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Bespoke tax planning is the future

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29th Nov 2013
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The future of tax planning lies in bespoke rather than mass-marketed schemes, partner at NGM Tax Law, Mark Nichols advised.

Speaking at the recent annual UK200 conference in Edinburgh, Nichols outlined how the recent media and political attention on tax avoidance, including the introduction of the new general anti-abuse rule (GAAR) are helping to kill off mass-marketed tax avoidance schemes.

Indeed, the most recent statistics from law firm Pinsent Masons showed that the number of tax planning schemes reported to HMRC fell by a third - 36% - in the last year.

This is the lowest number of schemes reported since the disclosure of tax avoidance schemes (DOTAS) was first introduced in 2004.

Pinsent Masons upholds that this is down to HMRC’s tougher stance on avoidance, but Nichols added that the media backlash, avoidance court cases and the code of conduct for banks have also helped in reducing the numbers of schemes.

Also this week, the European Commission proposed a rule to outlaw corporate tax avoidance loopholes and introduce a common anti-abuse rule.

ICAEW chief executive Michael Izza said that making changes to the EU’s Parent Subsidiary Directive will help clarify rules for companies and help governments collect taxes due.

“The proposals demonstrate the EC’s clear intention to play an active part in the worldwide efforts by governments, businesses and other stakeholders to make improvements to tax systems.”

During his presentation to UK200 members, Nichols spoke about the GAAR, the future of tax planning in the changing landscape and gave some practical examples of situations in which tax planning might be labelled as abusive.

The GAAR

The GAAR came into force in July this year, and is, in effect, according to Nichols, a “statutory smell test…to allow HMRC, the GAAR advisory panel and the court to justify their conclusions" on the merits of a tax avoidance case. 

He questioned whether the rules were really necessary, and added that they were really a further means of cutting off the supply of off-the-shelf tax schemes at source.

The Revenue has had an 85% success rate in avoidance litigation cases in recent years, and with other retrospective legislation, DOTAS, targeted anti-avoidance rules, the watchful eye of regulatory bodies and the court of public opinion - is it therefore really needed, he said.

“The real certainty is that the GAAR has sounded the death knell for mass-marketed contrived tax avoidance schemes. Bespoke planning lives on, within reason,” Nichols said. “The key is going to be whether there can be a reasonably held view that entering into the tax arrangements was a reasonable course of action.”

There are three questions to ask to determine whether the GAAR applies, he continued:

  • Are there arrangements?
  • Is it reasonable to conclude that the obtaining of a tax advantage was the main purpose or one of the main purposes of the arrangements?
  • Are the tax arrangements abusive? And if so, are they entering into or carrying out of which cannot reasonably be regarded as a reasonable course of action?

If HMRC wants to use the GAAR, they must refer to the GAAR advisory panel, and the question whether or not the entering into or carrying out of the specific arrangements put to them is a reasonable course of action.

But, this is only the first leg of a double reasonableness test - the GAAR advisory panel has the first shot at determining whether it’s a reasonably held view.

If one of the three says it’s reasonable, it’s likely the taxpayer will win. However, even if all three say that the scheme is not reasonable, all is not lost.

In this case, the taxpayer should go to tribunal and produce credible expert witnesses and as much extraneous supporting evidence as possible, Nichols advised.

Best placed to “opine” on this are those advisers whose reputations who have not been damaged by implementing or promoting dodgy schemes, he added.

In light of the recent case of Mejhoo Vs Harben Barker, Nichols suggested that accountants now have a duty to tell the client to see an expert concerning the widely marketing tax avoidance schemes.

Nichols gave some examples in practice to illustrate his points further, including: 

Example one

A client is using loan stock as part consideration for share disposal to defer some of the gain for six months, into the new tax year.

Nichols answered: If a loan note lasts six months, the Revenue has not in practice challenged it. 

The GAAR cannot change that position in straight forward cases, but be very careful if you leave the jurisdiction to escape tax altogether, he advised.

Example two

The next example was that of David Heaton’s ‘bump scheme’.

There are two underpaid secretaries going on maternity leave who are both entitled to a bonus.

You choose to pay this just before they go on leave, which increases their maternity pay - surely this is not egregious tax avoidance or even mildly naughty, but it is a seemingly sackable offence, Nichols advised.

David Heaton was removed from the panel for promoting the scheme, albeit where more tax might be an issue. However, Nichols doubted whether any 101 style tax planning tips would be caught by the GAAR.

Example three

A third example concerned B share schemes, whereby you put a newco on top via a scheme of arrangement and buy back the newly issued shares at par - no distribution - all capital gains. Does clearance help with this?

The Revenue has said this is acceptable for listed companies. but what about private companies? Nichols said: as long as actual distributable cash reserves are not paid out in this way, then "go for it".

Be up front with the Revenue in this case, Nichols advised, go for clearance to make sure there’s no “second bite” under the GAAR.

Do you think the future of tax schemes lies in bespoke planning? 

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By johnjenkins
02nd Dec 2013 09:54

I actually think

that the role of the Accountant is going to be limited to simple bookkeeping. With the advent of cloud systems it won't be too long before HMRC glean all the info they require and send out tax bills accordingly. So yes the future of all tax scenarios will be bespoke. However there will be a lot more tax experts to choose from as the up and coming Accountants realise that Accountancy is a thing of the past and taxation is taking over. Unless, of course, we get a government with a bit of guts to give us a fair tax system.

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By PK Group
02nd Dec 2013 16:40

Bespoke Tax Planning is benificial for all parties

Bespoke Tax Planning can help clients recieve a more valuable overall service. This is especially useful to clients of 'Financial Architect' type firms, since a more in-depth analysis of a client's tax affairs could lead to other non-tax services being utilized.

Furthermore, when a client recieves a more bespoke service, clients may feel a greater level of trust towards the company handling their tax schemes.

I believe that tax schemes will incorporate more bespoke planning in the future, since it appears to help both the client and the tax planner.

PK Group

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