Tag Archive | "retrospective tax"

Tackling tax avoidance is good but what about tax evasion?

Contractor accountants may be interested to learn that the coalition has decided to adopt a more novel approach to tax avoidance.

The Treasury released their “Tackling Tax Avoidance” paper last week and it won quick approval from the CIoT. The Institute has been campaigning for changes to the government’s stance on retrospective tax changes for some time and is delighted that the retrospective approach has finally been dropped.

Vincent Oratore, the president of the CIoT, was delighted that the organisation’s concerns had been listened to and said SMEs and contractors will welcome this new approach as it provides them with greater certainty.

Wealthy individuals who have been able to cut down on the amount of stamp duty paid on expensive residential properties will find that loophole now closed to them. In the past, millionaires have been able to set up a company and make it the legal owner of their mansion thus avoiding a large portion of stamp duty. The Treasury estimates it will rake in an additional £30 million every year by putting a stop to this practice.

The government has now made three property related schemes illegal. Two involved buying a property through a financial institution and the third involved taking a long-term lease, of anything up to 999 years on a property, rather than buying it outright.

George Osborne also intends to raise a further £750 million by clamping down on disguised remuneration schemes.

Whilst it is understandable that the government wants to tackle tax avoidance, experts claim that tax evasion and other criminal activity have a much greater impact than legal avoidance.

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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.


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.
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Retrospective taxation should be avoided says the CIoT

HMRC should take extreme care when taxing people retrospectively otherwise people lose confidence in our taxation system, says the CIoT.

The Institute commented that although it is still a reasonably unusual; there has been a growing trend for the government to introduce tax rules with retrospective effect. The coalition should clearly state when retrospective action is valid, the Institute pointed out in a paper handed to the government. Retrospection damages confidence in the taxation system as it undermines certainty and stability, which in turn has the knock-on effect of damaging the economy.

The paper states that the fundamental principle that taxpayers are taxed based on the legislative wording in place at time of the Revenue’s actions must remain. The government must make a clear statement of when it sees retrospective action as appropriate. The CIoT thinks this should form part of a new protocol when legislative changes come into effect immediately.

The Institute is not totally opposed to retrospective action but thinks extreme care should be taken if it is to be implemented and there should be lengthy justification in Parliament for such a move. The general presumption should be against retrospection but that principle could lay out some very limited instances where it is considered essential as opposed to desirable.

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Contractor accountants concerned about retrospective taxes

The certainty in the UK tax system has been thrown into doubt by the Treasury’s use of retrospective action according to the Chartered Institute of Taxation.

They are concerned about amendments to the taxation rules regarding manufactured dividends, which were announced by the Treasury’s financial secretary Stephen Timms last week. These amendments have been applied retrospectively back to 1 October 2007.

John Whiting, director of tax policy at the CIOT understands that the government needs to ‘confirm the general understanding of the tax system’ but warns that they should proceed with extreme caution.

He believes that the government should issue a clear statement defining when retrospective action will be used and what boundaries will be applied so as not to ‘dislodge the principle that the taxpayer is taxed on the wording of the legislation in place at the time of their actions.’ Many leading contractor accountants have already voiced their concern over this issue.

The latest amendment has been introduced to close a loophole that allowed manufactured payments from sale and repurchase transactions to be exempt from corporation tax even though they were taken into account in calculating accounting profits.

Previously HMRC has closed loopholes with immediate effect but to also apply the new rule retrospectively seems to be a sign that the government department is taking an ever more aggressive stance towards tax evasion.

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A bad day for some…

Big news of the day is about a court case that concerns a piece of the 2008 budget referred to as BN66.

This is one of those things that came out in the supporting documentation that tells the actual truth about the contents of the 2008 budget as opposed to what the chancellor said in the House.

To put it very simply, the use of an Isle of Man-based taxation avoidance scheme used by quite a few contractors was closed off. The scheme relied on an interpretation of an earlier piece of legislation that, in effect, exempted you from some UK-based taxation. Closing it off is fair enough, the Government can make any laws it likes after all.

However the killer in this case was that the effect of the legislation was made retrospective back to the original act, basically by arguing that this was what was originally meant to be the case and we’re just clarifying the wording. Since tax investigations that don’t involve fraud or evasion can only go back 6 years, this meant in effect that all those scheme users’ income from 2001 onwards was in scope. Clearly this is a little unfair, to put it mildly.

As a result a group of them have been preparing a case for a Judicial Review of the retrospective aspect of the change. The judgement has just been handed down today and found in favour of HMRC, hence the retrospection stands.

Clearly this is awful news for those involved, since they are looking at tax bills into six figures. This is not the kind of money many of us can find lying around and will cause some people major problems if HMRC press for the full settlement

Furthermore, it’s also not that good news for everyone else. HMRC already have form for imaginative re-interpretation of the law; the whole point of the Arctic case – which involved splitting out company income between husband and wife shareholdings – was that the rule they tried to apply was never meant to apply in that situation. Clearly, if this ruling means that HMRC can change the rules retrospectively by “clarifying” already understood rules, then an already uncertain tax landscape just got a whole lot more wobbly.

The BN66 group will be looking at the possible next steps so this isn’t yet the final position. However, it’s not been a good day for any of us.

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