Tax temptation of the week: Stamp Duty Land Tax avoidance

The Saturday Times* was headlined with reference to a story about how the 'super-rich' avoid paying Stamp Duty Land Tax (SDLT) when they buy their mansions.

Simply stated the property doesn't change hands. The purchaser buys the shares in a limited company that owns the property. As long as the company itself doesn't sell the property there is no SDLT to pay.

Easy? Not at all. How to do you get the property into a limited company in the first place without paying SDLT? There are many complex tax related minefields to negotiate to make such a plan work. And it costs thousands of pounds to find out if it would be possible and to navigate the minefields.

Please do not be fooled into thinking that any of this is something to consider doing for the sort of properties that we normal mortals can afford. And there are no other simple ways to avoid SDLT any more, as I explained in May when answering the question: Are stamp duty avoidance schemes worth the money?

A similar view to mine was shared on CityWire in March. They explained: The chancellor has finally clamped down on stamp duty avoidance schemes widely used by rich individuals buying high value residential properties as well as buyers of commercial properties.

And I note that Solicitors have been advised by the Law Society not to get involved in SDLT schemes. That, I think, says it all.

The real issue here is the jealousy that the Times story generates. We don't like paying SDLT. The media are highlighting the facility available to the super-rich and we are in uproar that they can avoid this tax. But how many readers would choose to pay hundreds of thousands or millions of pounds in tax on a new property if there was a reliable legal way to avoid doing so?

So we agree that the 'loophole' should be plugged. Will it be? Don't hold your breath.

*As The Times story is behind their paywall I have linked to a rehash of the same story on the 'This Is Money' website.

Tax scheme warning of the week - from the GAAR study report

I was especially taken by para 5.43 of the GAAR study report to which I referred in my last blog post:

I [Graham Aaronson QC, the author of the report] therefore see no unfairness in applying the GAAR to an arrangement which is not yet completed before the date when it comes into force; and it would in my view be appropriate to do so.

Is it just wishful thinking on my part? This strikes me as a warning to anyone who continues to promote 'abusive', 'artificial', 'egregious' or 'unacceptable' tax schemes (as referenced in the report).

The General Anti-Abuse Rule (GAAR) has yet to be finalised or to enter the staute books. However the GAAR's guardian has set out a clear warning that it should be capable of operating retrospectively. You have been warned!

Do you agree?

Related posts

• Do you have to organise your affairs to pay the maximum tax?
• The beginning of the end for structured tax avoidance schemes?
• 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

Top ten tax understatements in GAAR Study report

Regular readers will know I have long awaited the outcome of Graham Aaronson's review. I have been referencing it on this blog since July 2010.

The Report has now been published and the media is awash with commentators rushing to offer their immediate conclusions. Suffice it to say that, as expected, the report offers an intelligent, practical and commercial way forwards. I look forward to hearing how the Government propose to move things on from here.

In the meantime I have identified my top ten tax understatements in the GAAR study report dated 11 November:

1. [A GAAR] would deter (and, where deterrence fails, counteract) contrived and artificial schemes which are widely regarded as an intolerable attack on the integrity of the UK’s tax regime. Para 1.7(i)
2. Judges inevitably are faced with the temptation to stretch the interpretation [of tax law], so far as possible, to achieve a sensible result; and this is widely regarded as producing considerable uncertainty in predicting the outcome of such disputes. Para 1.7(iii)
3. The tax rules in many areas have become extremely complex and in practice can give rise to very anomalous results. Para 1.10
4. In some cases the Courts, under the guise of purposive interpretation, have been prepared to stretch the interpretation of tax legislation in order to thwart tax avoidance schemes which they regard as abusive. Para 3.13
5. It is still early days to determine the value of the DOTAS scheme as a whole. However, it is plainly a useful source of information for HMRC. Para 3.17
6. It is clear that purposive interpretation, specific anti-avoidance rules and DOTAS are not capable of dealing with some of the most egregious tax avoidance schemes. Para 3.20
7. [A GAAR] should target those highly abusive contrived and artificial schemes which are widely regarded as intolerable, but that it should not affect the large centre ground of responsible tax planning. Para 5.1
8. The UK tax rules offer, and indeed in many instances positively encourage, the opportunity for taxpayers to reduce their tax liability. Taking advantage of this can be described as a form of tax avoidance, but clearly it is not something to be criticised and therefore it should not be counteracted by a GAAR. Para 5.14

And my two favourite tax understatements:

9. There are some areas of taxation, such as trusts, where the present statutory rules are extremely complex and can give rise to many anomalous consequences. Para 5.30

10. The UK’s tax legislation is notoriously long and complex. In many places it is virtually impenetrable. Para 1.7(iv)

Have you identified any other understatements in the report? Do add your observations as comments below.

Tax trap of the week: Film Schemes - were they missold?

On the one hand tax breaks for the British film industry have just been extended until 2015. There have long been plenty of promoters of film scheme 'investments' that exploit the tax breaks - which have varied over the years. However tax schemes are rarely as simple as they may seem. Just this week I heard of a group of investors who don't understand why they are having to pay tax by reference to film schemes they invested in some years ago.

I suspect some will claim that they were victims of what might be termed 'misselling'. Although equally the investors may not have read the small print. At it's simplest the old film schemes could be described as the equivalent of getting an upfront loan (by way of a tax refund) from HMRC that would, effectively, be repaid over a 15 year period. The law was changed in 2006.

The problem is that, prior to the rule change, many advisers and investors focused only on the upfront tax refund. Investors either did not understand or chose to ignore the longer term cashflows. These were always going to result in tax being paid on profits from the film - and there had to be an expectation of profits or the scheme would not have been commercial. The profits would not be paid out however so the investors have to pay the tax out of their own resources - hence the confusion I noted earlier.

The schemes would still have appeared attractive as long as the investor expected to invest the tax refunds so as to generate a return that should exceed the tax payable over the next 15 years.

Although tax reliefs will continue to be available through to 2015, many past investors are losing faith in their film scheme investments. Some of the more aggressive and/or controversial schemes are being struck down. The courts are deciding that investors were not entitled to tax refunds (under the old rules) after all. The first tier tax tribunal found in favour of HMRC in September as regards two separate film partnerships promoted by Future Films (Samarkand Film Partnership No 3 and Proteus Film Partnership No 1). And 250 investors in another film partnership, that reportedly generated £117 tax benefits, are awaiting the outcome of another tribunal hearing.

The forecast does not look good for the outcome of these appeals or those re other more controversial tax avoidance schemes. As I have long maintained, a favourable Counsel's opinion does not mean you will win if HMRC challenge your tax scheme. It simply means you should be safe from charges of tax evasion if HMRC win. And therefore only liable to pay the tax and interest without any further penalty - if everything was fully disclosed.

Tax twit of the week - Bernie Ecclestone

Last week the F1 supremo, Bernie Ecclestone was challenged by a court in Munich as regards a payment of £27m he made to Mr Gribkowsky, a former banker.

Mr Ecclestone admitted that the money was paid to discourage Mr Grobkowsky from making accusations that would have led to a potentially costly UK tax investigation.

Mr Ecclestone claims that he had done nothing wrong. However he was clearly concerned that either the cost of defending his position, if challenged by HMRC, or of the back taxes, interest and penalties they would have secured would come to MUCH more than £27m.

Somehow I suspect that HMRC may take a look into his affairs now that the quantum of his concerns have been publicised. Don't you? For publicly explaining that he paid £27m in an effort to avoid damaging allegations about his tax affairs being made public, I will be sending Mr Ecclestone my Tax Twit of the week award.

Did Vince refuse to engage in tax 'avoidance'?

Leaving aside Vince's well publicised Tax Mistake on which I commented in my last blog post, there is another angle to the story.  Did Vince refuse to engage in what he perceived to be 'tax avoidance' even though the facility in question is set out very clearly in the rules?

I was wondering why Vince's accountant (Myrus Smith) hadn't encouraged him to register for VAT long before the problem became apparent.

They seem to be a reputable firm and I suspect they did give him the advice any decent accountant would have done. But clearly Vince did not register early.  He also seems to have ignored the standard advice that he would need to monitor his income as the year progressed, and then register for VAT once his earnings were likely to exceed the registration threshold.  This is of course harder to do in practice than in theory - despite the rules.

I suspect that his accountants gave him good advice. I suspect that they explained to Vince that he could register for VAT even when his earnings were below the VAT registration threshold. And that if he did so it would reduce his taxes.

There are two angles here. The first is that once registered Vince would simply be charging his clients VAT and then paying over this VAT to HMRC. But it would also mean that he could claim a reduction for the VAT he paid on all business related expenses. This would have saved him money.

The second angle is that he could have registered to use HMRC's official VAT flat rate scheme. This is particularly beneficial for smaller businesses with very low outgoings. I suspect Vince was in this position and could have saved hundreds of pounds a year had he registered.


But to Saint Vince, both of the above tax savings might have sounded like 'tax avoidance'. As such he probably chose not to register for VAT before it was necessary and then lost out by leaving it too late.

If I'm right this is as good an example as any that the term 'tax avoidance' is being used too widely.

What do you think?

Being skeptical about financial advisers and tax...

Financial journalist, Paul Lewis, presented what I'm sure was a fascinating talk to a group of skeptics in June 2011.

I have long harboured similar reservations to Paul about some financial advisers but I have never been able to articulate my concerns as well as Paul has done.

I strongly recommend that anyone interested in debunking tax and financial advice reads the transcript of Paul's talk. It's on his website here. In it Paul, who presents MoneyBox on Radio 4, argues that:

• Financial Advisers do not address most areas of financial advice with which the public have problems;
• Financial Advisers become seduced by the product providers and promote products that are not in the investors' best interest;
• It is commission – not solutions to financial problems – which has driven the growth in the financial services industry;
• Most people should clear their debts before starting to invest for the future;
• Many advisers and the public confuse savings with investments. If you save money it remains yours. If you BUY an investment you no longer have the money you have an investment - which can go up or down...
• Assessing what the industry calls customers’ ‘attitude to risk’ is not done well. Because most people haven’t got a clue.
• The impact of inflation is not specific to savings accounts. It simply means that any investment return needs to outstrip inflation (and charges) to have been worthwhile. And this always carries a risk that it may not happen.

Paul concludes:

• Do financial advisers really give the financial advice we need? Not often.
• Do we all need to see a financial adviser? Absolutely not.
• Will the Retail Distribution Review make things better? Yes. But there is still a long way to go.

From a tax perspective it was also interesting to note Paul's analysis of the top ten common financial topics he gets asked about. This included income tax, national insurance and inheritance tax (IHT). Of these, financial advisers will typically only advise in detail on the latter. I wonder how often the typical financial adviser involves a TAX adviser rather than simply looking at ways to fund the inheritance tax when it falls due? Maybe it's my background but I'd think that the starting point for people with concerns about IHT should be an inheritance TAX SPECIALIST rather than a financial adviser.

Finally I should state that I know a number of financial advisers who do not fit Paul's stereotype description. Equally I know a number of accountants and tax advisers who promote tax schemes with much the same mindset as that of which Paul complains. By which I mean they are seduced by promises of healthy commission and assurances given by the original promoters of the schemes that the scheme works and that the hoped for benefits outweigh the risks. But that's a whole separate subject - that I've addressed many times before on this blog.

What's your view?

Related posts:

Are Stamp Duty planning schemes worth the money?

NO. The Revenue do NOT approve Disclosed tax schemes

Tax planning to be wary of

Naive promoters of tax avoidance schemes

Tax avoidance is a card game - the metaphors multiply

Tax tease: How likely are you to be arrested for tax avoidance?

This week HMRC announced that five plumbers have been arrested for failing to pay the right amount of tax. A further 600 or so are under civil investigation by HM Revenue & Customs (HMRC) for failing to pay the right amount of tax. Some of those involved owe up to £150,000.

The arrests and investigations have taken place during HMRC's campaign titled the 'Plumbers Tax Safe Plan (PTSP)' . This invited plumbers, gas fitters, heating engineers and members of associated trades to get their tax affairs in order by the end of this month. But there was an earlier deadline of 31 May by when you had to notify HMRC you intended to 'fess up. The raids and arrests were of people who were known to be tax ‘ghosts’ - people who have not declared their earnings.

HMRC have announced that more raids are expected to take place over the coming weeks across the UK, including Yorkshire, Kent, Cambridgeshire, Tyne & Wear, Midlands and South Wales.

So how likely is it that you might be arrested for tax avoidance?

Simply stated it will NEVER happen. Not for tax AVOIDANCE anyway. But remember that the plumbers were not arrested for tax avoidance. What the plumbers did was to EVADE their tax obligations, and that's illegal. Which is why they have been arrested.

I have long argued that more publicity of this type of heavy-handed action by HMRC and the police would have a deterrent effect. I expect that it will encourage more people to come clean earlier. And hopefully more people will recognise the huge risk they take by conducting a business without telling HMRC what they are doing.

There are two problems however:

1 - Those people who would like to come clean and are now scared off by news of the arrests. Don't be scared. If you come forward voluntarily there is next to no chance of being arrested*.

2 - Those people who are paid cash in hand by 'employers' who refuse to comply with their obligations as employers. They would also 'sack' anyone working for them who threatens to tell HMRC what's going on. In such cases it is clearly the 'employer' who is in the wrong. They may be prosecuted by the workers would never be arrested in such cases.

*Whether you are a plumber, a gas fitter, a life coach, an ebay trader, a restauranteur, a medical professional or indeed anyone who has been evading tax, or you know someone who has, TAKE PROPER ADVICE. The same goes for you if you run a business that is evading VAT.

I haven't picked any of those categories at random. They are all referenced in recent pronouncements by HMRC. I've written about some of them in previous blog posts - see below. Even if your situation has yet to be addressed by a specific HMRC campaign, the penalties will generally be less severe for taxpayers who come forward voluntarily to put their affairs in order with HMRC. And in such cases these penalties will NEVER include imprisonment.

Taking PROPER ADVICE means speaking with an experienced tax consultant with specialist experience of negotiating 'back duty' settlements with HMRC. (Back duty is an outdated but still useful term to focus attention). Few local accountants are able to do this sort of work unaided. Which is why I recommend the Tax Advice Network.

Related posts:

Life coaches, fitness coaches and tutors targeted by taxman
HMRC robots to catch out online traders
HMRC targets VAT cheats - or rather, it will do soon...
Last chance for tax cheats to get their tax affairs straight
Doesn't everyone try to avoid or evade taxes?

Tax Failure of the week: Begbies sells tax division due to falling demand

The Evening Standard reports that quoted top 20 firm Begbies Traynor is selling its tax division, under the headline: "No money in loopholes". The Standard goes on to report that Begbies suffered from a lower demand than anticipated for its tax services:

"primarily due to a tougher stance towards tax planning activities adopted by the Government and HMRC."

Regular readers will know that I am no fan of the sort of tax schemes being attacked by HMRC as well as by successive Governments. Whist there are some boutique tax practices that focus on promoting such schemes I am surprised to read that Begbies are effectively admitting that this was a key part of their business.

There has always been and will continue to be plenty of work for good tax advisers. They do not need to advocate fancy schemes either when solving tax problems or when helping with genuine tax planning.

I would guess that the issue here is that Begbies tax division was tasked with achieving unrealistic fee income targets - perhaps by reference to the sort of fees that are only achieved when putting wealthy clients into fancy schemes. I would agree that there are fewer such schemes and that demand has fallen sharply as people become more aware of the risks and downsides. I also anticipate that HMRC will win further 'avoidance' cases in the courts over the next couple of years. Remember that these cases typically relate to tax 'avoided' between 5 and 10 years previously.

Anyway. If you want to get in touch with vetted independent expert tax advisers, you know where to go.

Related posts

Are Stamp Duty planning schemes worth the money?

NO. The Revenue do NOT approve Disclosed tax schemes

Tax planning to be wary of

Were you wasting time advocating this tax scheme?

Naive promoters of tax avoidance schemes

Tax avoidance is a card game - the metaphors multiply

At last a tax protest that might actually make some sense

I'm referring to the highly publicised protests that are likely to be a feature of this year's Galstonbury festival. ArtUncut are planning to publicly criticise Bono and his band U2 for their alleged tax avoidance activities.

In some respects the protests will be similar to those waged by UKuncut against various high street stores earlier this year. There is one BIG difference however. The UKuncut protests did not directly target the people whose tax avoidance actions were being criticised.

ArtUncut will be protesting right in the face of the alleged tax avoiders U2 and their campaigning leader, Bono. As the Guardian reports:

"The band was heavily criticised after moving parts of its business affairs from Ireland to the Netherlands in 2006, apparently in response to a cap on already generous tax breaks for artists in the republic. Though the band insists this simply reflects the global nature of their income as the world's highest-earning musicians, their decision not to pay all their tax in their home country looks even worse in the light of Ireland's financial meltdown. Bono is happy to tell the government how it should spend taxpayers' money – campaigning for an increase to the aid budget – yet he has taken his tax euros not just from Ireland's development fund, but also its hospitals and schools."

They also note that:

"The case in Bono's favour – and it is a strong one – is that he's almost certainly done more for the world's poorest people than anyone who has come to protest against him in the Glastonbury crowd. Which makes his choices over tax even more curious."

There does seem to be a case to answer here. There are no apparent mitigating circumstances, external shareholders or commercial reasons that might justify the band's (legal) tax avoidance activities. About the only justification I could imagine that would legitimise these would be if the monies otherwise payable as taxes are being donated directly to charitable aid projects. This would be akin to Bono saying to the Irish Government - "I'm cutting out the middleman. Instead of keeping my companies in Ireland and paying taxes here, I've set things up so that I can pay similar amounts (or more) directly to help the needy. I don't trust the Government to do enough for them." It's a nice thought.

I have no idea whether Bono and U2 are making huge (cash) donations to help the needy instead of paying taxes in Ireland. I'm a fan of 'celebrities' like Bono securing positive publicity for altruistic campaigns such as 'make poverty history'. Bono is rightly renowned for his humanitarian work and I hope he retains his passion to 'do good' for many years to come. But he has set himself and his band up as legitimate targets for criticism given their overt tax avoidance activities. How will they respond to ArtUncut I wonder?

Are stamp duty avoidance schemes worth the money?

I was intrigued by a response to one of the Questions of Money items in the Times on Saturday. I had asked a similar question of a top stamp duty tax lawyer during the week.

The questioner in The Times noted that he was:

"looking to buy a two-bedroom flat in London and was contacted out of the blue by an outfit selling a stamp duty avoidance scheme."

Was it effective or too good to be true?

The answer contained good advice to the questioner that it really wouldn't be a good idea.

"The risk is that you pay a [promoter] a substantial sum to avoid tax, HMRC get wind of it, closes down the scheme and you end up having to pay stamp duty [land tax] after all, having already forked out the fee."

These schemes rely on the naivety and greed of people who object to paying stamp duty land tax. They are no doubt advised that the scheme is legal and robust. Why should anyone question this?

Last week I asked a top stamp duty tax lawyer his opinion of SDLT avoidance schemes. He said that there are NO off-the-shelf schemes around any more that work and which are legal. The anti avoidance tax changes in recent years have had the desired effect. In effect, unless one is spending more than a £1m and is willing to enter into convoluted transactions that can be complex to unwind, SDLT tax avoidance is dead.

You wouldn't think so if you look online for SDLT avoidance schemes. One promoter claims they can save you tax on the acquisition of properties worth more than £250k. At least two others set a minimum of £500k.

If you are still tempted, you may feel there is nothing to lose if the promoter promises to refund the fee if the taxman forces you to pay the tax. But who knows whether the promoter will be around, contactable, able and willing to refund the fee when that happens? In which case you would be well out of pocket and you will have had the deep joy of facing a tax enquiry. They're not much fun. Still; each to their own.

Are super-injunctions 'just like tax avoidance'?

I was taken by the analogy drawn by Chris Blackhurst in The London Evening Standard:

"People secure super-injunctions because they can. It's just like tax avoidance. Wealthy folk minimise their tax bills because they're able to, because the law allows them to, because their adviser would be negligent if they did not show them how.

Most of us cannot avail ourselves of that service and the schemes the rich use. And that annoys us - but it doesn't mean we wouldn't do it. Human nature decrees that we look after our own - and anyone who claims otherwise is delusional".

I made a similar point to the one highlighted above (by me) on this blog last year: Doesn't everyone try to avoid or evade taxes? Some of the critics of the rich who pay for tax schemes think nothing of fiddling their taxes (or expenses - which amounts to the same thing as it creates additional income that should have been taxed).

The big difference is that the promoters of most tax avoidance schemes generally try to stick WITHIN the letter of the law. Those who fiddle their taxes, eg: by failing to declare all of their taxable income or claiming deductions for non-business expenses are clearly breaking the law and evading their taxes. The complaint therefore is really that some people can afford to PAY for advice to get around the law - as with those philanderers who secure super-injunctions to cover up their infidelities.

The article in the Standard rightly concludes:

"If they're honest, lawyers should tell their clients not to bother - that transparency really is a better policy. As they see constant hints dropped in their direction and live under constant pressure of exposure, those holders of existing super-injunctions might concur."

And, as regular readers of this blog will know, I think accountants and tax advisers should be careful with their advice re tax avoidance schemes. All too often clients get caught up in something more complex, 'dodgy' and time consuming than they had anticipated. See this earlier post: "Have a look at this scheme and tell me what you think". It includes a routine quote from a client who has been given chapter and verse on the risks and downsides of a tax scheme: "Now I understand it properly, why would I want to go into a scheme like that?"

On balance, I think I disagree with the analogy drawn by Chris Blackhurst. What about you?

MP's can still benefit from 'disguised remuneration' trusts

I was shocked to read a note in AccountancyAge online this morning claiming: "MPs excluded from tax avoidance legislation".

That would be outrageous. I've checked the Finance Bill in question and cannot find the words originally quoted in the article*. However what it does say is almost as bad.

We're talking here about the legislation to tax what is called 'disguised remuneration'. It often, but not always involves payments and loans to and from Employee Benefit Trusts (EBTs) and Employer Financed Retirement Benefit Schemes (EFRBS). I wrote about this last month:

HMRC turn the Spotlight on the newest EBT related tax avoidance schemes.

The legislation appears in the Finance Bill 2011 and this also sets out various exemptions - intended, one assumes, to ensure that innocent transactions are not caught by widely drawn anti-avoidance powers. Amongst the exemptions is this one set out in Schedule 2 which introduces section 554(8). It says that the anti-avoidance legislation:

"...does not apply by reason of a relevant step taken by the Independent Parliamentary Standards Authority in relation to a member of the House of Commons."

I do hope there is an innocent explanation for this exclusion. It would seem to have been a late addition to the Bill as it's not referenced in the explanatory notes to the Finance Bill. These only go as far as section 554(7).

Maybe someone (who?) wanted to avoid the possible complications that would ensue if the IPSA should ever decide to put trust arrangements in place and to lend MPs money re their expenses before they have been verified. Maybe. I still wonder who asked for the exemption to be drafted and why it was needed over and above all of the other exemptions that apply for everyone else. IF MP's are getting special treatment it would be outrageous - not for the first time of course.

*EDIT: Following my intervention AccountancyAge have revised the article to reflect the quoted words I referenced above.

Unreliable evidence: A high level Radio 4 discussion about tax avoidance

The Radio 4 programme, Unreliable Evidence, hosted by Clive Anderson, last night contained an informed and fascinating discussion about tax avoidance - the way in which people and companies make arrangements within the law to keep their tax bills low.

The first 25 minutes of the programme addressed a number of issues and misconceptions about corporate tax avoidance and also touched on the question of non-doms.

The guests were all senior, informed and credible tax experts - focused on looking at things from a strict legal perspective.

• Graham Aaronson QC
• Professor Judith Freedman
• Lord Hoffman
• Steve Edge, from Slaughter & May

I recommend you listen to this on BBC iplayer if you have an interest in such matters. It was quite refreshing to hear such an informed discussion on the radio. Free of rhetoric it was illuminating. All of the speakers seemed to be adamant about the supremacy of the rule of law. They say there is no room for interpreting the 'will of Parliament' other than through a legal interpretation of the letter of the law.

Anyone hoping for some recognition that there is a difference between acceptable and unacceptable tax avoidance would have been disappointed by this first half of the programme. BUT, the second half was a revelation as regards the likelihood of us having a General Anti-Avoidance Rule in the near future. I'll be writing about this in a separate blog post.

What did you think of the first part of the programme? Please let me know in the comments box below.

HMRC turn the Spotlight on the newest EBT related tax avoidance schemes

Employee Benefit Trusts (EBTs) have long been used for tax avoidance purposes. They have evolved over the years as advisers tried to avoid the impact of tax cases and changes to the tax rules.

HMRC have clearly got fed up of playing catch-up and last December the Government announced onerous new rules to tax "disguised remuneration". In addition to EBTs, the rules would also impact Employer Financed Retirement Benefit Schemes (EFRBS).

Some commentators suggest that the proposed rules are draconian. This may be right. But in most cases those who would be caught are only those who persist in their attempts to frustrate the rules that would tax income when it is earned. Don't want to get caught by the new rules? Avoid fancy and artificial payment arrangements. Pay the tax otherwise due on what would be your income but for the fancy scheme.

Following a consultation on the draft new rules HMRC published a list of Frequently Asked Questions on February 21. These confirm that the new rules are intended to apply to arrangements

"involving a third party to reward employees and directors which seek to avoid, defer or reduce income tax and national insurance contributions",

and to arrangements that are

"used as a tax-advantaged way to save for retirement, using an employer-financed retirement benefit scheme as an alternative to, or to top up, savings in a registered pension scheme."

In advance of the new rules coming into effect, some newer avoidance schemes have been promoted. These are designed to shelter funds in current EBT schemes from the effect of the proposed legislation. These new schemes rely on the availability of credit for loan repayments made before 6 April 2012.

HMRC have wasted no time in adding such schemes to the Spotlights page of their website.

In HMRC's view, while these convoluted arrangements seek to weave a way through the legal changes, they do not succeed. Even if they did HMRC would still challenge them as delivering remuneration which should have been subject to PAYE from first principles.

Subject to parliamentary approval, the new legislation will be effective from 6 April 2011 and some aspects of the proposed new law will apply from 9 December 2010. These changes are designed to prevent the avoidance of PAYE and national insurance contributions on employment income.

Individuals considering entering into such income tax avoidance arrangements should be aware that HMRC will pursue people who seek to avoid tax on monies they earn, through the courts where necessary.

But, hey, if you want to risk such activity go ahead. Some promoters no doubt will sugest that (part of) the financial cost of such legal cases can be covered by tax risk insurance. That is of course just one of the issues to consider. Each to their own.

Related posts:

• NO. The Revenue do NOT approve Disclosed tax schemes
• Tax planning to be wary of
• Were you wasting time advocating this tax scheme?
• Naive promoters of tax avoidance schemes
• Tax avoidance is a card game - the metaphors multiply

NO. The Revenue do NOT approve Disclosed tax schemes

I was at a business networking event last week and found myself talking to 'Bill' from 'XYZ Capital management'. He will have seen my name badge referenced the 'Tax Advice Network'.

This is pretty much how the conversation went:

Me: And what do you do at XYZ capital management?

Bill: We help wealthy people manage their capital.

Me: Are you financial advisers?

Bill: More than that. We can help people reduce the tax they pay down to zero, using approved tax schemes.

Me: Approved by whom?

Bill: HMRC. We only use approved schemes that have been fully disclosed under DOTAS

Me: Sorry. HMRC never approve tax schemes. The Spotlights page of their website was recently updated to make this clear as they are fed up of promoters telling people that a disclosed scheme has been approved - when it hasn't.

Bill: Well, once they've been disclosed HMRC don't seem to have a problem with them.

Me: Sorry. I know a bit about all this. But I think it's best I keep off my soapbox and simply say I have no interest in such schemes.

I resisted the temptation to give 'Bill' a full lecture. He asked for my card - which I gave him and suggested that if he wanted to know more about HMRC's Spotlights page he could check out the references to it on this blog. I said I had also addressed the way that tax schemes are, in my view, frequently mis-sold.

If you're reading this 'Bill', do let me know what you think.

Tax twang: Tax avoiders and evaders to be exposed on Wikileaks

The papers are reporting that Rudolf Elmer, a former executive at Bank Julius Baer, yesterday handed over a CD listing the details of 2,000 allegedly tax dodging individuals and firms to Wikileaks founder Julian Assange. Assange said he could publish the data within two weeks.

According to media reports Elmer was, until 2002, chief operating officer of the bank in the Cayman Islands. Bank Julius Baer is one of Switzerland’s top private banks and accuses Elmer of stealing the information he has now passed to Wikileaks.

As the Telegraph reports: Celebrities using tax avoidance schemes could be in the spotlight

Taking advantage of complex tax laws in order to reduce the individual burden is perfectly legal and has been standard practice among the super-rich for years.

Whilst that is true, I have mentioned on this TaxBuzz blog many times, that the dividing line between legal tax avoidance and illegal tax evasion is more blurred than some would have us believe.

Fancy tax avoidance schemes will often be determined as legal by top tax barristers. Such opinions will often be hedged with caveats but as long as all the related advice is followed to the letter, all should be well. By which I mean the rich taxpayer will have a strong defence and can claim to have stayed on the right side of the letter of the law. On the other side of the line we have blatant tax evaders. Contrary to the press stories implying that they are always rich, they operate at all levels of society. Tax evaders are those who fail to disclose all sources of taxable income, inflate their business expenses or otherwise pay less tax than is strictly due.

Rudolf Elmer's list apparently includes the names of celebrities and politicians from around the world. Many will be household names and, I've no doubt, many will be British. I suspect they will all be tarred with the same brush. Only they, their closest advisers and HMRC (the taxman) will know whether their deposits were the result of fancy tax schemes or the proceeds of blatant tax evasion.

Or does the list contain more extensive details of the "tax dodging individuals and firms"? Time will tell.

Related posts:

• Tax planning to be wary of
• Do you have to organise your affairs to pay the maximum tax?
• Doesn't everyone try to avoid or evade taxes?
• Tax planning schemes

Tax tease: Inaccurate Footie Tax story resurrected as 'news'

The headline in today's Sunday Times is "Top footballers dodge millions in income tax". And that "Rooney pays 2% on some earnings." Other footballers are then mentioned too.

The report seems to simply confirm the predictions of a very similar story the Times published in May 2009.

Football stars plan to dodge 50p tax rate
Scheme being considered by Manchester United, Arsenal and Liverpool means players can get salaries as interest-free loans

The Press Association are reporting the 'new' story as leading to a "Crackdown on top rate tax loophole". As the Sunday Times report though HMRC have been trying to do this for years.

The footballers are using two tax avoidance schemes. One involves their clubs paying large chunks of their earnings as 'image rights' rather than as employment income. The other scheme involves the footballers taking loans rather than salaries or dividends from companies they own. I need to debunk a key element of this part of the story to make clear that it's not as effective as the press reports suggest.

For the avoidance of doubt I'm no fan of this tax avoidance. Regular readers of the TaxBuzz blog may recall I mentioned this in the context of the 7th of my '8 fallacies that undermine the UKuncut tax protests' last month.

Debunking

When someone, a footballer or otherwise, takes a loan from their company they initially pay very little income tax. Instead of being taxed on the full amount they only pay tax on the interest they should have been charged.

In 2009 the Times suggested the tax would be as little as 2.5%. It now seems to be just 2%. The reports miss the key point though that this tax is paid every year for as long as the loan lasts. So the longer the loan lasts the more tax is paid. If the loan lasts for ten years and interest rates rise the total tax paid could end up being more than the tax they hoped to avoid.

Eventually the company will at some stage have to pay salaries or dividends to the footballer to clear the loans. This income will be taxed at the top rate - in addition to the tax already paid on the 'beneficial loans'.

I mention all this to help discourage anyone from thinking that it's always tax effective to take loans rather than salaries or dividends from their company. It seems to be attractive for footballers as long as they do NOT own the company and as long as they will leave the UK permanently before the loans need to be repaid.

When your own company lends you money the company is required to (effectively) also lend money to HMRC. This reduces the cash available in the company. And this loan to the taxman is only repaid when the loan to which it relates is repaid.

Most people trying to copy the footie players' tax avoidance scheme will also have to pay a fortune to close down their companies using complex (and expensive) schemes without paying back the loans. When that happens they will still face years of sustained challenges from HMRC who will argue that the loans were a sham and subject to tax as earnings.

Can't say I have any sympathy for the footballers though.

8 fallacies that undermine the UKuncut tax protests

Those who know me and those who read this blog will know I'm no fan of aggressive tax avoidance. I'm also critical of those in the media whose attempts to comment on tax issues reveal a woeful lack of knowledge and understanding of our tax system.

The protests outside big companies' stores around the country derive from this invitation set out on UKuncut's website:

"At the same time as making massive cuts to public services, this government is letting rich individuals and corporations avoid billions of pounds of tax. Join UK Uncut’s Big Society Revenue & Customs (BSRC) and become part of an army of citizen volunteers determined to make wealthy tax avoiders pay."

I do understand the need to simplify complex issues so that these can be understood by the man in the street. Equally I deplore the way that some people use the need for simplification to manipulate their readers and viewers. It seems to me that this is part of the background to the recent tax protests.

Part of me really wants to admire what UKuncut has achieved in recent weeks. Leaving aside the anarchists who have joined in, I'm in awe of the level of genuine support UKuncut have secured for their protests. In this regard I heartily reccommend a recent article by Alan Finlayson writing on The philosophical significance of UK-Uncut.

BUT I'm also saddened by the confusion caused by conflating different issues. And also by what some might see as cynical manipulation of public anger. In this regard I have identified 8 fallacies that seem to me to undermine the tax protests.

1 - Who is to blame for the UK's complex tax system?

It's long been complicated but it was Labour who layered our tax system with complexity upon complexity over a 13 year period in office. It was Gordon Brown who resisted calls for effective consultation - and instead rushed new tax rules into law with loads of anomalies and gaps. The Coalition Government have promised a new approach and the evidence todate is that they will do as they have promised.

2 - Who let the Big Companies reduce their tax bills?

The unpaid taxes that UKuncut complain about relate to the 13 years that Labour were in power. You can't blame the Coalition Government for tax avoided before they were elected.

3 - The Coaltion Government are taking action to reduce aggressive corporate tax avoidance

The Coalition Government has announced numerous anti-avoidance tax rules to further reduce the opportunities for aggressive tax avoidance. They aren't ignoring the issue.

4 - Who is the bad guy here?

Either UKuncut is protesting about the Coaltion Government's cuts or about tax avoidance being allowed to continue. Either way the complaint is against the Government rather than against the workers and customers of the stores being attacked by the protests.

5 - There is a degree of naivity at stake here - especially by protesters who don't pay tax

Only a minority of the protesting students have ever paid tax on their earnings. Most employees who pay tax through the PAYE system are understandably frustrated at how much of their pay goes in tax. They want to pay less. If they could, they would. The tax rules for employees make this more difficult than for the self employed and for business owners. But it's still a natural reaction. Those who've not paid tax to date seem not to have conisdered what their reaction will be to the payment of tax.

6 - And there are clear double standards too

Almost every self employed person and small business operator in the UK expects their accountant or tax adviser to help them pay less tax than they otherwise would do so. I wrote a piece recently: Doesn't everyone try to avoid or evade taxes? Common requests are "What can I do to pay less tax?" "What can you do to reduce my tax bill?" and so on. As long as such tax avoidance is within the rules they break no laws. Why should big businesses be held to a different standard?

7 - What about tax avoidance by footballers and football clubs?

Not only do top players receive outrageously high salaries but their contracts invariably entitle them to payments for 'image rights'. Substantial amounts of tax are avoided (legally - most of the time) but no one seems to care, except HMRC who regularly petition Governments (old and new) to change the rules to limit the capacity for such tax avoidance. However it seems no one wants to protest outside football clubs though to make these "wealthy tax avoiders pay".

8 - No one pays tax unless it is due

If an individual or a company arranges their affairs so that less tax is payable than would otherwise be the case, that is all they will pay. Paying more than this isn't an option. If there was a way in which you could change things and be liable to pay extra tax in future years, it's likely to take some time to make the necessary changes to your business structure etc. Simply stated, no one should be expected to make excessive payments to the taxman. And even if they did, HMRC's computers would simply show such sums as overpayments and then refund them at a later date!

Tax planning to be wary of

The Spotlights page on HMRC's website remains as it was before the change of Government. It's purpose is to clarify what activities HMRC "are likely to see as [unacceptable] tax avoidance."

The page identifies the types of arrangements and schemes which HMRC say they are likely to challenge. I've mentioned some of these before. The page also sets out 17 indicators of tax planning that HMRC suggest you should be wary of.

I've divided HMRC's list into 2 parts and added some additional comments of my own below.

Even HMRC accept that none of these features, of itself, is a problem. However the more of these features that are present, the more likely it is that HMRC would see the arrangements as [unacceptable] tax avoidance. And, I would add, the greater the likelihood that the promised tax savings are more risky and less certain. This is not simply because of the prospect of the taxpayer being subject to a challenge by HMRC. It is also because the more of these features that exist, the more likely it is that HMRC's challenge will be successful. This is especially the case when the promoters have had no previous connection with the taxpayer - ie: the taxpayer has been encouraged to use a marketed scheme rather than simply undertaking commercially driven tax planning.

So watch out where a marketed scheme is involved and any of the following apply:

1. There are guaranteed returns with apparently no risk.
2. It sounds too good to be true.
3. There are secrecy or confidentiality agreements.
4. Upfront fees are payable or the arrangement is on a no win/ no fee basis.
5. The scheme is said to be vetted by a top lawyer or accountant but no details of their opinion are provided. [In the past I saw schemes where the opinion was from a different Barrister to the one addressed in the instructions - suggesting that the promoters had to keep looking to find someone who would provide the desired opinion]
6. It involves money going in a circle back to where it started.
7. Low risk loans to be paid off by future earnings are involved.
8. The scheme promoter lends the funding needed.

And be cautious about structured arrangements where 2 or more of the following apply:

1. Artificial or contrived arrangements are involved.
2. It seems very complex given what you want to do.
3. Tax benefits are disproportionate to the commercial activity.
4. Taxation of income is delayed or tax deductions accelerated.
5. The scheme is said to be approved by HMRC (it does not follow that this is true).[HMRC make the point that when they issue a Scheme Reference Number this does not mean either that HMRC 'approves' the scheme or that HMRC accept that the scheme achieves its intended tax advantage].
6. Offshore companies or trusts are involved for no sound commercial reason.
7. A tax haven or banking secrecy country is involved without any sound commercial reason.
8. Tax exempt entities, such as pension funds, are involved inappropriately.
9. It contains exit arrangements designed to sidestep tax consequences.

For the record I have previously noted that HMRC's spotlights page contains an example of how: HMRC confuse tax avoidance and tax evasion again