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The harder you try…..the harder it gets!

The harder you try…..the harder it gets!

This year, for the first time in 13 years, we were saved the interminable and ultimately disingenuous dirge that was the Pre Budget Report. Mr Brown and latterly Mr Darling’s attempts to justify what they were planning to do in the real budget with no real connection to reality is no more, happily.

Instead we were treated to 500 pages of draft legislation that covers much the same ground, albeit without the over-optimistic assessment of the chances of delivering an improvement in our financial position. A lot of it is merely tedious rate setting, but there were some very interesting items in there.

One of them is the revised ruling on various mechanisms aimed at stopping people avoiding tax and/or NICs by what HMRC clearly regard as dubious methods. Mostly these are characterised as offshore EBTs although the legislation is actually very wide ranging. It does not concern itself with just monetary reward, but also things that can be utilised as monetary reward. All very clever.

Of course, every contractor I’ve spoken to about EBTs assures me that they took that route to get around IR35 and it was nothing at all to do with minimising their tax bill. Well that’s OK, you still avoid IR35 and paying the extra 20% come April is a mere inconvenience, isn’t it…

Nevertheless, as far as most contractors are concerned this is the death knell of the EBT. Changes in the taxation of the income they provide has effectively killed them off as a commercial proposition, and means that anyone using one is in no better position than the average umbrella user. HMRC also neatly avoided the trap of making this retrospective this time, delaying any charges until the end of the tax year. So there’s time to make alternative arrangements. But there is a slight gotcha…

They also introduced what they term anti-forestalling regulations. Using a degree of wit we’d all thought they’d had drummed out of them by Brown, HMRC have twigged that if the impact is not effective until next April people might actually try and take evasive action. So they’ve ensured that any such income from December 9th – the day they published the legislative changes – is in scope.

Oops.

The end result is that EBTs are, as of now, dead in the water. Which, as you may have noticed from previous musings on the subject, is something of which I approve.

Sadly, the lesson does not appear to have penetrated the skulls of some in the accountancy trade. Their immediate reaction is to disappear back into Tolley’s with their friendly local QC and look for another way to achieve the same ends. OK, so they’re protecting their business but if they could lift their collective heads from the mantra of “it’s legal to do it so it’s our right to do it” they might conclude they’re fighting a lost cause. HMRC, and indeed HMG, are clearly set on enforcing the rule that if you live here and work here, you pay taxes here. Which is something I actually agree with.

But leaving aside the schadenfreude, HMRC haven’t got it quite right, have they…?

Firstly there is vastly more money leaving the UK in the way of avoided taxation than will ever be recovered from these changes. Until they work out a way to make large corporations subject to the same principle of unavoidably paying UK tax on UK earnings – and I can’t for the life of me see how they can do that – the new rules are largely window dressing, in overall economic terms.

Secondly, and rather more importantly, they seem to have failed to exclude genuine pension payment schemes that EBTs and the like were originally intended to benefit. Which is a bit of a shame on two fronts: either the pensioners are going to see their income significantly reduced or the scheme providers will successfully appeal the change and get it reversed. Which would be a shame, in some ways.

But what it all goes to show is that the more rules you introduce, the harder it is to get the desired result.

Alan Watts can found at LinkedIn.
© 2010 All rights reserved. Reproduction in whole or in part without permission is prohibited.

Image: Alphabetical Jigsaw by CrosswordMan

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