibility of the taxman taking a different view: To disclose or not to disclose?

If you disclose the uncertainty - which would include details of the transactions involved in an avoidance scheme, you may feel that you are increasing the risk of an enquiry. However this would only transpire if a suitably experienced tax officer actually reads and understands the implications of your 'white space' disclosure. Surprisingly this is quite rare so as long as your disclosure is sufficiently detailed you should only have to wait until the end of the normal enquiry window to achieve 'certainty' as regards your tax position for the period covered by your tax return. In most cases this is now simply 12 months from the submission of your tax return.

If you don't disclose the uncertainty you are at risk of the taxman making a later 'discovery' - this could occur some time into the future - certainly long after the end of the normal enquiry window.

The issues relevant to this choice changed in the light of the 2004 case of Langham v Veltema. The decision in favour of HMRC caused concern in the profession. Eventually HMRC clarified the position with Statement of Practice 01/06 which is now contained in EM3261 - Reopening Earlier Years: Discovery in SA Years. In effect this set out the level of disclosure that is required to protect taxpayers from later discovery assessments.

Last month the Scottish Court of Session again found in favour of HMRC despite the taxpayer having made what appeared to be a full disclosure on his tax return. He had 'invested' in a tax avoidance scheme and wanted to deny HMRC the right to issue a section 20 discovery notice seeking disclosure of all relevant paperwork.

The taxpayer had made what he and his advisers considered to be a full disclosure of the scheme and the tax consequences using the 'white space' on his 2003/04 tax return.

The Court held that the discovery notice was valid despite the disclosures made on the tax return as to the Capital Redemption Contract, the relevant legislation and all of the steps involved in the transaction. Such disclosures had been made in a deliberate attempt to deny HMRC the facility to make a discovery assessment after the normal deadline for enquiries into 2003/04 tax returns.

The Court determined that the disclosure in the taxpayer's tax return was insufficient and that HMRC had 'discovered' the taxpayer was involved in a specific type of packaged tax avoidance scheme. The Court also determined that the tax return disclosure did not contain sufficient detailed information about the scheme to provide the hoped for protection from a discovery notice.

There is already much misunderstanding as to when HMRC are entitled to make a 'discovery' about underpayments of tax. Many people wrongly assume that they are 'safe' after a year or two. Equally HMRC have been known to attempt to make a 'discovery' and charge extra tax when they are not permitted to do so. Even so, this latest case gives HMRC more ammunition I think. R(on the application of Pattullo) v CRC

Thursday, October 22, 2009

Were you wasting time advocating this tax scheme?

Yesterday the Government announced they were blocking another structured tax scheme. One of the primary promoters of the scheme later wrote to the accountants whom they had been encouraging to advocate this to their clients saying the following (and yes, I'm being selective). The italics are my interpretation of the statements:

"I am sorry to have to report to you that an announcement has been made today to block the [scheme] income tax strategy". [We've been found out]

"HMRC has extended the sideways loss relief rules to trades, professions and vocations. In addition, a purpose test will now be applied in the future to this kind of structure". [We'll have to find something new or go out of business as promoters]

"Naturally, this is extremely disappointing as the level of interest [in the scheme] was extremely high. For those accountants that have referred clients for [the scheme], can you please now liaise with them?" [We know the clients you talked to were tempted by the hope of sizeable tax savings that are definitely no longer available. If you've been spending time advocating this scheme to clients you'll have to tell them that it's been blocked. ie: Please spend more non billable time talking about schemes that many clients would never have done anyway]

"We could not explain to clients upfront exactly how this worked because of financial services restrictions." [Just to confirm, we didn't expect you to understand what you were encouraging your clients to do. Let's just all pretend that there's a good reason to justify this.]

"The moral of the story is to act early or be disappointed" [Hmmm. Actually the moral of the story is that unless you rush in next time without knowing what you're doing, you could find that future opportunities, that may or may not really enable your clients to avoid tax, are blocked. Don't worry that such an approach wouldn't be professionally justifiable.]

"It is clear that those clients that placed trust in their accountants, [the promoters]and the process have been able to exercise the control and choice over their financial and taxation affairs". [Hmmm. It is clear that clients who placed blind trust in their accountants, who were seduced by the prospective commissions from a scheme they didn't understand, have been able to put funds at risk and may yet be the subject of a long lasting tax investigation].

"I'll be in touch with you shortly regarding the final opportunity for employee benefit trust implementation before the budget". [We have another idea that we hope to persuade you isn't blocked by the recent anti-EBT avoidance announcements. We hope you'll spend time trying to understand it and advocating it your clients so that they go ahead before it's definitely blocked in the Budget or in another announcement like happened yesterday. By the way, don't tell your clients that HMRC will be challenging it anyway.]
In other words, many accountants have previously been encouraged to WASTE a load of their time trying to persuade clients to undertake transactions that neither party really understands. The hoped for tax savings, that were never guaranteed anyway, are now definitely unavailable. And the promoter thinks that clients will be willing to devote more time to hearing about more such schemes that could equally be blocked at short notice.

Indeed the promoter (for whom I will not provide any publicity) seems to be suggesting that accountants should move faster to persuade clients to enter into any future such schemes that his company promotes - before they get blocked - and presumably without first ensuring that the chances of success are sufficiently high to warrant everyone's time and effort.

I would add also that the Financial Secretary's announcement includes the (perhaps inevitable statement) that:
"The Government does not accept that these arrangements have the effect that is sought, but to remove any doubt, and to prevent scheme providers continuing to devise and operate even more contrived schemes that seek to challenge the sideways loss relief rules, I am announcing prompt and decisive action to protect the Exchequer."
Anyway - as ever - you pays your money and takes your chances. I remain of the view that there are easier and less potentially problematic ways to both help clients and to earn good fees than to promote structured avoidance schemes.

Sunday, October 18, 2009

Five tips to spot scam emails from 'HMRC'

Many of us are used to receiving scam emails promising us something for nothing. Over the last couple of years fraudsters have been sending increasingly more sophisticated scam emails that purport to come from the taxman (HMRC). Even the Guardian, the Independent and the BBC are now reporting on this. Although they and other media tend to only be repeating the content of HMRC press notices and examples of recipients of scam emails.

Variations on such emails promise enticing opportunities such as tax refunds, the waiver of penalties, prize fund winnings, corrections to your NI record and updates to your HMRC security details. These emails are designed to fool the most suspicious of recipients and include links to what appear to be genuine pages of HMRC's website. In some cases, once you have been tricked into disclosing personal information you are then redirected to real HMRC web pages.

In theory we could all simply set our computer's spam filter to catch all emails that purport to come from HMRC. But the spammers know that many of us cannot do this. We may have registered to file our tax returns, our VAT and/or our Payroll returns over the web. We need to see the emails that confirm these have been received and processed. And although HMRC's press releases contain good advice they do not contain a simple summary.

So here are my five tips to help you identify scam emails that purport to come from 'HMRC':
  1. Email asks you to supply bank or credit card details or links you to an HMRC website that asks for this information;
  2. Email asks you to supply personal or password details or links you to an HMRC website that asks for this information;
  3. Email asks you to complete a form to receive a tax refund or rebate or links you to an HMRC website that asks you to do this;
  4. Email asks you to download an application or executable file (.exe) or links you to an HMRC website that asks you to do this;
  5. Email does not contain your name, was unexpected and does not relate directly and specifically to any details you have filed online with HMRC in the previous 48 hours.
HMRC would never send out genuine emails that do any of the above. Specifically they say:
  1. They never send notifications of a tax rebate over email;
  2. They never request that you update your security certification by email;
  3. HMRC's Online Services are only available to customers who register their details in advance;
  4. They never issue emails asking for personal details;
  5. If you receive an email requesting such information, please forward it to and then delete it;
  6. Never disclose personal information such as User IDs or Passwords in response to email requests;
  7. If you do follow a link to HMRC's website that requires you to enter sensitive personal information, only do so if there is a padlock in the bottom right hand corner of your Internet browser when you are on that page;
If you want to know more there is a dedicated and regularly updated page on the HMRC website that contains examples of the scams and frauds. The Tax Advice Network has reported on this in the past and offered practical tips and links in our weekly practical tax newsletter. HMRC also publish guidance on how you can make your online experience as secure as possible. This is aimed at the increasing number of taxpayers who have registered to communicate with HMRC online.

Friday, October 16, 2009

Too many marginal tax products are sold to too many unsuspecting people

Hot on the heels of the Taxation editorial to which I referred yesterday (The beginning of the end for structured tax avoidance schemes?) it seems the world is changing faster than I had anticipated. The following comments are included in a retrospective piece written by Stephen Herring in the 1,000th issue of the Tax Journal:
"I am disappointed that at some time in the early 1990s certain parts of the tax profession 'sold out' to the sales teams seeking to 'roll out' tax 'products/solutions/ideas' across the client base with little regard to their suitability."

"I agree that some products may succeed in the courts and some clients are capable of implementing and willing to defend them as far as is needed but what I'm saying is that too many marginal tax products are sold to too many unsuspecting companies and individuals."
Stephen concludes his piece with the following observations:
"I suspect that before too long, HMRC will come to the conclusion that the only way to restrict the marketing of artificial tax arrangements is to copy the stance adopted by the IRS in the US and seek criminal penalties in some situations to draw a line in the sand between acceptable, even if aggressive, tax planning and purely artificial schemes. This would be a hugely disappointing outcome but one which I consider at the moment to be almost inevitable"
Stephen is a tax partner with BDO LLP and has had a variety of managing partner and other management roles in leading accounting firms over the last 20 years. So he is well experienced in such matters.

As it happens Stephen shared such views with me during a recent BDO alumni party. I did not expect to see them in print. I know a number of other senior tax practitioners who would probably agree with the above sentiments. And I expect to see more serious commentators and practitioners publish their views now that Taxation and Tax Journal have opened wide the door that, I like to think, I unlocked a couple of years back when I explained Why I gave up giving tax advice.

I tend to suspect that we are more likely to see a draft General Anti-Avoidance Rule (GAAR) emerging in the not too distant future. However the developments I noted in my piece about the Vantis tax advisers facing charges of “cheating" re a tax scheme are not a million miles away from Stephen's view of the near future. And of course he wrote his piece well before that latest news leaked out.

Before today I felt almost like a lone voice in the tax profession. Now within 24 hours we have a senior tax partner at one of the largest firms of accountants in the country and also the Editor of the leading weekly tax publication in the country, both commenting publicly that some tax schemes are indefensible even if technically legal. The tax world is indeed moving quickly. Hold on tight. It'll be a rocky ride!

Thursday, October 15, 2009

The beginning of the end for structured tax avoidance schemes?

Last month I referenced a watershed speech given by the Financial Secretary to the Treasury which made it clear that: Tax cheats need to think again.

I suggested that the debate is moving to consider whether those who do the deliberate and severe bending of the tax rules are just as much 'tax cheats' as those who consciously evade taxes and break the rules.

It comes as a great delight to note that the editor of Taxation magazine has just published a hard hitting editorial that further evidences the way this debate is moving. Mike Truman makes his view very clear that:
"It’s time to stop defending artificial pre-packaged avoidance schemes".
Regular readers of the TaxBuzz blog will know I am no fan of what Mike also calls "aggressive packaged schemes". And I have long disputed the view, put forward by some advisers, that accountants are at risk of negligence claims if they fail to make their clients aware of such schemes. It simply is not necessary to do this in my view.

Expect to see more debate on this subject and a draft General Anti-Avoidance Rule emerging in the not too distant future. It's inevitable in my view. Such a rule is easier to draft in theory than it will be to finalise and to apply in practice without introducing significant uncertainties in all fields of tax planning advice. I only hope that the Government consults effectively on this rather than rushing ahead with inadequately defined legislation as has occurred too often in the past.

Earlier relevant posts:
- Bending vs breaking tax rules
- Tax avoidance is a card game - the metaphors multiply
- Tax avoidance - what are you allowed to do? A simple guide.
- Tax avoidance schemes - a simple guide
- Naive promoters of tax avoidance schemes
- Five facts all accountants need to know about tax avoidance schemes
- Five more facts all accountants need to understand about tax avoidance schemes

MP could not register his business at Companies House

Sadly I continue to be fascinated and frustrated by the MPs' expenses scandal to which I have referred many time on this blog.

This morning's revelation about MP David Wilshire suggests he blatantly disregarded the rules. However the story also perpetuates a myth about owner managed businesses in the UK.

Mr Wilshire is said to have "used his House of Commons expenses to pay more than £100,000 of taxpayers’ money to his own company." Then we are informed that "there is no official record of the company’s existence and it has never filed public accounts" and that "it had never been registered as a company."

Er, perhaps that's because the business, Moorland Research Services, was a partnership and NOT a company. And of course, this in itself seems to be a clear breach of the Parliamentary expenses rules. It suggests, in effect, that Mr Wilshire was claiming expenses for payments to himself as a partner in the business.

But the implication that there is some further wrong-doing by virtue of the partnership not having been registered at Companies House serves only to perpetuate the myth that 'business', 'partnership' and 'company' are different words for the same thing.

It's important to note that being in business is NOT synonymous with running a company. I would expect most regular readers of this blog are already aware of the distinction, but for the record, there are actually four alternative common forms of business structure in the UK:
  • a sole trader;
  • a conventional partnership (where the individual works with one or more partners in the business);
  • a limited liability partnership - LLP - (this provides the individual and their partners with the protection of limited liability, just as with a company); or
  • a limited company.
LLP's are a relatively new innovation and far less common than conventional partnerships.

There is no obligation or facility to register sole trader businesses or conventional partnership businesses at Companies House.

Before you start a business it is important to consider carefully the respective benefits, obligations and disadvantages of each of the alternative structures. And there's a lot more to the decision than simply comparing the respective tax rates. There's a host of other tax, administrative and strategic issues to consider. Sadly many people rush ahead without giving these all due consideration - but that's another subject for another day.

Tuesday, October 13, 2009

IHT receipts FALL under Labour - what's going on?

The Guardian reports that: Inheritance tax drops to all-time low under Labour. Can this be right?

HMRC's website reveals a document dated Sept 2009 that shows the number of Estates notified for probate, the number taxed and the tax take in each year from 2002/03 through to 2006/07. Since then we have had 2007/08, 2008/09 and are now in 2009/10.

The number of estates subject to IHT rose from almost 27k in 2002/03 to over 34k by 2006/07. According to the Guardian however, "this year" (presumably 2009/10) it will only be 12,000. Can that be right? Well, it is possible I suppose as the transferable nil-rate band introduced by Alastair Darling in 2007/08 will have reduced the number of estates subject to IHT; indeed that was the purpose of the change. But a reduction of 65%? That would be quite astonishing.

The Guardian also focuses on the sharp reduction in the amount of IHT payable in recent years. This is easier to accept and will be a function of:
  • the transferable nil-rate band which reduced number of estates subject to IHT;
  • the impact of falling house prices and
  • the fall in value of stocks and shares generally during the recession.
Amongst the statistics on HMRC's document is a general note that makes for interesting reading too.

It states that the total number of deaths in 2006/07 was approx 570,000 and that estates on which IHT was paid that year represented just 6% of the total. Now, remember that this was before the introduction of a transferable nil rate band between husband and wife. As indicated above, this will dramatically reduce the number of estates liable to pay IHT from 2007/08 onwards. So the % of estates subject to IHT must also fall - probably to something closer to 4%.

It does make me wonder why why the press write so much about IHT when such a small proportion of their readers are ever likely to have to pay it.

MPs' expenses - the 25 unanswered tax questions

MPs expenses are back in the news. Following a detailed enquiry headed by Sir Thomas Legg many MPs are receiving letters instructing them to repay excessive expenses claims. And some MPs are revolting. That story will continue to unfold.

In the next month or so we will have the report from Sir Christopher Kelly, chairman of the Committee on Standards in Public Life, which is expected to propose FURTHER changes to the system for paying MPs allowances and reimbursing their expenses. I stress that these are FURTHER changes as the system was changed earlier this year (before the scandal broke) after the Members Estimate Committee last reported on its Review of Allowances in June 2008.

Beyond that I still hope to receive responses to the 25 questions I posed earlier this year concerning tax issues related to the MPs' expenses scandal. There have been a couple of small developments in this regard although they simply confirm the concerns I had already expressed.

Sunday, October 11, 2009

Vantis tax advisers to face charges of “cheating" re tax scheme

Today's report in the Sunday Times, headlined: Stars caught up in £219m tax 'scam' concerns "two leading City accountants who have been charged with a multi-million-pound tax scam involving celebrities, sportsmen and other wealthy clients exploiting charitable donations".

If the reports are true, Roy Faichney and David Perrin (neither of whom are qualified as accountants*) will be facing charges around 3 years after their homes were raided over, what I assume to be, the same £100m tax avoidance scheme used by leading sportsmen, musicians and investment bankers. The Sunday Times reported this story and outlined the scheme in December 2006. At the time many tax commentators thought that HMRC's actions were heavy handed. I know I did. The same 'stars ' were named then as are mentioned in today's paper, ie: Martin Corry, captain of the England rugby team, and Yusuf Islam, the musician formerly known as Cat Stevens.

Not surprisingly Vantis is reported to have announced that "David Perrin and Roy Faichney, employees of Vantis Group, will be strenuously defending any charges brought against them."

In my talks I often stress that there can be a significant time lag between when tax advice is given, acted upon and tax refunds received and when HMRC will challenge the transactions or tax refund claims. All too often promoters of aggressive schemes imply that all is well when HMRC have received a disclosure of the scheme and have permitted tax refunds to be paid out. But this is rarely the whole story. The full picture typically only emerges many years down the line.

There was another example of this time lag earlier this year. The Mercury Tax Group announced that it was preparing a damages claim against HMRC following a court hearing that ruled the taxman had unlawfully obtained warrants to raid the firm’s offices and the home of its chief executive. The raid, related to a 'gilts strip scheme' took place almost two years earlier and was widely considered to be an example of HMRC using a sledgehammer to break a nut.

In both cases (Mercury and Vantis) I would stress that mere accusations by HMRC are not proof that the law was broken by the accused. The old maxim "Innocent until proven guilty" is as true in tax planning as it is in all other cases. I'm sure that in each case the advisers were satisfied that their advice to clients constituted legal (albeit aggressive) tax avoidance rather than tax evasion. In other words they did not intentionally break the law nor encourage clients to do so. And having taken Counsel's opinion, as I'm sure they did, they would have expected to be protected against accusations of illegal activity. As would their clients. And the Mercury case has progressed such that it seems that HMRC eventually backed down.

So why do I draw attention to this case on the TaxBuzz blog?

Quite simply because it supports my contention that pre-packaged aggressive tax avoidance schemes are more risky than some advisers would have you believe. And many of those who promote such schemes do not have the technical understanding of the risks to ensure that their clients fully appreciate them before they decide whether or not to proceed.

As is well known I am no fan of aggressive avoidance schemes and am uncomfortable with the idea of 'planning upto the wire'. Interestingly I am finding more and more experienced tax advisers seem to take a similar view. For example, last week a very well known tax lecturer told me that they would never put their name to any book or article titled: "How to avoid tax on...."

The times they are a-changing.

*For the record I know Roy and David as I used to work with them at what was then WJB Chiltern plc before they left to join Vantis almost 6 years ago. I always liked them but we have not spoken for some time.

Earlier relevant posts:
- Bending vs breaking tax rules
- Tax avoidance is a card game - the metaphors multiply
- Tax avoidance - what are you allowed to do? A simple guide.
- Tax avoidance schemes - a simple guide
- Naive promoters of tax avoidance schemes
- Five facts all accountants need to know about tax avoidance schemes
- Five more facts all accountants need to understand about tax avoidance schemes
- Tax cheats need to think again

Sunday, October 4, 2009

IR35 rules are not being applied to BBC freelancers

There is no mention of IR35 in an otherwise balanced article in today's Sunday Times under the heading: "BBC advises stars on avoiding tax". And yet, unless we expect BBC freelancers to be subject to a different regime to everyone else, the rules in IR35 are clearly very relevant. Let me explain:

When I first saw the article I thought 'Here we go again'. I expected it to be a biased piece about how the BBC encourages its freelance presenters to provide their services through personal service companies.

That message was indeed the thrust of the article although it was far more balanced and informed than the opening paragraphs had led me to expect. I suspect the input of Richard Murphy who is quoted later in the article and who may well have influenced the tone and coverage. It is still misleading in part though and this is largely a function of undue complexities in our tax system.

The use of personal service companies really took off shortly after Gordon Brown introduced a 0% (and later 10%) rate of corporation tax. Many genuine freelancers set up such companies to reduce the effective rate of tax on their incomes. The overall benefits of such arrangements have significantly reduced in recent years such that some contractors (and even BBC stars) could end up out of pocket if they use a company structure without a great deal of careful thought and planning.

Many large corporates though have also, over the years, insisted upon the use of personal service companies by their contractors. This is to enable the 'employer' to pay the contractor's company without having to worry about PAYE or employment law. Such an approach reduces the 'employment' cost to the 'employer' and shifts any tax risk to the contractor - who might otherwise be deemed to be an employee. This seems to be what the BBC has been told by HMRC.

The tendency for people to seek to reduce the tax on earnings through the use of personal service companies was the rationale for the now notorious 35th Inland Revenue press release notice on Budget day 1999. Ever since then 'IR35' has been used as an abbreviation for the subsequent legislation that applies to personal service companies.

I have written previously on this blog about IR35 and how fears about it's application are often overstated eg: Is it IR35 or the pressure to work as a quasi employee?

The key points in the Sunday Times article then are:
  • Many BBC stars have set up personal service companies to avoid the new 50% tax rate that comes in next year. - IF, and only IF the stars in question were previously on staff then this may be a fair accusation. I suspect however that this is journalistic licence and that the use of personal service companies long predates the announcement of the imminent new top rate of tax.
  • HMRC told BBC to either take the freelancers on as employees or require them to set up personal service companies. - This is the advice that tax advisers often provide to employers whose freelance workers are at risk of being identified as employees. It shifts the tax risk from the 'employer' to the 'employee'. When an employer, such as the BBC is found to be making payments to freelancers who are later identified as employees the 'employer' becomes liable for back taxes and penalties for failing to operate PAYE. If a freelancer supplies their services through a personal service company it is that company that becomes at risk if HMRC challenge the disguised employment status of the BBC stars. If HMRC did suggest this to BBC then clearly HMRC considers that the freelancers are potentially BBC employees - under the arrangements then in force - which may of course have since changed.
  • The arrangement is less beneficial for the British taxpayer - This is because the BBC is avoiding the payment of employer NICs on payments that would otherwise be 'salaries' and because the tax payable by the stars (looking at both the corporation tax payable by their company and the income tax they pay on money paid out of their companies) is less than the PAYE tax that would be due on their 'salary'.
  • Many freelancing BBC stars are effectively employees (as are those named as such in the article) - In which case surely HMRC plans to apply the IR35 rules to those companies. And if successful then the only people to lose out will be the stars themselves. IR35 effectively removes the hoped for tax saving that comes from paying corporation tax and then dividends - with income tax due thereon at a later date. But if HMRC plans to attack the companies using the IR35 rules surely the article would have reported this?
And yet there is no mention of IR35 in the article. My conclusion is that either:
  • HMRC are not seeking to challenge the disguised employment status of freelance BBC stars;
  • The employment status of the freelance BBC stars in question is NOT as cut and dried as the article suggests;
  • HMRC do not want to risk losing what would be a high profile case that exposes the flaws in the employed vs self employed rules which are one of the foundations for the IR35 rules;
  • The article has omitted reference to the contrary argument that would make the piece less newsworthy.
Answers on a post card (or as comments below please).

ps: If you want a smile - check out the sponsored links on the Times own website if you search for - tax bbc freelancers (Surprisingly the article I was seeking didn't appear though!)