Introduction
Nobody likes paying tax.
Why does it matter? – Tax Gap - £42 billion. One sixth or £7 Billion is tax evasion and another £7 Billion is tax avoidance.
The balance is uncollected taxes.
It is for this reason we have the crucial distinction between avoidance (legal) and evasion (not legal).
Dennis Healey famously commented that the difference between tax avoidance and tax evasion is ‘the thickness of a prison wall!’
The battle with the Revenue is not new:
Lord Clyde – ‘No man in the country is under the smallest obligation, moral or other, so to arrange his legal relations to his business or property as to enable the Inland Revenue to put the largest possible shovel in his stores.
The Inland Revenue is not slow, and quite rightly, to take every advantage which is open to it under the Taxing Statutes for the purposes of depleting the taxpayer’s pocket.
And the taxpayer is in like manner entitled to be astute to prevent, as far as he honestly can, the depletion of his means by the Inland Revenue.’
Ayrshire Pullman Motor Services v Inland Revenue [1929]
A. EVASION
HMRC’s Affluence Unit – Evidence of a crackdown
Background - The Affluence Unit was established in September 2011.
It was focusing on around 200,000 people who had net wealth between £2.5 million and £20 million.
It now also deals with individuals who earn more than £150,000 per annum and have net wealth between £1 million and £2.5 million (January 2013).
The move follows the success of the High Net Worth Individuals Unit (HNW) set up to deal with individuals whose wealth exceeds £20 million.
HMRC will often arrange meetings with individuals and one of the first lines of attack was offshore property and any rental income from foreign property not declared or property bought with ‘dirty money’.
The Affluence Unit announced that it was recruiting an extra 100 inspectors so now has between 200 and 300 inspectors across six locations in UK.
The target is to recover £586 million by the end of 2015.
HMRC’s Affluence Unit – Evidence of a crackdown
Background - The Affluence Unit was established in September 2011.
It was focusing on around 200,000 people who had net wealth between £2.5 million and £20 million.
It now also deals with individuals who earn more than £150,000 per annum and have net wealth between £1 million and £2.5 million (January 2013).
The move follows the success of the High Net Worth Individuals Unit (HNW) set up to deal with individuals whose wealth exceeds £20 million.
HMRC will often arrange meetings with individuals and one of the first lines of attack was offshore property and any rental income from foreign property not declared or property bought with ‘dirty money’.
The Affluence Unit announced that it was recruiting an extra 100 inspectors so now has between 200 and 300 inspectors across six locations in UK.
The target is to recover £586 million by the end of 2015.
Common characteristics:
Affluence Unit will target wealthy individuals who:
- Habitually use avoidance schemes;
- Have a low effective rate of tax across their total income;
- Have bank accounts in Switzerland and who appear to be understating their liability;
- Fail to file self-assessment returns on time;
- Avoid or evade Stamp Duty on property purchases; and
- Have UK and offshore property portfolios.
2012 – HMRC claimed to have saved £200 million by closing three tax avoidance schemes (which ones?) and in early 2013 clawed back an estimated £500 million from Barclays avoidance schemes. Barclays’ chief executive, Anthony Jenkins then closed down the unit and stated that ‘although this was legal, going forward such activity is incompatible with the new tax principles which we are publishing. We will not engage in it again’.
HSBC – Swiss entity – whistle blower passing information to HMRC. Claimed that HSBC's Swiss private banking arm helped clients in more than 200 countries evade taxes on accounts containing £77bn ($119bn). The alleged evasion was said to have taken place at HSBC's private bank in Switzerland in the mid-2000s.
Reports that HMRC have recovered £100 million from the 100,000 individuals whose details passed to HMRC.
Interesting exchanges between the Select Committee and Lin Homer (Chief Executive) and Jennie Granger (Enforcement & Compliance). One area was surrounding the presentation of cases by HMRC’s enforcement team to the CPS.
1. New – strict liability offence
Consultation on strict liability offence of offshore tax evasion; also consultation on criminal liability for corporate failure to prevent evasion.
B. AVOIDANCE
Aggressive Tax Avoidance – How aggressive is aggressive and how do they work in practice?
Between 100 - 200 providers in the market (last count)
Well publicised cases – K2 (Jimmy Carr), Eclipse 35, Icebreaker
HMRC published a list of 1,200 schemes in July 2014.
Tax avoidance promoters require the signature of a leading tax QC attached to scheme to create a highly marketable and lucrative product.
View that tax avoidance promoters can sell scheme 250 times before HMRC spots it.
Limited shelf life for scheme - Before Revenue acts
Rewards can be huge. Comment that a single planning idea generated fees of around £100 million.
Create the product and the market. Advertising to professionals.
Common Features of Aggressive Tax avoidance schemes
My attendance at seminar – SDLT in 2012 – Focus on Sub – Sale Relief (3S) and the Multi – Purpose Trust (MPT)
Sub sale relief is legitimately used by housebuilders to avoid paying stamp duty twice, first when they buy the house and again when they sell it.
Before decision in Vardy Property Group – September 2012 – HMRC succeeded and was trumpeted by HMRC as evidence that they could go to court and win.
Case concerned a scheme used by Vardy whereby a site was acquired for £7.25 million in 2006 by an intermediary and then transferred to Vardy which then used sub sale relief to avoid paying £290K in stamp duty.
Spoke of couple of tax barristers. Revenue bar is very small.
Had to sign an NDA before my place was confirmed.
Remember promoters are salesmen; they also duplicate and cannibalise each other’s plans.
Watch out for offshore promoters – they are sheltered from HMRC.
How do HMRC fight back?
Historically HMRC are always playing catch up, always behind the curve. Their problems:-
Disclosure of Tax Avoidance Schemes
Aggressive Tax Avoidance – How aggressive is aggressive and how do they work in practice?
Between 100 - 200 providers in the market (last count)
Well publicised cases – K2 (Jimmy Carr), Eclipse 35, Icebreaker
HMRC published a list of 1,200 schemes in July 2014.
Tax avoidance promoters require the signature of a leading tax QC attached to scheme to create a highly marketable and lucrative product.
View that tax avoidance promoters can sell scheme 250 times before HMRC spots it.
Limited shelf life for scheme - Before Revenue acts
Rewards can be huge. Comment that a single planning idea generated fees of around £100 million.
Create the product and the market. Advertising to professionals.
Common Features of Aggressive Tax avoidance schemes
- Scheme providers will charge high entry fees for entry into a scheme which will put it beyond the reach of most ordinary people.
- The scheme may offer some protection against fees incurred as a result of an HMRC investigation typically up to first round tribunal. However, word of warning, fees unlikely to cover the cost of the full investigation. Subsequent costs will therefore have to be funded by the scheme participants.
- All of these schemes are notifiable to HMRC so, where an individual or company has participated in a scheme they are required to inform HMRC and disclose the identification number.
- HMRC aim to investigate each scheme and the investigation could last for several years.
- If the result of the investigation ends in HMRC’s favour then the participants will have to pay over any tax due, plus penalties (which could be up to 100% of tax due) plus interest and will have also incurred the initial costs of the entry to the scheme and the costs of defending it to HMRC. Could very easily add up to substantially more than the tax initially saved. (Point raised at select committee re HSBC where initial starts up costs for entry were more than tax paid to HMRC by way of settlement thereby questioning the success from HMRC’s perspective of the deal.)
- Conversely, if the scheme is found to be legal, then a significant amount of tax could be saved but position is unlikely to be certain for many years.
- Note impact of disclosure of tax avoidance schemes and accelerated payment notices (see below) – much less cashflow advantage than before.
Sub sale relief is legitimately used by housebuilders to avoid paying stamp duty twice, first when they buy the house and again when they sell it.
Before decision in Vardy Property Group – September 2012 – HMRC succeeded and was trumpeted by HMRC as evidence that they could go to court and win.
Case concerned a scheme used by Vardy whereby a site was acquired for £7.25 million in 2006 by an intermediary and then transferred to Vardy which then used sub sale relief to avoid paying £290K in stamp duty.
Spoke of couple of tax barristers. Revenue bar is very small.
Had to sign an NDA before my place was confirmed.
Remember promoters are salesmen; they also duplicate and cannibalise each other’s plans.
Watch out for offshore promoters – they are sheltered from HMRC.
How do HMRC fight back?
- Targeted anti avoidance rules.
- Wide ranging targeted rules – e.g. transactions in securities, employment-related securities, disguised remuneration.
- Case law – Ramsay, Furniss v Dawson, Halifax.
Historically HMRC are always playing catch up, always behind the curve. Their problems:-
- Permutations on loopholes they thought they had blocked;
- Delay in finding out what is going on in the market;
- Cashflow advantage is with the avoider – keeps the tax until the appeal process is exhausted.
Objectives
The objectives of the disclosure rules are:
The objectives of the disclosure rules are:
- To obtain early information about tax arrangements and how they work; and
- information about who has used them.
The effect of disclosure
On its own the disclosure of a tax arrangement has no effect on the tax position of any person who uses it. However, a disclosed tax arrangement may be rendered ineffective by Parliament, possibly with retrospective effect.
General Anti-Abuse Rule (GAAR)
Already exists for stamp duty land tax – section 75A Finance Act 2003.
Now extended to SDLT plus all taxes except VAT (European law) and stamp duty.
Advisory panel rules on whether arrangement are abusive – the double reasonableness test.
No appeal.
Plans to bring in extra penalties for GAAR cases.
Not tested as yet.
On its own the disclosure of a tax arrangement has no effect on the tax position of any person who uses it. However, a disclosed tax arrangement may be rendered ineffective by Parliament, possibly with retrospective effect.
General Anti-Abuse Rule (GAAR)
Already exists for stamp duty land tax – section 75A Finance Act 2003.
Now extended to SDLT plus all taxes except VAT (European law) and stamp duty.
Advisory panel rules on whether arrangement are abusive – the double reasonableness test.
No appeal.
Plans to bring in extra penalties for GAAR cases.
Not tested as yet.
New weapons
Very limited right of appeal.
Perception and Enforcement
Embarrassment of being accused of tax dodging and profiting from tax dodging. Morally repugnant according to George Osborne.
’It is not that you did it John, it is the fact you got caught’
Truth is aggressive avoidance is a convenient construct. Licence for HMRC to take action at its own discretion.
Are they pursuing Amazon, Starbucks or Vodafone for their highly artificial arrangements? (But NB diverted profits tax – unilateral action by UK, jumping the gun ahead of “BEPS” programme of OECD).
They seem to be concentrating their efforts on the smaller fry or low hanging fry to try to use these cases as an obvious deterrent.
Note blurring of lines between evasion and avoidance.
Professionals and Aggressive Tax Avoidance Schemes
‘Damned if they do, and damned if they don’t’.
- Follower notices
- Accelerated payment notices
Very limited right of appeal.
Perception and Enforcement
Embarrassment of being accused of tax dodging and profiting from tax dodging. Morally repugnant according to George Osborne.
’It is not that you did it John, it is the fact you got caught’
Truth is aggressive avoidance is a convenient construct. Licence for HMRC to take action at its own discretion.
Are they pursuing Amazon, Starbucks or Vodafone for their highly artificial arrangements? (But NB diverted profits tax – unilateral action by UK, jumping the gun ahead of “BEPS” programme of OECD).
They seem to be concentrating their efforts on the smaller fry or low hanging fry to try to use these cases as an obvious deterrent.
Note blurring of lines between evasion and avoidance.
Professionals and Aggressive Tax Avoidance Schemes
‘Damned if they do, and damned if they don’t’.
Accountants and tax advisers
Court of Appeal decision in Mehjoo v Harben Barker (2014)
Case that received much attention and whose decision at first instance caused a certain degree of concern amongst tax advisers.
Argued that the Claimant’s accountant had, as a reasonably competent chartered accountant, the obligation to advise Mr Mehjoo that he had or very probably might have non-dom status which carried significant tax advantages and that he should therefore seek and obtain tax advice from a firm of tax advisers or accountants which specialised in advising non-doms on their tax affairs. Mr Mehjoo’s case was that armed with this advice he would have gone to see such a specialist and been advised to enter into an aggressive tax avoidance scheme to avoid paying any CGT on the sale of shares in one of his businesses.
The Court of Appeal reversed the ruling in favour of Mr Mehjoo at first instance and held that an accountant does not have a general roving duty to have regard to and advise on all aspects of a client’s affairs absent a request to do so.
Particular attention was paid to the accountant’s retainer letter and the generally accepted view that the extent of a professional’s retainer depends on the terms and limits of the retainer and any duty of care to be implied must be related to what he is instructed to do.
The imposition of an open ended and apparently limitless duty upon the accountant was therefore rejected by the Court of Appeal.
Lawyers – SRA – Breach of professional Duties?
Professional Indemnity Insurance (role played by) – More difficult to obtain in market?
Certainty, peace of mind and a reduced tax bill.
Advice in dealing with HMRC
As an individual or corporate entity – think very carefully before entering into schemes.
If it goes wrong it can go badly wrong –
Icebreaker investors:
If you are interested, check:-
Conclusion
John Walmsley and Paul Giles – JKW Law
26th March 2015
JKW Law
45 King William Street
London
EC4R 9AN
0203 102 6865
john@jkwlaw.com
Court of Appeal decision in Mehjoo v Harben Barker (2014)
Case that received much attention and whose decision at first instance caused a certain degree of concern amongst tax advisers.
Argued that the Claimant’s accountant had, as a reasonably competent chartered accountant, the obligation to advise Mr Mehjoo that he had or very probably might have non-dom status which carried significant tax advantages and that he should therefore seek and obtain tax advice from a firm of tax advisers or accountants which specialised in advising non-doms on their tax affairs. Mr Mehjoo’s case was that armed with this advice he would have gone to see such a specialist and been advised to enter into an aggressive tax avoidance scheme to avoid paying any CGT on the sale of shares in one of his businesses.
The Court of Appeal reversed the ruling in favour of Mr Mehjoo at first instance and held that an accountant does not have a general roving duty to have regard to and advise on all aspects of a client’s affairs absent a request to do so.
Particular attention was paid to the accountant’s retainer letter and the generally accepted view that the extent of a professional’s retainer depends on the terms and limits of the retainer and any duty of care to be implied must be related to what he is instructed to do.
The imposition of an open ended and apparently limitless duty upon the accountant was therefore rejected by the Court of Appeal.
Lawyers – SRA – Breach of professional Duties?
Professional Indemnity Insurance (role played by) – More difficult to obtain in market?
Certainty, peace of mind and a reduced tax bill.
Advice in dealing with HMRC
As an individual or corporate entity – think very carefully before entering into schemes.
If it goes wrong it can go badly wrong –
Icebreaker investors:
- lost in court
- lost their insurance cover for non-disclosure of relevant information
- have conflicted adviser probably requiring replacement; and
- worse still, in many cases the firms that advised them have ‘phoenixed’ the businesses so as to avoid the inevitable claims
If you are interested, check:-
- What advice did Counsel actually give?
- What rights have you got against the promoter? (Hint – there will be very little recourse.)
- Will the scheme be disclosed?
Conclusion
- Clear evidence of a crackdown – Affluence Unit.
- HMRC are prepared to fight hard and take their legal challenges to Court.
- High start – up or entry fees means that aggressive tax avoidance schemes are not for the average individual and certainly not for the faint – hearted.
- HMRC may be playing catch – up but are now better resourced and with new weapons
- Advisers need to carefully check their retainer letters to ensure the scope of their advice to clients is clear and unequivocal.
- Get expert advice, Counsel’s Opinion and possibly a second Opinion.
- Stay the right side of the prison wall!
John Walmsley and Paul Giles – JKW Law
26th March 2015
JKW Law
45 King William Street
London
EC4R 9AN
0203 102 6865
john@jkwlaw.com
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