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......?

1 comment:

  1. Mother of a Hard Working British FamilyDecember 15, 2009 at 2:46 PM

    Well you need to read the recent Astall case - a clear example of a purposive interpretation taken by the courts (althougth for direct tax).

    So perhaps things are changing now - and courts are going to rely more on Halifax and Mawson?

    I went to a private equity conference recently and the prevailing view of many of the managers was that given that the tax rate is now 60% plus (for earners just over the 100K limit) then aggressive tax avoidance is now fair game. Surprisingly some of them want a fight - their sick and tired of this government - and a few are planning to take a flight.