TaxZone Newthwire 54: Tax Avoidance

TaxZone Newthwire
Issue 54 - 21 June 2004 - Tax Avoidance
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Editorial note

The latest missives to hit the desks of practising accountants are the new draconian provisions regarding the pre-disclosure of tax avoidance arrangements. As will be seen later, and in common with the money laundering regulations, these provisions can be perceived as a 'sledgehammer to crack a nut'.

What has been worrying the government and the Inland Revenue are the arrangements entered into by very large quoted companies to avoid (quite legally) enormous amounts of corporation tax. However, once again it will be the small and medium sized businesses that will suffer from what appears to be 'overkill'.

Personally, I do not approve of those arrangements that go to the very edge of the law, and would not introduce them to my clients. However, this country has a long history of allowing taxpayers to arrange their affairs to the best tax advantage, provided this is within the law. It appears that is about to change.

This principle was enshrined within case law, but has been
undermined in recent years by the judiciary, public opinion and the current government. The current government attempted to
introduce the 'moral argument' as part of its crusade, and both
the Revenue and Customs have attempted to equate 'avoidance'
with 'evasion'. It has now gone one stage further in the 2004
Budget. One can foresee a complete tax avoidance regime being
introduced in future years, unless things change.

Regards,
John T Newth
mailto:[email protected]

Disclaimer
==========

No responsibility for loss occasioned to any person acting or
refraining from action as a result of any information in this
wire is accepted by the author or AccountingWEB. In all cases,
appropriate professional advice should be sought before making
a decision.

History
=======

Tax avoidance is enshrined in case law that was determined
between 70 and 80 years ago. The remarks of judges in two
famous cases highlighted the culture of that time. In Duke of
Westminster v CIR 19 TC 490 the judgment of Lord Tomlin
contained the following statement:

'Every man is entitled if he can to order his affairs so that
the tax attaching under the appropriate Acts is less than it
otherwise would be.'

Some years later, in the case of Ayrshire Pullman Motor
Services & Ritchie v CIR 27 TC 331 Lord Clyde observed:

'No man in this country is under the smallest obligation, moral
or otherwise, so as to arrange his legal relations in his
business or to his property so as to enable the Inland Revenue
to put the largest possible shovel in his stores'.

High taxation
=============

These attitudes could certainly be justified in the post second
World War years when the top rate for an individual reached 98%
in the 1960s and 1970s, with the possibility of additional
surcharges on top. Not unsurprisingly that era spawned a
burgeoning tax avoidance industry.

This era is well documented by Nigel Tutt in his book The
History of Tax Avoidance. Individuals such as Roy Tucker and
Ron Plummer, through their Rossminster companies, Godfrey
Bradman, Michael Hepker and Patrick Taylor became 'tax famous'
as proponents of tax planning schemes.

Revenue ire
===========

Some of these tax avoidance schemes appeared to be so
outrageous, and the loss to the public revenue was so great,
that the anger of the Inland Revenue was aroused. Eventually
this led to the famous Rossminster raids (see [1980] STC 42)
and subsequent court actions attacking arrangements made.

The Rossminster case was followed by W T Ramsay Ltd [1981] STC
174 and Furniss v Dawson [1984] STC 153. In these cases the
courts sought to undermine complex tax avoidance measures on
the grounds of artificiality and the use of composite
transactions to get round existing tax law.

Other cases followed, and presumably the government and the
Revenue assumed that the judgments in the two cases would be
confirmed. In practice this did not happen, and the issues
became further blurred by varying judgments in later cases.

Other developments
==================

However, other developments were occurring. The governments of
the time were committed to reducing the rates of personal and
corporate taxation, and this has been achieved successfully,
although undermined by the various 'stealth taxes'.

At the same time public and political opinion began to question
tax avoidance. This campaign grew until at the turn of the 21st
century the Revenue and Customs were trying to equate tax
avoidance and tax evasion. They also attempted to introduce the
'moral argument' in an attempt to bring the tax planning
industry into line.

At the same time various senior judges, perhaps under the
weight of political opinion of the time, began to question the
judgments in the two old cases that I mentioned at the
beginning of this wire. Lord Roskill did this in Furniss v
Dawson, and a particular thorn in the side of tax avoidance was
Lord Templeman. Other judges who adversely commented on the old
legislation were Lord Steyn and Lord Cooke of Thorndon.

The scene was therefore set for the announcements made in the
2004 Budget, regarding which the professions had been pre-
warned in the November 2003 statement. However, the severity of
the disclosure regime and the administrative complexities were
a surprise.

The 2004 Budget
===============

It is not possible to examine in detail all the technical
points that have emerged from the 2004 Finance Bill and
Statutory instruments so far issued. At the time of writing
this wire a consortium of large law firms are attempting to
gain exemption from the new provisions. It is also a pity that
much of the detail is being promulgated by secondary
legislation in the form of Statutory Instruments. However, I
would like to draw the attention of subscribers to a number of
issues concerning the new legislation and regulations:

# As reported in the professional press, the planned
consultation period allowed in respect of the new provisions is
less than the statutory 12 weeks. By the time this wire goes
online, only a few days will be left. It is intended that the
new system will come into operation on 1 August 2004.

# Within five days of implementing a scheme, advisers will have
to provide:
* A description of the scheme,
* Details of the transactions involved,
* The statutory provisions that they are applying and the
expected tax consequences of the tax planning
scheme.
* Failure to comply could result in a penalty of up to
5,000 pounds. There is also a daily penalty and 'scheme users' can
also be subject to penalties.

# An arrangement is available for implementation when the
promoter provides sufficient details to clients or potential
clients to enable them to consider whether they should
implement the scheme or the arrangements. Schemes will have to
be reported as soon as the adviser becomes aware of any
transaction that forms part of a 'notifiable arrangement'.

# The Inland Revenue will undertake to return a reference
number for the scheme within 30 days, but this will not
indicate any judgement on its admissibility.

# The new system incorporates the following concepts:

(1) Persons affected.
(2) Notifiable arrangements.
(3) Notifiable proposals.
(4) Tax advantage.
(5) Promoters.
(6) The Promoter's duties.
(7) Information required.
(8) Reference number.
(9) Duty to notify.
(10) The effective date.
(11) Legal professional privilege.

Commentary
==========

It is interesting to quote from the proceedings of Standing
Committee A, Sittings 1 & 2. Although the remarks of Howard
Flight MP apply to VAT avoidance, they no doubt apply equally
to direct tax:

'As drafted, the Bill states that businesses have a duty to
pay the maximum VAT that they can and, if they do not, they
should disclose it as an avoidance scheme. The conceptual
problem emanates from a failure when drafting by the government
and Customs to produce any definition of unacceptable VAT
avoidance. We must clarify what constitutes acceptable VAT and
tax planning and what does not. The definition of unacceptable
tax avoidance in new Schedule 11A is so widely drawn as to mean
anything not maximising VAT costs to a business could be deemed
unacceptable tax avoidance...'

Mr Flight has gone a stage further, and the Human Rights
Committee of Parliament has been asked to rule on Tory claims
that the government's crackdown on tax avoidance amounts to a
breach of basic principles. Opinion of leading counsel has been
obtained on this issue. In the Joint Lords and Commons
Committee Mr Flight also complained about the retrospective
nature of other provisions in the Finance Bill during a furious
row with the Paymaster General, Dawn Primarolo.

The way in which the new rules have defined a 'notifiable tax
advantage' clearly demonstrates a lack of understanding by
government and the Revenue of how businesses operate. Advisers
would be helped greatly if a list of allowable schemes was
published by the authorities.

The Finance Bill itself leaves the way open for the
notification regime to be extended to any direct tax, including
national insurance, because of its integration with income tax.

As it stands the draft law and regulations will produce an
administrative nightmare that will result in numerous
unnecessary reports and the inevitable gridlock in Revenue
systems. Those readers who have studied the 20 page Revenue
document 'Tackling Direct Tax Avoidance - Disclosure
Requirements Draft Guidance' will be aware of this fact.

It is also worth mentioning that, apparently, the Treasury is
most interested in employment-related schemes and schemes
involving financial instruments. The drafting of the law and
regulations, however, would seem to bring very small tax-saving
measures proposed to a client within the ambit of disclosure.
Once again, as with the money laundering regulations, we have
the spectre of the government and Revenue acting as prep school
headmasters and punishing the whole school because of the
transgressions of a few.

It behoves the members of the CCAB to take immediate and urgent
action to avoid a tax disaster. Current proposals have the
potential to be just as draconian as the money laundering
regulations. One view of what is happening is that the proposed
measures are transitional before the introduction of a full-
blown anti-avoidance regime. The new Chairman of Revenue and
Customs must not expect to be popular. Fortunately he has been
a chief executive in a commercial company, where the popularity
of the CEO is not expected. However, in his new post it is not
only employed staff but also 'customers' who will be critical
of the attitudes and actions of the new monolith.

Professional action
===================

The Chartered Institute of Taxation have now responded
forcefully to the new draft regulations and guidance on the
subject of tax avoidance. In addition to the points that I have
mentioned above, the CIOT has commented, inter alia, on the
following points:

* The Institute takes issue with the statement that once a
scheme is 'ready to be proposed to a client' it is disclosable.

* There is confusion as to whether a scheme implemented by a
client prior to 18 March 2004 and now proposed to another client
comes within the regulations.

* If the regulations are to be kept within manageable
limits, then the Inland Revenue will need to publish a 'white
list' of schemes that are not regarded as 'abusive'. This list
would include personal pensions schemes, ISAs etc.

* The definition of 'promoter' within Clause 291 is
currently far too wide.

* Paragraph 3 of the Schedule is too wide in scope. For
instance:

(1)A cheque is regarded as a 'security'.

(2)It appears that if a company pays a director-shareholder
dividends rather than a salary, then this procedure has to be
reported as a tax avoidance scheme.

(3)Para 3(1)(e) catches any asset, including, it seems,
luncheon vouchers, childcare vouchers etc. Is this really
intended?

(4)Situations where an employer writes off an employee's
season ticket loan where the employee remains on the staff and
the season ticket has expired also appear to come within the
regulations.

* The regulations do not make it clear when the disclosure
requirements have been met. In the view of the CIOT this should
be when the form is received or treated as received by the
Revenue.
* Where a disclosure form is sent by first class post, it
should be deemed to be received by the Revenue the day after
posting.
* It should be possible to make disclosures by electronic
means.

Any Answers
===========

There have been a few Any Answers queries on site regarding tax
planning.

Cost of tax planning
--------------------
On 22 January 2002 Verka asked whether the cost of tax planning
is a tax allowable expense. John Mackay observed that, for
smaller clients, there would unlikely to be a specific fee for
tax planning. It is taken as read that that function comes
within the realm of best advice and within the engagement
arrangements.

However, as Harry Ross stated, in the case of a large corporate
client, and where a specific fee was charged, advice on
corporation tax planning is likely to be tax disallowable.
However, fees for remuneration planning may well be allowable.
The organisation that supplied the planning advice ought to be
able to confirm whether or not their fee was tax allowable.
" target="_blank">https://www.accountingweb.co.uk/item/69794

Tax Planning - LLP
------------------
Two directors of a limited company were proposing to set up a
limited liability partnership to provide services to the
company. One of the reasons for this arrangement was to run the
business cars through the LLP and avoid car benefit assessments
on directors etc.

ADS, in a query dated 25 February 2003, asked whether this was a
common tax planning strategy. Were there any adverse tax
implications? What was the VAT position? Can an LLP be a member
of a group VAT registration?

I would comment, first of all, that if this idea was promoted
from 1 August 2004 on by the accountant or other professional
adviser of the company, then it would need to be notified to the
Inland Revenue under the new disclosure rules.

Based on legislation then in force Montrose gave some very
valuable advice. First of all it must be remembered that IR35
applies to partnerships (including LLPs) as well as companies,
and the whole arrangement was likely to be counterproductive.

A better scheme might be for the trading company and the
directors to form an LLP. This would avoid NIC charges on the
profit share of the directors on the assumption that their
partnership share was similar to previous directors
remuneration. The car benefit point would follow automatically.
From a company law point of view, approval of an Extraordinary
General Meeting would be prudent, and the directors' fiduciary
duties to the company should be watched.

For VAT, an LLP is a separate entity, and theoretically might
join a VAT group. This is commented on in the well-known De Voil
publication regarding VAT.
https://www.accountingweb.co.uk/item/104175

Is tax planning evasion?
-----------------------
This was the title of an item posted by Red Queen (on behalf of
Humpty Dumpty) on 11 March 2004. This query arose from an
article in the Financial Times where the writer(s) were
obviously confusing tax planning (legal avoidance) and tax
evasion (an illegal act).

There were a number of replies to this item, some tongue in
cheek, but the reality of the 2004 Budget and Finance bill is
now with us. It has been fairly clear for some time that leading
figures in the Inland Revenue and Customs & Excise do equate tax
planning and legal avoidance with illegal evasion, and this is
demonstrated by the new legislation and regulations.

Whether the current government, if it remains in power, will go
one stage further and seek to introduce general anti-tax
avoidance legislation remains to be seen. As more than one
respondent observed, such a measure would be almost impossible
to enforce, but it is not beyond the realms of possibility in
the current political climate.
https://www.accountingweb.co.uk/item/124070

Ask a question
==============

Readers with a current case should post their query in Any
Answers.

JOHN T NEWTH
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