Saturday, August 1, 2009

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.


  1. I have been busy elsewhere and am behind on surveying the dross doing the rounds. Can you PM me the details of this one please ? Thanks.

  2. Everything you say is valid. I was asked about this scheme, not from a client but by an acquaintance at a Party. The person was not happy his accountant did not recommend it! I told him I would not recommend it - I have a client that I have had to return to a previous accountant because of a retrospective FA meant that a client who left one of these (different) schemes is now was facing a tax bill he can not pay and the old accountant has to deal with the appeals etc, which was part of the agreement of the original trusts. The client keeps in touch as he finds me more helpful in dealing with the stressful situation he now finds himself in. He tells me he would have rather paid the tax in the first place, than go through what is now hanging over him.......