University fees loophole ?

University fees loophole ?

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Our clients run a successful legal practice. It is a husband and wife partnership with a couple of other minority interest partners. All the partners enjoy incomes of over £100K.  The husband and wife who have small children are angered that they are about to loose their child benefit and concerned about University fees in due course. They have approached me with a view to incorporating the business. Their idea is to live off the directors loan account (generated from the sale of goodwill) and also off their personal cash savings which are substantial. They may also draw a modest wage/dividend from the new company but ensure its below the Higher rate threshold. In this way they hope to secure funding for University and also continue to claim child benefit. They could also possibly be able to claim family tax credits too. Could such a plan be attacked ?

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By Richardrussell
27th Oct 2010 10:37

Tax Credits

In the current tax credit legislation, there are provisions for instances where an individual may deprive themselves of income in order to receive tax credits.

If the child benefit proposals stay as they are (remember, they're not due to be brought in until 2013), I am pretty sure that they will have similar clauses.

After all, as the politicians keep telling us, tax avoidance is bad!

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By cymraeg_draig
27th Oct 2010 10:51

Benefit fraud

Are you sure they aren't bankers?  They certainly seem to display the same level of greed.

Personally I have absolutely no problem in assisting clients to minimise their tax liability within the law. However, in a climate of cuts, where the really poor are suffering, then I find what they are proposing immoral. I also have a problem with lower paid members of society being taxed to support the offspring of people who dont need help.

To be honest I view what they are proposing to amount to benefit fraud - and I would act accordingly.

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By Phil Rees
27th Oct 2010 11:04

Agree with other respondents

We don't have people like this as clients.

The word "scum" comes to mind.

 

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Rebecca Benneyworth profile image
By Rebecca Benneyworth
27th Oct 2010 11:11

They don't need handouts

Child benefit is to help parents with things like shoes etc for their children when they wouldn't otherwise be able to afford it. And I don't mean Jimmy Choos! I have a couple of clients in this position.

It is laughable (and to be truthful almost obscene) to suggest that your clients need this support - or indeed any support from a struggling state. I'll happily hand over my tax revenue to support anyone less well off than me - but not to people who are better off who think they would like to get something for free.

However, I think you're in an invidious position as unless you want to lose the client you may consider that you have to answer their questions truthfully, and advise them without taking the moral high ground. (or possibly you don't agree with the comments made so far?)

We've often discussed "Legal or moral" on this site and it usually draws out some heavy fire. But the question is this - hand on heart how many members would resign?

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By Roland195
27th Oct 2010 11:34

Lawyers eh?

There is little point debating morals & ethics with lawyers. If they had them they would not have a sucessful legal practice to be in this situation anyway.

My understanding is that the anti-avoidance rules here are particularly wooly. For example, they will simply argue that the incorporation was for commercial purposes and that given the youth of the new company, they are acting sensibly & responsibly by not paying salaries & declaring dividends. Very hard to prove otherwise. 

No-one has ever said taxes were fair.

 

 

 

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By edward33
27th Oct 2010 11:40

University fees loophole not new

30 years ago when I was at Uni I received a full student grant. My best friend also received a full grant although his father had a very successful business (appears in Sunday Times Rich List). When I asked how he did it friend explained that over the 7 year period that he and his siblings were at university his father took no salary or dividends just ran up an overdraft of several hundreds of thousands of pounds which he would clear when they had all graduated.

We all advised plans to reduce, tax incorporation pay 10% CGT and run down DCA or bring in the wife etc. In a previous life I dealt with the tax affairs of 3 MPs they were up for any planning to reduce tax. 

This one is maybe a bit more galling but if OP doesnt do it someone else will.

I have a case against me at the moment where I incorporated a client and he ran down DCA and only drew £5000 salary. I ommited to tell him to claim tax credits and he is suing me.  At times I think our life would be a lot better without clients, HMRC , Banks.........

 

 

 

 

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By Peter613
27th Oct 2010 11:53

Morality does not come into it

Many thanks for your replies so far. Whilst I might agree that what our clients are proposing is 'wrong' , these people employ me as their accountant not their moral guardian. So I have no choice . As long as they are not acting illegally which would trigger a money laundering report I don't think it is my position to question it.  

As it happens I'm not sure the University fees would make that much difference as there are limited handouts now anyway - students are offered loans whatever their parents circumstances.

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By cymraeg_draig
27th Oct 2010 12:46

Legal morals

There is little point debating morals & ethics with lawyers. If they had them they would not have a sucessful legal practice to be in this situation anyway.

 

Posted by Roland195 on Wed, 27/10/2010 - 11:34

 

I hate to burst your bubble - but some of us do have morals and are sucessful.  Those morals mean that we ensure that "the state" doesnt imprison or punish people without first proving its's case properly and fully.  Today as it happens those morals also mean that several of us are involved in disclosing the total outrage of a British Company exporting the chemical sodium thiopental to facilitate an execution in Arizona.  This is contrary to European law on the death penalty and several solicitors & barristers are acting to ensure such an outrage never happens again.

You might be surprised to discover that the legal profession is in fact full of people with extremely high moral standards. 

 

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By Roland195
27th Oct 2010 12:51

Other considerations

You may like to point out to your clients the other considerations of living on a small/no income such including pension payments, impact on ability to obtain credit and the possible extra tax charges involved in reversing the situation at the end of this period by having to draw cash at higher rates.

These things will doubtless be your fault when they look for a bigger house to house their latest offspring and find the bank won't entertain a mortgage based on two salaries at £6k per year.

 

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By cymraeg_draig
27th Oct 2010 12:51

I disagree with your views
..... So I have no choice . As long as they are not acting illegally which would trigger a money laundering report I don't think it is my position to question it.   

Posted by seitler on Wed, 27/10/2010 - 11:53

 

I totally disagree. Your clients are deliberately manipulating the system to present a wholly false picture in order to qualify for a benefit they are not in reallity entitled to. I see no difference between their actions and those of any other benefit cheat doing undeclared work, hiding savings under the mattress etc.

In my view you have both a moral and legal duty to report this scam to the authorities or risk accusations of aiding & abetting a benefit cheat.  Why not advise your clients to go the whole hogg, draw nothing from the company, and claim the maximum WFTC too.

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By Peter613
27th Oct 2010 13:01

I diasgree with your views

Cd wrote :

 

'' I totally disagree. Your clients are deliberately manipulating the system to present a wholly false picture in order to qualify for a benefit they are not in reallity entitled to. I see no difference between their actions and those of any other benefit cheat doing undeclared work, hiding savings under the mattress etc''

 

Absolute nonsense CD !   The law clearly states that benefit claimants must declare all their income. If they did not its illegal. Where have my clients broken the law ?

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By cymraeg_draig
27th Oct 2010 13:09

Really ?

Absolute nonsense CD !   The law clearly states that benefit claimants must declare all their income. If they did not its illegal. Where have my clients broken the law ?

Posted by seitler on Wed, 27/10/2010 - 13:01

 

By deferring wages/dividends they are building up a capital assets which at some time will be paid to them to clear overdrawn directors loan accounts etc.  It is illegal not to declare ALL capital including capital assets accruing.

By supporting and colluding in a "scheme" which you know is deliberately designed to defraud the taxpayer your own position is also precarious both legally, and in terms of professional ethics.

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By ShirleyM
27th Oct 2010 13:45

Dragons Den

Off the subject a little I know ... but I remember an episode on Dragons Den where someone had a limited company, but wasn't taking ANY income from it at all (they didn't really need it as they were getting massive help from the state). The dragons applauded the wisdom of deferring remuneration and dividends so that the person could claim maximum benefits, tax credits, etc!

Your clients probably saw the same episode!

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By DMGbus
27th Oct 2010 14:10

"Duke of Westminster" case

A very old case which I think said  that in effect that a taxpayer need not organise his tax affairs in such a way that he pays the highest amount of tax, ie. a taxpayer can arrange his business in such away that mitigates his tax liabilities.

I know that more recent case law has dediced that circular or artificial schemes can be challenged.  However it is a perefectly normal strategy and accepted practice to run a business as a Ltd Co rather than as a sole trader or partnership.  It is NOT even a "circular" transaction with artificial steps inserted - there is a different commercial end result (limited liability, Companies Act obligations, etc.) to incorporate.  The tax consequences of incorporation can be good or bad - good in the quoted instance.Regarding Tax Credits a recent newspaper report concerned the "scandal" of a high-living person not paying Child Maintenance.  The report said that thie individual concerned was exempted from paying Child Maintenance as he was in receipt of Working Tax Credit.  The report went onto say that he was getting Working Tax Credit because he was on a salary of just £12,000 and the rest of his means of living was living off loan repayments.  In his defence the individual stated that he had paid tax in substantial sums in years before and invested those taxed earnings in his new business that was not yet profitable, hence living off low salary plus loan repayments. 

I appreciate that there's a moral argument (tax avoidance is legal but frowned upon as opposded to tax evasion being illegal).

Regarding TCO and allegedly underdrawing available income, here's what an advisor (The Tax Credits Team) say:-

Sarah and John – Incorporate their business

Sarah and John were married with two young children. John had been in partnership with his parents running a garage. They then incorporated the business and capitalised the goodwill, since it lead to significant ongoing tax savings. As a result John now found himself with a director’s loan account

– i.e. the new limited company owed him money.

After taking professional advice, instead of paying him a

salary, the business paid him the equivalent amount by way of a repayment of his loan account. As a result he was also able to receive an extra £9,552 in cash in the form of Tax Credits.

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By ShirleyM
27th Oct 2010 14:35

Off the subject again ... but ...

Having 2 small children gave them tax credits of £9,552! If they did not have children they would have received virtually nil, so they get an extra £9,000 (approx) for having 2 small children.

Do 2 small children cost an extra £9,000 per year to keep?

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By Chris Wise
27th Oct 2010 14:49

The Reasons behind it

Phil's early reply is interesting. From previous posts I think Phil has confirmed he often uses the low salary and dividend remuneration method. Isn't this proposal largely the same, the difference being the client has stated their rationale for doing so is to obtain benefits they wouldn;t otherwise be entitled to.

If the children are "small" will the DLA be available to draw on once they reach university age, assuming of course the rules haven't been changed by then. My reckoning would be it will dwindle very quickly because they will want to maintain their lifestyle, and as another poster says they will come unstuck if they need/want  to remortgage.

Morally questionable - definately, but i'd say most small business owners and by t he sound of it bigger ones too, who are advised to take the low salary option also claim tax credits, and we'll see more of it with the child benefit issues kicking in.

Legal - yes i think it is, doesn't make it right tho.

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Rebecca Benneyworth profile image
By Rebecca Benneyworth
27th Oct 2010 14:48

Duke of Westminster

I really do think that there is a big difference between tax planning advice and deliberately reducing income to obtain state benefits. I don't think the Duke of Westminster principle can possibly apply to the latter.

In the case of tax credits there are two anti avoidance rules which will give you problems - and one of them probably will scupper any tax credit claim :

If someone reduces their income in order to enhance a tax credit claim that is ineffective, andIf someone does work for less than full market rate for someone who can afford to pay then the claimant is treated as also having the amount of the underpayment as either employment income or income as self employed.

I think 2 is your bigger problem as if the company is profitable then you won't be able to justify £5,000 in salary as it is less than market rate. So whether the income is drawn or not, the claimants must declare the income in any event.

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By Phil Rees
27th Oct 2010 15:23

Under the low salary and dividend remuneration method tax is pay

Income is not being suppressed or hidden. It is being sheltered from NI contributions. Tax is paid on this income at higher than the basic rate of income tax.

 Not the same thing at all imo.

 

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By cymraeg_draig
27th Oct 2010 15:50

Risk

However you look at it the intention is to fraudulently claim additional benefits contrary to s15 The Theft Act 1968.(maximum penalty 10 years imprisonment). 

"A person who by any deception dishonestly obtains property belonging to another, with the intention of permanently depriving the other of it, shall on conviction on indictment be liable to imprisonment for a term not exceeding 10 years."

The actus reus of this offence is complete if the defendant (1) by deception (2) obtains (3) property (4) belonging to another. The mens rea consists of the defendant acting (1) dishonestly (2) with the intention of permanently depriving the other of it, and (3) deliberately or recklessly making the deception.

The fact that it is planned is of course an aggrevating factor which, in my view, would guarantee a custodial sentence.

If they do not notify the Benefits Agency that they are in fact living on drawings from a loan account and deliberately suppressing salary then they commit the above offence.  The evidence of previous income is of course a matter of record, and with the sharing of information between HMRC and other agencies this is bound to come to light.

However, if clients wish to take this risk that is their decision and they must live with the consequences. However, assisting them in making such a claim has serious implications for the accountant too. If a client decided to rob a bank you wouldnt go along to act as getaway driver - assisting them to defraud the taxpayer is exactly the same. Professionally I am certain that the Institutes would also take a very dim view.

 

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By Bolo
27th Oct 2010 16:47

Agree with Rebecca

Rebecca has it spot on with this.

If your clients need it in black and white check the HMRC guidance.  www.hmrc.gov.uk/leaflets/wtc2.pdf

Page 23 bullet points 2 & 4 are the points already made.

 

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Red Leader
By Red Leader
27th Oct 2010 17:52

To Edward33

Edward33 wrote: I have a case against me at the moment where I incorporated a client and he ran down DCA and only drew £5000 salary. I ommited to tell him to claim tax credits and he is suing me. 

Could you tell us more about this? It may be a salutary tale which hopefully we could learn from. There but for the grace of god, go I......

Thank you.

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By DMGbus
28th Oct 2010 08:57

More from expert advisors...

Either the expert advisors are wrong or the nay-sayers are wrong on reducing income by drawing off capital, here's what some expert advisors say:-

Paul and Anne – Owed money by their business
Paul and Anne are married with three young children. Paul owns a small building

company, and the company owes him £220,000. Normally Paul takes salary of

around £6,000 to use up his personal allowance and a tax efficient dividend of

around £20,000 to give him the total of £26,000 a year he needs to live on.
After taking professional advice, instead of the company paying him a £20,000

dividend this year it has paid him a £20,000 repayment of the money it already

owes to him. So Paul has received the same amount from the business as normal,

but he has also received an extra £9,552 cash from the Tax Credits system.
Once again, the “income disregard” rules mean that as long as Paul’s income

doesn’t go up by more than £25,000 they will receive another £9,552 as Tax Credits

next year also. And if certain technical conditions are met, they may also receive that

amount of Tax Credits for quite few years to come.

 

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By gsullymorgan
29th Oct 2010 15:49

Changes and penalties

Don't forget that the £25,000 increase buffer is changing.  £10,000 then £5000.

Unfortunately I can't paste charts or tables here but I've just finished a paper looking at the effects of the Emergency Budget and CSR changes on Tax Credits and Benefits which might be interesting. (If anyone would like a copy, email me at [email protected]).

There are some complex changes affecting bottom line net income arriving over the next 5 years, including the introduction of Universal Credit.  There are some, effectively, poverty traps arising as a consequence of some of the changes as well.

What isn't changing, yet, (it depends on what they implement by way of Child Benefit penalties) are the determinations of disposal of income or capital and failure to take up available income or capital.  The rules are still focussed around the point that an intention to acquire entitlement to, or a higher rate of, a benefit does not have to be the sole motive.  It needs to be a 'significant operative purpose'.  Once it can be shown that a person understands that such a consequence follows then it becomes a fairly discretionary decisaion by an officer.  If it can be shown that there was ignorance about the effects then, clearly, the case falls.

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