It's a hostile environment
Tax has become front page news in the UK.
First, the headlines focused on the so called "sweetheart" deals that large corporates had agreed with H.M. Revenue & Customs ("HMRC") in order to lower their corporation tax bills. Next, they revealed that several companies with a large presence in the UK are, in fact, paying little or no corporation tax due to cross border structuring. More recently, newspapers in and out of the UK have moved on to naming well known individuals and highlighting their involvement in tax avoidance schemes.
At the same time, tax has been prioritised on political agendas. Revenues need to be raised after a period of economic difficulty. In March 2011, the UK Government published a leaflet called "Tackling Tax Avoidance" in which it stated its intention to "plug the tax gap" (the gap between the amount of tax collected and the amount HMRC expected to collect which they estimated to be £40billion) to help raise some of the revenues that it needs. It is clear from the leaflet that the UK Government considers both tax avoidance and tax evasion to be a problem that it intends to deal with.
Traditionally there has been a distinction between illegal tax evasion (deliberately understating tax liabilities) and tax avoidance (arranging your affairs to minimise tax liability within the legislation). The headlines written by the media and the policies published by the UK Government seemingly erode this distinction. For a tax adviser, the question is therefore whether the two concepts have become one. If so, what is the future for tax planning?
What has changed?
The UK Government
True to the UK Government's word, recent budgets have been full of new anti-avoidance measures. Of particular note are: a new regime taxing UK residential property owned through a corporate envelope (and the latest budget reduces the definition of "high value" to £500,000 from April 2016); proposals for taxpayers to pay disputed tax upfront during disputes with HMRC; measures to allow HMRC to recover tax directly from taxpayer accounts (these are particularly controversial); and, importantly, the introduction of the general anti-abuse rule ("GAAR").
The intention behind GAAR was to produce an over-arching piece of legislation that swept up planning considered to be "abusive". Much has been written on the application of the "double reasonableness test" that GAAR applies to determine whether planning is abusive:
"Tax arrangements are "abusive" if they are arrangements the entering into or carrying out of which cannot reasonably be regarded as a reasonable course of action…".
The test is meant to create a high threshold but it has instead been seen as creating uncertainty because it is so subjective. This has, however, forced tax advisers to be more cautious and before planning is effected the question must now always be asked: would the GAAR apply to this?
International policies
This is not just a UK problem. Modern technology has made it easier for corporates and individuals to structure their affairs across multiple countries. This has also allowed the corporate and the individual to take advantage of tax breaks offered by those countries - while taking on little of the tax burden.
In response, there has been an increased drive by the OECD and the G20 to co-ordinate measures to combat international tax avoidance. Individual countries have already introduced automatic exchanges of tax information with other countries – our clients must now be aware that their tax affairs in one country will be shared with other countries. The next goal is greater transparency. In particular, the European Parliament has proposed that there should be a public register of the beneficial ownership of companies and, if the latest proposals are successful, this register could be extended to include trusts (although this is particularly controversial).
Specific offshore evasion
In the UK, the Government intends to make use of the additional information it now has to target offshore tax evasion. The recent Budget contains proposals for a new strict liability criminal offence of failing to declare taxable offshore income - i.e. a person can be found guilty regardless of whether the person intended to commit the offence. In addition, it plans to introduce higher penalties of up to 200 per cent. of tax evaded.
Taking shelter
So is tax planning dead? The answer - no, but the old way of thinking about it is.
The most recent high profile case in the UK was a judgment in a tax tribunal case – it made headlines because a well-known radio presenter was named in the judgment. The arrangements put in place generated significant tax losses under the guise of creating a trade in used cars for a number of individuals. In each case, the turnover from the so-called "trade" was very low (and in some cases, nil) but the individual incurred significant losses which were offset against their income tax liability for the year. As an example, in one case turnover was £9,513 but the loss created was £14,500,192!
Although the case has raised headlines in the UK, is there much to be feared by it and others like it? Perhaps not. The judgment did decide that the scheme failed in its entirety. However, the judgment makes it clear that it failed because the losses were considered to be contrived and because the arrangements lacked substance and commerciality. They were also entirely artificial – the individuals involved had no intention to set up a used car business, little, if no, involvement in any trading that did happen and they were open about this in their statements.
This case is certainly support for the proposition that highly artificial arrangements no longer work but then, to us, this is not surprising. For some years now, we have advised our clients against using highly artificial schemes that are rolled out to multiple investors. Instead our focus has been, and will continue to be, on putting in place bespoke solutions that are tailored to the client's circumstances and, importantly, to what the client wants to achieve.
And there is no suggestion that this type of bespoke planning is off the table despite the change in political atmosphere and the increase in anti-avoidance legislation. In fact, in a recent HMRC publication entitled "Tempted by Tax Avoidance" HMRC state that an individual is entitled to plan their tax affairs in a way that makes sure they do not pay more tax than they have to – echoing the famous judgment of Lord Tomlin in the Duke of Westminster case in 1936 when he said "…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…".
This is therefore where the future of tax planning lies: in using the legislation to structure an individual's affairs in the way the legislation intended. For example, no matter what the media headlines may say, the UK's non-domicile rules are not loopholes but incentives put in place to encourage individuals to come to the UK. They have been discussed and debated and they are deliberately generous. Individuals are entitled to take advantage of them and should continue to do so - careful planning can still maximise the advantages an individual receives.
Is there anything the client can do?
Clients do need to be aware that some planning is now seen as high risk, in particular that which is artificial and has little commercial reality. But can clients tell the difference between, on the one hand, a scheme which is high risk and, on the other hand, planning which structures their affairs so that they do not pay more tax than they have to?
- Clients should ask themselves whether they are comfortable with the arrangement they are entering into. A question we often ask is would they feel comfortable if their parents, family or friends knew about the arrangements they had entered into?
- Clients also need to consider the potential ramifications of unwanted press attention and the effect on their professional reputation. For example, Gary Barlow, a member of the well-known boy band, Take That, is currently facing calls to hand back his OBE (an honour that recognised his contribution for services to music and charity) over press claims that he has been involved in tax avoidance schemes.
- Clients' advisers should ask another simple question, do the arrangements stack up? Is the arrangement just being put in place on paper or is it being put in place in practice? If just on paper, the client should be wary.
- Clients should consider, with the help of advisers if appropriate, whether the effect of the planning is in line with the intention of the legislation i.e. did Parliament broadly intend for the planned outcome or is the outcome arrived at through a highly contrived reading of the legislation?
- Clients should also consider the long term practicality of the arrangements. Is it possible to unwind structures being put in place now if there are future changes to legislation? Can money be extracted if they want to exit the arrangement? What if partners die or disagree on the future of the arrangements?
- Does the client have a team around them? Clients can put themselves in a good position by surrounding themselves with advisers they trust and who can give a view on the whether any proposed planning carries significant risks.
Conclusion
In summary, we do not think tax planning is dead. In fact we believe it is alive and well. However, our clients must be aware that public opinion and government legislation are increasingly hostile to aggressive tax planning. So now, more than ever, it is important that clients take detailed, considered advice before putting any planning in place and also that they exercise their own judgement as to whether the planning is commercial, appropriate and fit for the long term.
