Spotlights on tax avoidance
Practitioners need to distinguish between acceptable tax planning and unacceptable tax avoidance, and Donald Drysdale considers the ground-rules.
Tax planning has been going on for a long time. For example, in the civilian settlement outside the Roman fortress of Vindolanda on Hadrian’s Wall, long narrow houses were built end-on to the streets to reduce their occupants’ exposure to property taxes based on street frontage.
Today, tax practitioners have become used to drawing distinctions between acceptable tax planning and aggressive tax avoidance. The former is what clients are entitled to expect from their tax advisers. The latter is rightly targeted by HMRC.
For those with impeccable professional ethics, the dividing line is usually crystal clear. But for some taxpayers, the temptation to entertain offers which promise to reduce their exposure to taxes can prove too attractive.
Professional Conduct in Relation (PCRT) was revised with effect from 1 March 2019 to ease navigation. It sets out the fundamental principles and standards of behaviours that all ICAS members, affiliates and students must follow.
In its new, shortened form, PCRT is supported by five supplementary help sheets. One of these, PCRT help sheet B: Tax Advice, provides guidance on the application of the PCRT fundamental principles and standards for tax planning.
The help sheets, while not mandatory, represent guidance designed to help members apply the fundamental principles and standards in their tax work. In a disciplinary case, a member may be asked to explain any failure to follow the help sheet guidance.
HMRC have incorporated PCRT into their Standards for Tax Agents. They may take shortcomings in its observance into account in assessing the severity of any failures in tax compliance. PCRT is therefore the yardstick against which all tax agents and advisers, whether qualified or not, may be judged.
Under the heading ‘Tax avoidance: an introduction’, HMRC have also published guidance on what tax avoidance is, what can happen to taxpayers entering tax avoidance schemes, and how such taxpayers might get help from HMRC in settling their tax affairs.
The April 2019 loan charge
In the current climate, any article about tax avoidance might be found wanting if it didn’t refer to the April 2019 loan charge introduced by Finance (No 2) Act 2017.
Disguised remuneration tax avoidance loan schemes were widely used to pay remuneration by way of purported loans, typically where the loans were unlikely to be repaid and in some cases no interest was charged.
In 2010 the Government introduced tax legislation targeting disguised remuneration, but it wasn’t until 2017 that it introduced wider provisions, arguably back-dated 20 years, aimed at the misuse of loans in lieu of remuneration.
While most practitioners instinctively steered their clients well clear of loan schemes, many taxpayers had been tempted into using them or, controversially, pressed into doing so by those engaging them. This widespread use of such schemes prompted a new flurry of arrangements aimed at avoiding the loan charge.
For further details of the loan charge, there are many useful documents on the LITRG website.
For some years HMRC have published ‘Spotlights’, a list of information about tax avoidance arrangements that have come to their attention.
These include some of the schemes that HMRC have identified as having the features of tax avoidance, or have started investigating. Most of them are no longer available, but taxpayers who are offered similar schemes are warned to seek advice as to their viability. Note that schemes not featured in Spotlights may still be challenged by HMRC.
Many of the Spotlight schemes are complex and convoluted. In normal circumstances, few taxpayers would become involved in using them unless they had aggressive tax avoidance in mind – although disguised remuneration arrangements attracting the loan charge seem to have been an exception in this respect.
HMRC’s Spotlights list is constantly updated. Of 52 schemes listed, 7 have been added so far this year and are dominated by the April 2019 loan charge, as can be seen from the following list:
- Spotlight 52: Disguised remuneration is paid to users, normally through an offshore trust in a low tax jurisdiction, in the form of loans that are not repaid in practice, in an attempt to avoid income tax and NICs. Such schemes must be notified to HMRC under DOTAS.
- Spotlight 51: In a scheme typically marketed by firms offering wealth management strategies, the user accesses contributions to an offshore remuneration trust through unsecured loans or fiduciary receipts from a personal management company.
- Spotlight 50: Contractor arrangements involving a personal service company (PSC) and a limited liability partnership are being marketed, claiming to avoid the loan charge by transferring ownership of the shares in the PSC rather than actually making a genuine repayment. HMRC warn of significant penalties and possible criminal prosecution.
- Spotlight 49: HMRC warn of arrangements which may be marketed from offshore (e.g. Cyprus, Malta or the Isle of Man), claiming to avoid the loan charge by securing that disguised remuneration loans are paid off without a real economic consequence to the transaction.
- Spotlight 48: In a misunderstanding or misuse of HMRC’s settlement terms, advisers are asking users of loan charge schemes (particularly contractor schemes) to pay to secure a deed of release or exclusion, or both. HMRC warn that any payment will not reduce the amount of earnings or income to be included in the settlement.
- Spotlight 47: A targeted anti-avoidance rule (TAAR) seeks to stop phoenixism by charging income tax on a winding up. HMRC will challenge some artificial arrangements (e.g. where the company is sold to a third party rather than being wound up). A recent press release from CIOT refers to HMRC’s updated views on such arrangements.
- Spotlight 46: Two recent General Anti-Abuse Rule (GAAR) Advisory Panel opinions held that arrangements involving loans and the transfer of creditor rights into Employer Financed Retirement Benefits Schemes (EFRBS) were not reasonable courses of action. Accordingly, counteraction under the GAAR legislation may be expected in such cases.
Too often, taxpayers find to their cost that networking and social media are sources of unreliable information about tax-saving wheezes.
Practitioners should maintain an awareness of tax avoidance schemes which HMRC have identified as unacceptable, including those listed in Spotlights. Only then will they be best placed to advise clients who might otherwise be tempted to sail too close to the wind.
Article supplied by Taxing Words Ltd