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!)

Friday, October 2, 2009

UK tax law ruled illegal by EU Court

To be fair this concerns a tax that will affect very few of us - stamp duty reserve tax (SDRT). The principle though has wide implications. The case in question involves HSBC which has just won what is predicted to be the right to a tax repayment of £27m after the European Court of Justice ruled that a tax [HMRC] has collected since 1986 is illegal.

It seems that elements of the law concerning SDRT have always been incompatible with EU law such that refunds will be available dating back to when the tax was introduced. In the light of this decision the government scrapped the tax on some share transactions yesterday after the European Court of Justice ruled it breaks EU law. The Telegraph reports that the UK Treasury (ie: the taxpayer) could be "forced to repay as much as £20bn to companies" as a result of this ruling.

One of the arguments employed in the battle against abusive tax avoidance and tax evasion is the rule of law. We should all comply with it. And of course we should. Equally so should the Government.

There are numerous cases however making their way to or through the European Court because the Government has not complied with European law - when framing or amending UK tax laws.

Where such allegations are made the cases are staunchly defended by HMRC on behalf of the Government. Many such cases are the subject of Group Litigation Orders - where a number of taxpayers claim that the UK law is incompatible with European law and thus the tax in question should not be paid or should be repaid to them.

As is well known I am no fan of abusive tax avoidance schemes. I am even handed however and am also disappointed when HMRC pursues cases that should never have come to court.

I'm no lawyer so would not presume to construct a legal test. However I do see a difference between those cases where:
  • the EU law was not properly considered when the UK law was framed; and those cases where,
  • after full consideration, the UK law was crafted in an effort to avoid the restrictions imposed by EU law.
Some might argue that the latter can be compared with contrived avoidance schemes and that consistent principles should be applied to deny both types of cases from having the desired impact - partly to discourage future such attempts to achieve the same ends. The alternative view, which I tend to prefer, is that it is perfectly proper for a sovereign state to want to retain the power to impose taxes and that to do so it has to examine the EU law to ensure that it is not breached. Occasionally the wrong conclusions will be drawn.

The real problem however comes when others take a contrary view and secure convincing legal backing for this. I imagine that HMRC does not want to have to admit that it's advice or parliamentary draughtsman made a mistake. Rather let the Court decide even in the face of compelling evidence. This ensures that the issue takes years to resolve even if it also costs hundreds of thousands of pounds in legal fees. My heart says this is what must happen in practice but my head tells me to believe that HMRC no longer pursue cases where they have been advised they have a less than 60% chance of winning. The sums involved in cases such as this however probably make the gamble worthwhile as the cost of fighting (even with only a small chance of winning) is so low - relative to the cost of losing or of giving in before going to Court.

In this latest case HSBC has won its case that the UK stamp duty reserve tax it was charged when it bought CCF, the French bank, contravened EU law. HSBC was fighting for, we are told, a refund of £27m. The full tax at stake - reports the Telegraph, could be nearer to £20bn. If this is right we should not be surprised that HMRC fought it all the way.

There have been other such cases in the past and there will be more in the future.