Beware of HMRC spotlights - EBTs now included

Regular readers will know I'm no fan of structured tax avoidance schemes. Now, hot on the heels of my recent posts containing ten things every accountant needs to understand about tax avoidance schemes, HMRC have published more of their spotlights on structured schemes.

Spotlights are used to highlight a selection (rather than all) activities which, in HMRC's view, are not likely to have the legal effect desired by those thinking of using them.

The purpose of the spotlights is clearly to frighten off those taxpayers who might be tempted or approached by the promoters of such schemes.

To amplify my earlier posts it's worth stressing that most professionally qualified accountants are required to comply with five fundamental ethical principles. These include: Objectivity, integrity and competence. Clearly this means that they should never be advising clients to undertake transactions unless they (the accountants) understand them. This is not something that can easily be done when considering most structured avoidance schemes. And it's hardly worth the effort to secure this knowledge given how relatively few clients choose to proceed with such schemes when offered an objective view of the downsides, risks and caveats along with the hoped for tax savings and benefits. Perhaps this partly explains my view that accountants are not at risk of negligence claims if they choose to ignore such schemes. Indeed advocating a scheme they don't understand could put them at risk of breaching the fundamental ethical principles.

In this connection it can help to be aware of the schemes featuring in HMRC's Spotlight. More fool anyone who suggests to clients that they will be safe from attack if they undertake such schemes: (NB: Spotlight 5 refers to scheme often described as Employee Benefit Trusts)

• Spotlight 1: Goodwill - companies acquiring businesses carried on prior to 1 April 2002 by a related party
• Spotlight 2: VAT artificial leasing
• Spotlight 3: Pensions schemes artificial surplus
• Spotlight 4: Contrived employment liabilities and losses
• Spotlight 5: Using trusts and similar entities to reward employees - PAYE (Pay As You Earn) and National Insurance contributions (NICs), Corporation Tax and Inheritance Tax
• Spotlight 6: Employer-Financed Retirement Benefits Scheme ('EFRBS')

Bending vs breaking tax rules

A recent email exchange has prompted this supplement to a piece I wrote for this blog in March: How far can you bend the rules?

That posting referred to the controversial phrase then included in HMRC's draft Charter. It stated that we could expect them to "Pursue relentlessly those that break or bend the rules."

My posting attracted much by way of comment (thank you all). By way of summary, in so far as is relevant to my observations below, I noted that:

• 'Bending' and 'Breaking' the rules are two quite separate concepts. Only the latter is illegal.

• Note that the sentence refers to bending 'the rules'. Is this deliberate or should it say 'the law'. The former are set by HMRC and the latter is approved (usually with only perfunctory consideration) by Parliament. But there is still a crucial difference.

• I've been here before. I can see both sides of the argument. The statement is controversial because it's ambiguous. It's also not going to be applied consistently due to resource constraints.

HMRC have since revised their draft Charter and the sentence in question now states that you can expect HMRC to: "Tackle people who deliberately break the rules and challenge those who bend the rules"

I applaud this recognition that different treatment is appropriate for the two distinct categories of behaviour. In the same way the new penalty regime is evidently designed to distinguish the generally compliant taxpayers who make mistakes from the deliberately non-compliant. Penalties will be charged more onerously on the latter - and quite right too.

And this brings us back to the age old distinction as between those who simply bend and those who actually break the law. Many would argue that only those who have evaded tax should be tackled.

Whilst there may have been no intention to break the law sometimes the bending is so severe that a fracture seems inevitable. In such cases it seems only reasonable to me that HMRC should be expected to challenge what has been done, how much force was applied and to apply x-rays to determine the possible damage. Only then will they know if the law was broken or not. And of course sometimes the rules are bent so far it takes the Courts x-ray to determine whether or not the rule has been fractured and in effect broken.

What would you suggest HMRC does when faced with people who seem to be bending the rules, possibly close to breaking point?

The letter HMRC is sending to the banks

We have obtained a copy of the letter being sent to banks by HMRC seeking information about offshore bank accounts.

It quotes the statutory authority under which the notices are being issued and includes a wide ranging definition of 'account'. This includes holdings of cash, time, notice and demand deposits. It also includes accounts which do not carry interest or any other return. And also any account into which money or investment assets have been deposited, including portfolio asset management accounts, whether managed by the account holder directly or managed bny another or others. So the types of account which will be disclosed include:

• current account
• deposit account
• capital account
• wealth management account
• discretionary account
• alternative investment account
• property investment account
• trustee account
• client account
• investment trust account
• bond account

Which accounts will NOT be disclosed by the banks?
The notice states that information and documents related to the following need not be disclosed:
account holders who have authorised exchange of information for the purpose of the EU savings tax directive (or int'l equivalent) - for periods covered by such agreements;

• accounts where the account holder died more than 4 years ago;
• accounts where all account holders are PLCs, governments, charities, churches, mutuals, trade associations or clubs
• ISA accounts

Information to be disclosed by the banks
This is much as you would expect but also includes:

• Account holder's date of birth
• Date account was opened
• Date account was closed (if closed)
• The account balance at 31 March 2004, 2005.....2009
• Transaction information for a number of specified periods including
• - April-June 2004,
  
• - First 3 months of operation for accounts opened after 31 March 2004
• - Jan, Feb and March 2009 for accounts open at 31 March 2009

There were some commentators who thought it unlikely that HMRC would win this fight. The tribunal's confirmation that these letters can be sent to over 300 banks has come at a timely moment given the imminent New Disclosure Opportunity. We have explained more about this in our weekly newsletters.

What do you think about the information being requested and what will happen when the banks get these letters?

Five more facts all accountants need to understand about tax avoidance schemes

This is a follow up to a recent post: Five facts all accountants need to understand about tax avoidance schemes.

That first list essentially provided support for those accountants who have already chosen NOT to advice on such schemes. Below I have listed five more facts which should also be borne in mind by those accountants who are nonetheless tempted to look further into the subject:

1. Encouraging a client to undertake a structured tax avoidance scheme is much like encouraging them to make a specific investment;
2. It takes a fair amount of time to get to grips with all of the relevant details of a structured tax avoidance scheme;
3. HMRC may announce a change in the law at any moment - leading to rushed (and perhaps botched) attempts to revise the scheme by the promoters;
4. Having committed all that time to learning about the scheme there may be a temptation to persuade someone to 'invest' even if they might not otherwise choose to do so;
5. If, some years later, the scheme is ultimately held not to work the client may sue the accountant for failing to adequately highlight the risks.

Together these ten facts should provide support for those accountants who choose not to advise clients on structured avoidance schemes. As before I'd be very happy to explain or expand on these and also to receive comments from people with a different view.

How to avoid the secret new steath taxes

In the past couple of months the media has reported several secret stealth taxes on car parking, broadband connections, mobile phones, patios , and company cars. There have been plenty of other reports in the past too.

However, often when I look at such stories the suggestion that they refer to secret or stealth taxes is spurious to say the least. Sometimes it is simply media speculation and on other occasions the story has it's origin in Government spin.

Of course including the word 'taxes' in the titles makes them more newsworthy. Adding the words 'secret' or 'stealth' almost guarantees reader interest. I think that's proven if this is the first time you've read an item on this TaxBuzz blog! ;-)

Typically such stories in the media refer either to:

• charges to be levied by local authorities or commercial businesses;
• ideas being floated by the Government to assess public reaction; or
• plans that the Government has little intention (or prospect) of introducing - but which it wants to be seen to have advocated.

Rarely are these taxes already in place or even inevitable.

At the risk of being flippant, the best way to avoid any such secret new stealth taxes is to stop reading about them. At least until and unless they actually start to affect you - and that's often going to be 'never'.

As and when you are subject to taxes or want to better understand how you can legally avoid them impacting you, do ensure that you talk to real tax specialists - such as members of the Tax Advice Network - simply click one of the links above or use the search facility (top right).

"Bereaved families hit by tax hike"

The headline I've adopted here is taken from a BBC news item. It includes reference to the ubiquitous (self proclaimed) Taxpayers' Alliance in their standard rent-a-quote guise. [Edit: NB: I seem to have some influence as the title of the article has since been revised to the more accurate: 'Bereaved face late tax fee rise'].

I suppose I shouldn't criticise the press for adopting attention grabbing headlines. I have to do the same thing to attract readers to articles on my blog and in my newsletters.

There are two points worth highlighting here though:

Firstly the article in question does not refer to a tax hike but to an interest charge on late paid inheritance tax. Despite the recent reduction in interest rates generally, HMRC will be charging 3% interest if IHT is paid more than 6 months after the death in question.

Secondly, only a very small proportion of estates are subject to inheritance tax. So I do wonder whether suggestions in a story such as this one that the "public would be angry at the changes" - are intended more as an attempt to influence public opinion. Surely that's not appropriate for the BBC.

Let me be clear, I'm not advocating increases in inheritance tax or excessive interest charges on late payments of tax. But I am in favour of more accurate headlines and reporting - both generally and especially as regards tax related issues.

In the mean time, do tell me - what do you think about the way that such stories are reported?

Environmental taxes - going up

I had an epiphany at the 2009 Wyman Debate after listening to Mark Schofield arguing the case for an increase in Environmental taxes.

Mark argued that if environmental taxes are well designed they can provide that double dividend of:

• generating additional tax revenues; and at the same time
• discouraging 'bad' behaviour so as to help the fight against climate change.
  

This is not a new argument but it certainly seemed to win over the audience as was apparent from the shift in voting during the evening. Before Mark spoke only 28% of those present thought that environmental taxes should rise. After hearing him however this increased to 51%.

At one point Mark referred to a report which he claimed suggested that a shift away from traditional taxes to environmental taxes would create 2.8 million jobs in the EU. I've been unable to trace this (as yet) though I have done some limited further research.

Unlike most excise duties environmental taxes are rarely direct taxes on the consumer. The cost of such taxes will however be passed on to consumers through higher prices so they would bear the bulk of any increase. And if costs do not rise this can only be because the businesses subject to the taxes have modified their behaviour with the consequential environmental benefits. Indeed this is a key objective behind the imposition or increase in environmental taxes.

The most well known environmental taxes in the UK at present are:

• aggregates levy - a tax on primary sand, gravel and rock that is dug from the ground or dredged from the sea up to 12 nautical miles off the coast
• climate change levy - a tax on commercial and industrial users of energy
• landfill tax - a tax on any business or local authority that wants to dispose of waste using a landfill site

In addition elements of fuel taxes (hydrocarbon oils), road fund licences and other motoring related taxes have also been impacted by the environmental argument. Equally the Government has also introduced a range of environmental focused tax incentives.

The office of National Statistics reports that environmental tax receipts rose to £38.5 billion in 2008, an increase of £0.5 billion (1.4 per cent) compared with the previous year and almost twice the amount collected in 1993. BUT Environmental taxes accounted for less than 3% of Gross Domestic Product (GDP), and were only just over 7% of total taxes and social contributions in 2008.

I appreciate that speakers at the Wyman Debate were asked to propose specific views with which they did not necessarily personally agree. Nevertheless, Mark Schofield's arguments were quite compelling. It seems inevitable to me that environmental taxes will rise. I'm aware that the Institute of Directors has argued against this inevitability.

What do you think?

How many tax agents are there in the UK?

It all depends what you mean by 'tax agents' of course.

HMRC use the phrase to mean all those advisers who file tax returns or claim forms on behalf of clients. HMRC say this includes accountants, tax advisers, solicitors, payroll bureaux and VAT advisers. It also includes all such advisers who are members of one or more professional bodies and also all those who have no professional qualifications.

There is no definitive list of tax agents so we are reliant on HMRC figures and here I am struggling. The references below are to paragraphs in their recent con doc: "Working with Tax Agents".

• At para 1.2 it states that 70% are affiliated to one of the main professional bodies within the UK. And then goes on to say that 80% of agents have a professional qualification. The implication being that 10% are qualified but no longer affiliated. Even if this were the case, how would HMRC know? It seems to me that either the statistics are spurious or that HMRC has more information about tax agents than has hitherto been revealed.

• At para 5.2 it states that "at least 12,000 tax agents in business in the UK are unaffiliated to any major professional body." I wonder how this figure has been determined. Given the figures noted at para 1.2 it implies that this represents 30% of the tax agents and that, therefore there are only around 40,000 tax agents in the UK. This accords with the figure quoted on page 5 of the Impact Assessment; this states that “there are approximately 43,000 tax agent establishments in the UK who act for more than five clients.”

• At para 5.10 it states that HMRC currently recognise 80,000 agents who act for less than 5 clients, including friends and family and those supporting the not for profit community. This seems to be twice the total number of tax agents previously identified. And yet it is clearly intended to be a minority of the total number of tax agents recognised by HMRC. According to the Impact Assessment this 80,000 figure is over and above the 43,000 tax agents who act for more than 5 clients. But this fact is not made clear in the con doc itself.

So how many 'tax agents' are there in the UK? Anyone want to make a guess?

Five facts all accountants need to know about tax avoidance schemes

This post follows on from a recent item I wrote about: Naive promoters of tax avoidance schemes.

So here are what I call the Five Facts you need to know about tax avoidance schemes:

1. Accountants should only promote such schemes if they are confident that they understand ALL of the risks and consequences for their clients;
2. Accountants do NOT have to advocate structured tax avoidance schemes;
3. Accountants who promote such schemes honestly will find that typically only around one in ten clients will proceed once they understand all of the risks;
4. Accountants do NOT have to notify all clients that such schemes exist;
5. Accountants are NOT at risk of successful negligence claims if they fail to alert clients to such schemes.

Do I need to expand or explain the justification for any of these? I'm happy to do so and also to receive comments from people with a different view. Experience suggests however that these five facts will be quite comforting for those accountants who are on the receiving end of promotions like the one I mentioned in my previous post.

Naive promoters of tax avoidance schemes

I saw a promo flyer from a respected accountancy grouping last week. It contained an overt promotion of [presumably 'new style'] employee benefit trusts for accountancy firm clients. I'd like to clarify a few points in this connection.

Here's the gist of what was in the flyer:

• We've formed a strategic alliance with some tax avoidance gurus;
• They are working closely with some of our members who are now 'tax mentors';
• They have all signed confidentiality agreements and won't compete with your firm if you let them at your clients;
• One of the 'mentors' has shared a case study "to show how an Employee Benefit Trust strategy has actually worked for one of his clients".

The clear implication being that this case study should persuade readers to consider talking to their clients about similar such schemes. Even more so as many accountants have clients just like the one featured in the case study and who was seen for the first time in late 2006:

"One of the first things identified was that the directors were paying substantial amounts of both Corporation Tax & also personal tax, due to the voting of bonuses in order to bring the taxable profits down to the small companies Corporation Tax rate band, and then dividends thereafter."

Of course the 'substantial' amounts of CT and IT are simply a function of the level of profits. The previous accountants have evidently been advising the client how to withdraw profits in the most tax effective way - without adopting any abusive schemes. The case study continued:

"We presented to the Board regarding extraction strategies and the directors decided to undertake an Employee Benefit Trust strategy, sheltering £300k into the Trust which was then taken by the directors as a loan from their individual "sub-trusts". The initial saving in tax, net of costs, was in excess of £100,000."

"The directors have been so delighted with the process that they are currently undertaking their third EBT in advance of their 31st August 2009 year-end. Both directors are personally debt free, they have both bought holiday homes with no borrowings &, very importantly, the balance sheet of the Company now has no excess funds on it, above those required for working capital purposes, hence a minimum amount of funds exposed to commercial risks."

"Finally, do the directors happily recommend us to other businesses that they come in to contact with? - Absolutely!"

Love that last line. Of course the Directors are happy and great advocates. But I'd also bet that they are either unaware of the risks they have taken or omit to mention them to their friends.

There's a fair amount missing from this story. Let's assume it's due to naivety and the desire to make a compelling advert for the promoters.

Let's start with the fact that the enquiry window for the first year's transaction (y/e 31/8/07) hasn't yet closed. And what about the (inevitable) ongoing HMRC enquiries? The best practice advice to keep the money aside to fund the tax in case it does eventually becomes payable? The lack of certainty as regards the final outcome?

And what about all of the other clients who were approached to adopt the scheme but who did not go ahead once they understood the costs and risks? Is it really worth an accountant spending all that time and effort if only a small proportion of clients decide to proceed? Presumably that's part of the reason for inviting a third party 'tax mentor' to do the pitching. In this connection I wrote a separate piece offering a simple guide to tax avoidance schemes last month.

Is it me? Do share your views - anonymously if you prefer.