Budget tax avoidance round-up
Laws to counter tax avoidance and evasion have become a Budget tradition for at least the past five years and yesterday's annual summary of government plans for tax and spending was no exception. The most interesting and probably controversial measures were an extension to HMRC's powers to settle tax disputes.
Here's a summary of the main anti-avoidance measures:
Avoidance schemes: Upfront payments to start this year
Taxpayers in a dispute with HMRC will have to pay the money up front without the right of appeal if the scheme is registered with the Disclosure of Tax Avoidance Schemes or if a similar one has been defeated in the courts.
Taxpayers will have to settle the dispute within 90 days after HMRC sends them a “follower notice” – or a further 30 days if they appeal.
Currently, even if HMRC closes an avoidance scheme through litigation, there is little incentive for other scheme users, or those using essentially similar arrangements, to accept the court’s findings and pay any underpaid tax, HMRC said.
The revised law for settling tax disputes was first announced in last year’s Budget. According to the HMRC information note on this measure, it will raise £340m in tax receipts in 2014-15 and £1.23bn in 2015-16.
The Chartered Institute of Taxation said that although it sympathises with the government attempts to close mass-marketed tax avoidance schemes, allowing HMRC to “act as prosecutor, judge and jury” on DOTAS is going too far.
Artificial use of dual contracts by non-domiciles
Seeks to prevent “contrived” arrangements by a small number of rich UK residents and non-domiciled individuals who, according to HMRC, create “artificial divisions between the duties of a UK employment and an employment overseas in order to obtain a tax advantage.”
It will apply to income from overseas employment based on criteria including:
- An individual has both UK and overseas employment(s) either with the same employer
- UK and an overseas employment are “related” to each other; and the foreign tax rate that applies to the income associated with an overseas employment
Foreign tax credit relief available against any UK tax charge will be available in the usual way.
Ray McCann, a partner at law firm Pinsent Masons, said the previously announced restrictions on dual contracts have been softened slightly. The new rules won’t raise much in taxes – £70m in 2015-16, HMRC estimated.
Avoidance schemes involving the transfer of profits
Companies that are part of a group will not be able to avoid tax by transferring profits between themselves.
The legislation, first announced in last year’s Autumn Statement, blocks avoidance schemes where tax relief is claimed for payments between companies in the same group under derivative contracts which are linked to company profits.
In the avoidance scheme, a company enters into a derivative contract, known as a total return swap, with a parent company or another group company - typically located in a tax haven.
All of the company’s profits of the company are paid away in return for much smaller payments back. A deduction is claimed for the payment under the contract, leaving little or no profit chargeable to tax.
HMRC said some new avoidance schemes are using financial arrangements other than derivatives to achieve the same tax benefits.
MHA MacIntyre Hudson said the change in tax law seemed to be aimed at small and medium-sized companies.
Venture Captial Trusts return of capital
Adjusts tax relief for individuals who invest in venture capital trusts (VCTs).
In last year’s Budget the government said it was concerned that some forms of share buy-back and reinvestment arrangements offered by VCTs were working as intended.
Legislation in the Finance Bill 2014 will prevent VCTs from returning share capital to investors within three years of the end of the accounting period in which the VCT issued the shares.
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Advanced payments - morally repugnant
Morally repugnant was a phrase used by the Chancellor to describe tax avoidance.
This new measure demonstrates that that the Treasury and HMRC are perfectly willing to embrace their own brand of moral repugnance.
Assuming this measure is enacted as drafted, we will have a tax system when someone who has entered in a legal tax avoidance scheme nearly ten years ago at a time when both the economy was healthy and the morality of tax avoidance was not being discussed will have to pay over tax in advance or have it snatched from their bank account.
Contrast this with an individual who has deposited money in an overseas bank account and deliberately evaded the tax on income earned. Despite HMRC being in possession of the income details, they write to the evader and incentivise the tax evader with a fixed penalty of just 10% of the maximum provided for in the legislation.
Let us hope that avoiders use every trick in the book to escape the advanced payments as the morality of a tax system with such clear cut injustices has clearly been lost forever.
Welcome to Retro Tax Land - Population You!
All MPs should consider voting against the Finance Bill 2014's proposals regarding empowering HMRC to be able to singularly decide and impose a supposed ‘tax due’ accelerated payment on those involved in tax planning without guilt being proven, judicial review of their actions being required and without the ‘accused’ having right of appeal.
The application of these new powers will be extended to cover legacy cases currently under appeal and can be considered retrospective in all but name. Moving the goalposts and retrospective legislation is a hallmark of a dishonest government and administration.
HMRC are very good at writing anti-avoidance legislation which is vague and all encompassing, and HMRC has made tax law very complicated often resulting in potential disputes which are not clear cut. By giving them these powers, they will become the judge, jury and executioner and the scope for their application is broad. Not confined to a small section of society.
Let’s take an example, Mr Jones, a small business owner, who unfortunately becomes terminally ill and decides to sell his business undervalue to get a quick sale and enjoy the proceeds. Unfortunately, HMRC decide that Mr Jones has intentionally sold the business for less than it is worth and therefore they will use their market valuation for the purposes of calculating the capital gains tax. Although he’s paid capital gains on the sum he’s received, he’s now expected to pay extra sums based on HMRC’s valuation of the business. It’s obvious how this then plays out, HMRC take the sums directly out of his bank account and now he’s left to spend his last days battling HMRC in court, where they have no incentive to act in a timely fashion.
Although I believe there is a need to clamp down on tax evasion and avoidance, this is a step too far and needs serious re-evaluation to prevent unforeseen issues coming to light when it’s too late.
I am not alone in my views. The following organisations who represent 100,000s of individuals and SMEs have also expressed their disapproval of these new powers:
• The Chartered Institute of Taxation
• The Institute of Financial Accountants
• The Institute of Chartered Accountants
• Mr Robert Venables, Q.C. of 15 Old Square, Lincoln’s Inn, London
• Ernst & Young
• KPMG