IR35 avoidance scheme - Dispute between the promoters

Full details of an old IR35 tax avoidance scheme are explained in the judgment from September 2009 of Montpelier v Jones and Morris.

The case centered on a dispute between various parties who had arguably either conceived, funded or promoted the scheme. The judgment includes:

• a summary of the background to the scheme which followed the introduction of 'IR35' in 1999;
• an explanation as to the development and promotion of the scheme from 2000-2003;
• names of all the companies involved including Montpelier Tax Planning (Isle of Man) Limited, Westwood, OMPS Limited, Contractor Solutions Limited ("CSL"), Executive Solutions Limited ("ESL"), MTM Consultants Limited, MTM (Isle of Man) Limited ('MTM') and www.suomotu.com.
  
• reference to Counsel's opinions (including those of David Milne QC, Philip Baker, Adrian Shipwright and Robert Argles) and extracts from some settled notes of conferences with Counsel;
• reference to E&Y London instructing E&Y IoM to withdraw from participation in the scheme, which was allegedly described as a "political hot potato";
• reference to alternative structures involving the use of Employee Benefit Trusts (EBTs);
• Montpelier's claims of breach of confidence, breach of copyright, passing off and procuring breaches of contract;
• The counterclaim by Mr Jones and Mr Morris that Montpelier repudiated contractual arrangements.

Although this was not a tax case the level of detail contained in the judgment will be of interest to anyone who advises on tax avoidance schemes. And also to those who shy away from them.

As I've indicated in previous posts here, the existence of Counsel's opinion does not guarantee that a scheme will succeed. The ultimate decision in this regard will rarely be known with certainty until after it has been tested in the courts. And that often means a long wait.

Is it ever morally acceptable to fiddle your tax form? (Radio4)

A friend suggested I listen to a Radio 4 Sunday morning religious programme broadcast this morning. The headline item was titled: Is it ever morally acceptable to fiddle your tax form?

I listened with interest and growing disappointment as I realised that this was a clear case of misrepresentation.

In the event the real focus was the age old argument about the moral rationale for telling white lies. As one speaker noted: When your wife asks: "Does this dress make me look fat?" No man should ever reply, "No dear, it's your fat that makes you look fat".

But en route to that discussion the presenter, Ed Stourton, introduced the programme by referencing "good citizens" who had either already filed their tax returns or were "scrambling to meet tonight's deadline". The BBC had apparently undertaken a straw poll on the streets of Manchester and the public had presumably been asked the question from the title of the programme.

Interestingly the majority of those asked seemed NOT to have fiddled their taxes. I got the impression that this wasn't what the producers had expected. There were a couple of more interesting replies such as:

"Some people tweak their receipts - fair play to them"

"I've embellished, but never fiddled (I've claimed I've done more miles in the car)"

But then it was clear that subsequent replies were to more generic questions about white lies and 'ethical creep'.

Back in the studio the distinction between embellishing your expense claims and fiddling your tax return was later described, without approval, as "cunning" - with no reference being made to the 'cunning' MPs' expenses scandal last year (which prompted me to list the 25 unanswered tax questions).

There was also a reference to the classical distinction between legal tax avoidance and illegal tax evasion.

But perhaps the most shocking (to me) point was when Ed Stourton asked his guests:

"Is anyone who uses an accountant guilty of an ethical crime?"

The implication seemed to be that all accountants help their clients pay less tax than is strictly due. His guests did not agree with this implicit slur on our profession and the discussion then moved entirely away from the subject of tax forms - despite the title of the programme. I wonder why?

At the time of writing you can listen to the programme online or as a Radio 4 podcast.

Retrospective tax avoidance legislation ruled LEGAL

Another nail has been placed in the coffin of 'artificial' tax avoidance schemes.

The media is today reporting the outcome of a claim for judicial review brought by Robert Huitson - who is described as a UK resident self-employed IT contractor. By arranging his affairs to conform with an avoidance scheme being marketed by Montpelier Tax Consultants in the Isle of Man (IoM), Mr Huitson paid the equivalent of just 3.5% tax on his income. He had secured this 'tax advantage' since first becoming a client of Montpelier in June 2001.

The scheme in question exploited the terms of the UK-IoM Double Tax Agreement (DTA) and was well known to HMRC.

As part of his March 2008 Budget, the Chancellor published BN66 - Double Taxation Treaty Abuse. This announced the introduction of retrospective anti-avoidance amendments to legislation introduced in 1987. The new rules were enacted as section 58 Finance Act 2008 despite some protests by opposition parties at the retrospective nature of the law.

The Government stated that UK users of a scheme that exploited a loophole in the 1987 legislation “remain liable to UK tax”, and have done since 1987, “despite the elaborate, artificial structure designed to exempt them.” Obviously those who had been promoting tax avoidance schemes that exploited the loophole were unhappy. As were many of those who had bought into such schemes - arguably in good faith that those promoting the schemes seemed genuinely confident that the schemes were both legal and effective.

In considering the facts of the case reported today, Mr Justice Kenneth Parker noted that:

"Whatever the true meaning of the DTA, there was a wider rationale in terms of public policy: UK residents should pay UK income tax on the profits of any trade or profession; and a DTA, intended to relieve from double taxation, should not be used as an instrument either to avoid all taxation or to reduce it to well below the level that would be applicable to the relevant income in the country of residence."

This strikes me as suggesting a purposive interpretation of the law.

He also stated, in defending HMRC's approach:

"...in my view, the state was not obliged to test the matter first in the courts before enacting legislation, even with retrospective effect. The public policy was of such paramount importance that legislation was necessary in any event to put the position beyond all doubt and to maintain the relevant public policy"

"At no time did HMRC indicate to affected taxpayers, including the Claimant, that they could safely rely upon the arrangements. On the contrary, HMRC consistently maintained that the arrangements did not work, and advised taxpayers to pay on account the income tax which HMRC said was properly due. Any prudent taxpayer who followed that advice would not now be prejudiced by the retrospective effect of the legislation."

As I have indicated many, many times on this blog, there is often a long time lag between someone entering into a tax avoidance scheme and when they can be certain as to the outcome. In this case HMRC first wrote to Mr Huitson 18 months after he started to use Montpelier's scheme. And it's only now, a further 7 years later that the outcome is clear. The High Court has ruled that the backdating of demands by HMRC was 'in the relevant circumstances proportionate' and did not breach human rights.

I have no doubt that the promoters of tax avoidance schemes will continue to assert that there is only a very small chance of any future anti-avoidance legislation being retrospective. They may be right as the facts here were specific to Double Tax Agreements. However I am equally sure that the goal posts have moved further together such that the scope for successful avoidance schemes is now smaller than ever.

Previous relevant blog posts:

• HMRC confuse tax avoidance and tax evasion again
• Were you wasting time advocating this tax scheme?
• The beginning of the end for structured tax avoidance schemes?
• 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

What to do about the "Hidden Economy"?

In the 2009 PBR the Chancellor announced that HMRC would be establishing a Hidden Economy Advisory Group to take a fresh look at what can be done to reduce the hidden economy.

An announcement was made earlier this month that the group has now been formed and that it is expected to report back "on a Budget 2010 timescale" with an initial assessment of the current situation and proposals for practical and immediate steps that could be taken by HMRC.

So in just a few weeks the Group needs to:

• examine the main barriers preventing people in the hidden economy joining the formal economy;
  
• recommend workable measures that might be introduced to remove or reduce those barriers;
• examine the motivations and behaviours that lead people to join the hidden economy; and
  
• make recommendations on what can be done to prevent and stop people joining the hidden economy.

The terms of reference for the group suggest that far more time is required to produce any meaningful independent advice as:

The group will examine the tax system and HMRC’s administrative processes and consider the whether they facilitate or prevent people from joining the formal economy.

This will include an assessment of the barriers – financial, practical or other – that act as disincentives to entering the formal economy. It will also examine the behaviours and attitudes of those that choose to remain in the hidden economy.

Based on this assessment, it will consider what actions that HMRC can take to increase the number of people that make the transition into the formal economy. It will do this while ensuring that HMRC continues to act in a manner that is fair to those who already pay their taxes.

I applaud the initiative but I deplore the short time scale in which the Group is required to report initial findings. This would challenge a full time research team let alone a simple 'Advisory Group'. Am I alone in wondering if the mere existence of this Group is intended to provide legitimacy to announcements of a more heavy handed approach from HMRC in the next Budget?

Bragging about witholding tax due by 31 January

Billy Bragg's tax protest, re the bonuses due for payment by (84%) state owned RBS, has received wide publicity in the media - from the FT and BBC to the Daily Mail, the Daily Mirror and the Guardian. And let's not forget his facebook group: NoBonus4RBS which now has over 23,000 members (at the time of writing).

I sense the genuine anger and frustration behind the protest and the growing support for Billy's campaign. Initially he was reported to be intending to withhold payment of the income tax he was due to pay by 31 January 2010. In his BBC interview however he admits that his taxes will be paid.

Here are a few facts for anyone considering joining the campaign and seriously intending to hold off paying their tax on 31 January.

Basic rules

1. If your tax is paid late the taxman's computer will charge you 3% interest until the tax debt is settled. If all of the tax due is not paid by 28 February the computer will add a 5% surcharge that you will be liable to pay in addition to the tax and interest. The surcharge increases to 10% if the tax isn't fully paid by the end of July 2010.
2. The £100 fine that you often hear about relates to the late submission of your tax return. So you can file your return online by 31 January and avoid the fine even if you don't intend to pay your tax on time. Incidentally, if you pay all your tax on time the £100 penalty is cancelled once your tax return has been fully processed.

Coming back to the campaign:

1. If you are an employee or pensioner you probably pay all of your tax through the PAYE system. This means you have no tax payable on 31 January. So you can join the campaign in spirit only.
2. If you are self employed or have to submit a tax return for other reasons you may well have already submitted your 2008-09 tax return. In such cases you and the taxman will know how much tax you should be paying by 31 January 2010. So you can expect to get increasingly threatening demands if you do hold back on payment.
3. If your tax return has yet to be filed the taxman doesn't know how much tax you are due to pay. So initially the demands will be for you to file your tax return. The £100 late filing fee will be charged and added to the outstanding tax, penalty, interest and surcharge.

Cutting off your nose
You may be due a tax refund from the taxman. This will generally only be the case if your total tax bill for 2008-09 will be lower than it was for 2007-08 - eg: because you suffered a fall in your income due to the recession.

The tax refund will arise if you have paid all the tax due last January and last July but where it now transpires that this is more than you needed to pay for 2008-09.

If this describes you then you would lose out if you joined the campaign by holding back on filing your tax return. Obviously the taxman won't send you a tax refund until he has processed your tax return.

Comment
I admire Bill Bragg for raising the issue so publicly and for linking it with tax payments due by 31 January. In practice though the taxman's computer will churn out standard demands for interest, penalties and surcharges if tax is paid late. And I can't see those demands being waived if anyone tries to argue that they paid late because of this campaign. So, support Billy's facebook group if you're so inclined - but pay your taxes on time!