"Raise the white flag" - Are tax schemes worth the effort any more?

I believe the sentiment of this week's Accountancy Age Comment piece deserves a wider audience. It was penned by Lynton Stock, of accountants Shelley Stock Hutter. They were Accountancy Age medium sized firm of the year in 2008.

Regular readers will know that I agree with his views. Do you?
Lynton starts by stating:

"I'm not a quitter. I have never run away from a fight of any sort. However when it comes to tax avoidance schemes, the anti-avoidance legislation is no so onerous (and the interpretation of that legislation by the courts seems so weighted against the taxpayer) that the days of artificial tax schemes succeeding seem to be over."

Lynton goes on to refer to the Disclosure of Tax Avoidance Schemes (DOTAS) legislation - which we now know is to be tightened even further. By way of example he recalls reading Counsel's opinion about a tax scheme where it seemed certain that the taxpayer was bound to win a case going through the Courts. In the event however, not for the first time in such circumstances, the Revenue won.

"Then there is the case of Drummond v HMRC. This related to a tax avoidance scheme in which an artificial capital loss was claimed. Again, some of the largest accountancy firms were promoting this scheme and the tax opinions that I read would have made you think it was game, set and match to the taxpayer before the first ball was struck. Again the taxpayer lost all the way to the Court of Appeal."

Next Lynton highlights the Government's willingness to introduce retrospective tax legislation to counter tax avoidance schemes.

He also reluctantly accepts that "tax schemes are here to stay" and references the new 50% income tax rate and clients' requirement for what, is inevitably, "more and more aggressive" tax planning. By way of example he quotes a typical conversation:

Client: "I want to save tax and I want you to come up with a tax scheme to help me"
Adviser: "In all honesty, from my experience, the tax schemes I have seen don't work. They are expensive, there are no guarantees as to success and you will have no certainty for many years in view of HMRC's stated policy that they are willing to litigate."
Client: "If you can't help me - I'll go to somewhere else to someone who can."

Lynton concludes by suggesting that:

"The real problem, however, is that when the dust actually settles and the tax scheme undoubtedly fails, it really doesn't help to say to your irate client: 'I told you so'."

When I was in practice I was conscious of three further related problems:

1. The accountant wants to charge fees for his related time commitment. This starts with discussing the idea with the client and includes trying to ensure that the client's eyes are fully open. Clients do not however take kindly to being charged fees for their accountant discouraging them from trying to save tax! I developed such a talent for this that it contributed to my decision to stop giving tax advice myself!
   
2. Assuming the client goes ahead anyway the accountant has further time costs related to his involvement - however peripherally - in reporting the transactions on the client's tax return and for liaising with the promoters. However the client is only inclined to pay the latter for their advice and intellectual property re the scheme. And a hefty fee that is too (a substantial proportion of the tax saved/avoided). The client is not inclined to pay his adviser for anything related to this especially as he was not supportive of the client's involvement.
3. The relationship with the client will invariably worsen as the promoter's approach differs from that of the accountant. This will start by reference to their alleged naivety and inability to understand why the scheme is the best thing since sliced bread. It will continue if there is any disagreement as to how the scheme transactions and additional information are disclosed on the client's tax return. And eventually it will spill over into frustration when preparing the client for a Tribunal hearing and any subsequent court case.

What are your experiences and views on this type of situation?

Previous relevant posts:

• Give me pure tax evasion any day
• Discovery assessments issued re film schemes in 2003-04
  
• HMRC challenge sideways loss relief tax avoidance
• HMRC confuse tax avoidance and tax evasion again
• Beware of HMRC spotlights - EBTs now included
• Were you wasting time advocating this tax scheme?
• The beginning of the end for structured tax avoidance schemes?
• Bending vs breaking tax rules

Which Budget proposals will make it into the Finance Bill?

After the Budget announcements, everyone poured over the related Budget Notes which give a better indication of what will appear in the Finance Bill. And all Budget commentaries faithfully reported such additional details.

This year however there is barely any time for parliament to debate and consider the Finance Bill because of the forthcoming General Election. So we know that the Bill will only contain some of the proposed changes. What few commentators seem to have noted is that the Government has already determined certain changes which will be held back for a second post-Election Finance Bill. Twenty of the 71 Budget Notes contain the phrase:

"The Government intends to legislate these changes in a Finance Bill to be introduced as soon as possible in the next Parliament".

I am indebted to my colleague Ian Young at the ICAEW Tax Faculty who has noted that this phrase appears in the following Budget Notes:

6,8,12,13,19,20,22,30,35-37,46-48,50,57,65-67 and 69.

This leaves 51 of the 71 provisions that could appear in the first Finance Bill. This is far more than is likely to be acceptable to other main parties so some of the 51 will also be held over.

You might think that the list represents those clauses that are party political or last minute additions to the Budget. A quick review reveals this is not the case and that there is no obvious distinguishing factor.

I can only assume that this list represents the items in respect of which Parliamentary Counsel had not yet started to draft the related legislation. And that would support the argument that Counsel is given insufficient time and resources to draft tax legislation generally. Is it any wonder that so much of it is unduly complex? Or have I missed something?

It was a Giveaway Budget for Getaway MPs

Little attention has so far been focused on the main beneficiaries of the pre-election Budget. I've identified 8 measures that will evidently help MPs who lose their seats, as many are bound to do following the expenses scandal.

Many ex MPs will struggle to get 'proper' jobs and will instead tout themselves as consultants or 'cabs for hire'. The rest will have to try start new small businesses.
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1. Remember the Chancellor talked about doing "more to combat financial exclusion, through a guarantee that everyone can have a basic bank account"? [Even MPs who have become pariahs]
2. And we were told that "Budget 2010 also announces a package of measures to help people make the transition back to work" [Departing MPs will need as much help as anyone]. One of these measures will ensure "the eligibility of the Working Tax Credit to people aged 60+ if they work at least 16 hours a week, rather than 30 as currently." [Of particular value to ex MPs who can't get that much work]
3. What about "ensuring that the supply of lending to the economy supports the recovery [of MPs after they stand down/lose their seats]"? Of the new money that Lloyds and RBS must lend, "£41 billion of this total being lent to small businesses [many to be run by ex MPs].
4. There's to be a 'small business credit adjudicator' to help "ensure that small businesses [run by MPs] are treated fairly when applying to their bank for finance. [Who'd want to lend to them otherwise?]
5. The Budget announced "an increase in the threshold of the Annual Investment Allowance to £100,000 for qualifying expenditure incurred from April 2010." [Should be very useful for ex MP's kitting out their new offices as the old limit of £50k would not have been enough given their past experience of and preference for expensive taxpayer funded items].
6. Another measure that will help ex MPs is the the small business rate relief whereby "eligible small businesses occupying properties with rateable values up to £6,000 will pay no business rates for one year from October 2010."
7. Older MPs will be pleased to note that they may be allowed to continue working outside the House beyond the "default retirement age" of 65 as "the Government intends shortly to launch a formal consultation on reforms to the Default Retirement Age."
8. The Chancellor said he was "relocating civil servants from expensive London offices to elsewhere in the country." What he didn't say but may have been thinking was that this should be another way to help MPs who lose their seats. It will be much easier for them to do their lobbying locally.

I could go on.
The one Budget announcement that is so evidently NOT intended to benefit departing MPs is the "two-year stamp duty land tax relief for first-time buyers for residential property purchases up to £250,000". Everyone knows most ex MPs would be at least third-time buyers given they already have two homes!

What did I miss? Which other measures may have been selected, designed or intended to benefit the MPs who lose their seats or who are not standing in the General Election?

Tax tweets: Budget 2010

Regular readers will know I'm not a fan of instant Budget analysis. We can pick up on what the Chancellor says, but it takes time to work through the Red Book, Press Notices, Budget notes, supporting docs and draft legislation that are all published after he sits down.

Today, for example, there were 71 Budget Notices alone. I'm happy to leave it to others to rush out their summaries. For the moment then here is a selection of my contributions to the twitter talk during the Budget speech.

Missing from #ukBudget speech: Equalising the rules for tax free expenses as between MPs and all other executives/workers

Missing from #ukBudget speech: New rules to abolish inequitable exemption from tax of MPs' payoffs when they stand down. Limit is £30k for us.

Few smaller and start up biz will really benefit from facility to offset a further £50k of capital exp (AIA) against profits #ukbudget

Official definition of 'small' business is one with a turnover of upto £6.5m. "Fledgling?" #ukbudget

The official definition of SME is one with a turnover of upto £25.9Million. Covers >99% of all UK biz. Targetted help? #ukbudget

All those refs to SMEs - Is he ill-informed or does he really mean the >99% of UK biz that satisfy that official definition? #ukbudget

"Access to finance is vital for small biz" - Very pleased to hear the ref to only those who are "Viable" A critical distinction #ukbudget

Relocation of civil servants out of London - another way to help MPs who lose their seats? => lobby more effectively around UK #ukbudget

Many of the 'higher than expected' tax receipts are due to poor forecasting by Treasury not due to better performance #ukbudget

Extending support for those losing a job especially all those older MPs who will not have to work long hours to benefit (ROFL) #ukbudget

New bank accounts for the financially impoverished - intended to help MPs who lose their seats and can't get 'proper jobs'? #ukbudget

Remember that many tax announcements in #ukbudget today will be simply confirming tax changes announced in Budget09 and in PBR.

Have you been subject to 50% tax since May 2009?

The Chancellor announced the introduction of a new top rate of 50% income tax during his 2009 Budget statement. It will apply to incomes above £150,000 with effect from 6 April 2010. So it only applies to taxable earnings and profits after that date?

To be precise, it applies to all earnings and profits that are taxable after 6 April 2010. Bonuses earned by and paid to employees beforehand will only be subject to 40% tax.

What about the self employed and those in partnerships?

They will be subject to 50% tax if their taxable earnings in 2010-11 are above £150,000. For the self employed and those in partnerships this affects the profits of accounting periods ending after 5 April 2010. Thus, anyone with an accounting date of, say, 30 April will be subject to the 50% rate as regards their taxable profits in the accounting period that started on 1 May 2009 and which ends on 30 April 2010.

I would suggest that any appropriate action will depend upon current and future cashflow and profit projections. Rash changes to accounting year ends should be resisted to avoid losing more than the hoped for gains in the long run.

Aspirational 50% top rate taxpayers

Regardless of any surprises in the Chancellor's last(?) Budget tomorrow, we know, from the 2009 Budget announcement that the top rate of tax moves up to 50% from 6 April 2010.

The 50% rate applies to taxable income over £150,000 in 2010/11. (That's some six times the average national wage). The 50% rate will never affect anyone who's income is unlikely to reach this figure. But accountants have many clients who are still worried about it, resent it and want to know how they can avoid having to pay it. These are the "Aspirational 50% top rate taxpayers". They anticipate, hope or dream of earning more than £150,000.

This all sits rather peculiarly with Gordon Brown's claim that Labour is "the party of aspiration" as none of those who aspire to earn more than £150,000 are really aspiring to pay 50% tax. On the contrary they want to know what they need to do to avoid having to pay it if they achieve their income ambitions. Or maybe their concern is based on a misunderstanding. Perhaps they assume that the 50% rate replaces the 40% rate which itself hits only 10% of all taxpayers. The Chancellor estimates that just 2% of the population will be affected by the 50% rate.

Why did the BBC's Sian Williams' appeal get to the Tax Tribunal?

Sian Williams, one of the hosts of BBC Breakfast has been in the news this week after it became apparent that she had a claim for tax relief in respect of clothes and hairstyling rejected by the Tax Tribunal.

Sian claimed that the items should be tax deductible because it was part of her job to look good on screen. Many of the media reports focused on one of the arguments used in case, that she would be prepared to read the news without clothes and only wears clothes because her employer requires it. As the Daily Express reluctantly notes however, "Mother-of-four Miss Williams has ...assured viewers that there is no danger of her actually presenting naked”.

Such claims for tax deductible clothing have long been a cause for dispute. One of the most famous cases involved a blonde Barrister (now Labour Peer), Ann Mallalieu and reached the House of Lords almost 30 years ago. She claimed tax relief for the black clothes that she was obliged to wear in court as she claimed she would never buy or wear such clothes for any other purpose. She lost the case because, the court ruled, the clothes were not purchased exclusively because she had to wear them in court, but also for the subconscious reasons of warmth and modesty.

We should bear in mind that Ann Mallalieu was self-employed and that Sian Williams was, in contrast, seeking to offset the cost of buying and laundering professional clothing etc against her employment income from the BBC. Thus her claim had to satisfy the notoriously restrictive test that the costs were involved “wholly, exclusively and necessarily" in the performance of the duties of her employment. As such her claim was almost bound to fail. As was the alternate claim being pursued that the clothes be treated as 'plant and machinery' qualifying for capital allowances.

Unsurprisingly the Tribunal first dismissed the claim for tax relief in respect of hairstyling. They noted that Sian did not have her hair done and coloured immediately before performing her duties as newsreader, and then changed back again immediately after finishing reading the news.

The failure of Sian's main claim was also quite predictable and one wonders who persuaded her that it was worth pursuing and on what grounds? Her situation was no different to many other employees (whether engaged to appear on TV or otherwise). There were not even any clear contractual obligations on Sian to acquire and wear a succession of appropriate outfits when she appeared on screen.

What do you think?

"Give me pure tax evasion any day"

This sentiment was expressed, by one of our tax investigation specialist members on the Tax Advice Network's private forum recently. What prompted such an intriguing comment?

We were discussing aggressive tax avoidance schemes. I'm no fan and have written many posts here in which I have sought to highlight that the real risks of such schemes are generally greater than the promoters would have you believe. This is especially the case if you are dealing with promoters who are one or more steps removed from the tax brains that originated the scheme.

The tax adviser members of the Network were sharing their views as to the complexity of such schemes. This was in response to my suggestion that we consider adding the following as additional headings on our list of 'specialisations':

Avoidance schemes and strategies - resolving challenges

Sadly there are plenty of taxpayers and accountants who have been taken in by the hard sell and ‘assurances’ offered by promoters of tax avoidance schemes. It’s a fact of life that the problems only become apparent some years after the initial transactions took place. Our advisers are experienced in negotiating with HMRC and helping clients to extricate themselves from complex structures that have little commercial value.

Explanations and advice

Unlike the aggressive purveyors of tax avoidance schemes who focus on promoting and selling their 'products' our advisers prefer to focus on bespoke tax planning. Some of our specialists are well aware of the 'solutions' being promoted to reduce income taxes, capital gains tax, corporation tax, SDLT, NICs VAT and IHT. Whilst the tax reduction is often attractive, many clients decide not to proceed once they understand the risks (and there are always risks). If a client is prepared to take the associated risks and the circumstances are appropriate.

Call or email one of our specialist advisers if you want help in resisting a hard sell or a more down to earth explanation of a specific strategy, the risks and probable outcome.

Despite the potential interest in such generic services, we concluded that we could not offer to provide them in the way I had initially suggested. To do so would require specific members to have in depth knowledge across a wide range of specialist area of tax and the related avoidance schemes. In practice most advisers only have such expertise in their own specialist area or areas. So, for example, one member noted that he would be willing to assist anyone who is involved with an employee loan scheme. However he would be reluctant to offer advice on non-employment related schemes as to do so would require a great deal of uneconomic research.

Another member of the Tax Advice Network noted that he has been instructed on a number of occasions after HMRC had successfully challenged schemes. He noted that it often only takes a little research to find:

"the little bit of writing - in the mass of over information - that covered the seller's back and usually points to the naive customer not reading the blurb with enough detail to spot that they were likely to end up paying through the nose for very little."

And another member noted that one of his past roles in a national firm of accountants was to unpick these avoidance schemes, with the result that very very few were sanctioned by the firm.

It became clear from our online discussion that there was no appetite for providing the two generic services I summarised above. Indeed, such is the lack of enthusiasm for such schemes among these experienced specialist tax advisers that one (a tax investigations specialist) was moved to conclude: "Give me pure tax evasion any day".

Why is HMRC staff morale so low?

Last month the Treasury Select Committee published a rather impressive report, Administration and Expenditure in the Chancellor’s Departments 2008-09, in which it expressed serious concerns about low morale and a lack of efficiency at HMRC. The report notes that:

"HMRC has an ambitious transformation programme to improve its efficiency involving a reduction in the number of people working for it, and a reduction and redistribution of the locations of its businesses. HMRC has already reduced the number of people in its organisation from 105,000 to fewer than 89,000."

The Chief Executive of HMRC, Lesley Strathie admitted to the committee that she accepted that she had an unhappy workforce that nevertheless seemed committed to stay with HMRC. GIven recent staff cuts those remaining probably comprise a mix of the truly committed and the truly awful who did not volunteer to go as part of the cut backs.

The Committee was justifiably concerned that "a disengaged workforce with poor morale" could impact performance - in terms of collecting all taxes that are due. Lesley Strathie recognised that her workforce needed clarity "about whether they have a future in the department and what that future looks like…" She also saw a need to build up the tax profession to "upskill and accredit our people." She acknowledged too that management needed to do more, telling the Committee that "many of our managers do not believe they need to change, and clearly we all need to change."

I think this is all rather worrying for accountants and for tax advisers. Ever since the Government announced its desire to cut staff at the newly merged HMRC we have been concerned about the professionalism and ability of those who would be left behind. Five years on and it is clear that, for those who remain, morale is at rock bottom, the pressure is greater than ever and the quality of service is generally low.

I have never been convinced that the so-called "transformation programme" bore any relationship either to modernisation, improved service to 'customers' or increases in the tax yield. The committee may well be right to blame senior management for the low staff morale within HMRC. Perhaps they could have done better. However let's remember that it was the Government who decided to decimate staff numbers, to close offices and to introduce complex new tax measures at short notice. I suspect that senior management are doing quite well given all of the obstacles placed in their way!

What do you think?

250th blog post: Tax Buzz

It feels like something to celebrate - along with the fact that we have moved beyond 2,500 registered users of the Tax Advice Network, and as we move towards offering access to over 30 independent tax advisers across the UK.

But I'm well aware that such celebrations are best kept as private affairs and are not considered newsworthy.

So this post is simply to mark what I consider to be a proud achievement: 250 posts on the TaxBuzz blog.

I explained more about the focus and content of the blog in a recent post: Review of TaxBuzz blog 2009

Prediction: CGT rate will increase to 50% this year

I rarely make predictions but this one seems so obvious and I'm disappointed at the way the CGT 'elephant in the room' is being ignored by other commentators.

Until the Chancellor's announcement in his 2007 Pre-Budget Report the main rate of capital gains tax (CGT) was linked to the top rate of income tax. At the time of the 2007 announcement everyone seemed to focus on the effective increase from 10% to 18% CGT on business assets. But that was never the main story.

No one has ever provided a meaningful policy reason for reducing the rate of CGT on short-term speculative gains from 40% down to 18%. It was a welcome tax cut for the rich although this was not widely highlighted as it was introduced by a Labour chancellor. And no one wanted such a generous tax cut to be reversed. However with the pressure now on to find ways to reduce the budget deficit it is inconceivable that CGT will be left untouched. Still however, no one wants to be seen to be calling for tax rises so there is little mention of it in Budget predictions.

In a blog post last year I set out some of the background to the CGT rate changes in recent years: Why are capital gains taxed at less than half the main rate of income tax?

Since then we have seen bankers' bonuses come under attack and there has been some linkage with the way that venture capitalists secure their rewards by way of capital gains taxed at only 18%, previously 10%, rather than 40% (or in future 50%).

The practical problem for the Chancellor is how to reverse the changes he introduced just 2 years ago without being accused of a predictable u-turn. He can of course blame the economy. Alternatively, if the Tories are elected they could secure a double whammy:

• Reverse a recent cut in the rate of CGT that was introduced by Labour without any logical policy justification; and
• Prove that they are not favouring the wealthy as such a move would impact the 'rich' more than anyone else.

NB: The cash flow impact of any increase in CGT from 6 April 2010 would not flow into Treasury coffers until 31 January 2012. If the increase is deferred until 6 April 2011 there would be no additional CGT paid until 31 January 2013.

As part of a balanced plan, and this would be easier for the Tories than for Labour (due to the U-turn it would require), we should also see a reintroduction of some form of taper relief to incentivise and reward longer term investment. This is pretty much what Gordon Brown promised when he first introduced just such a facility in 1998. To an extent the entrepreneurs' relief, introduced in response in response to howls of protest in 2008, already retains the 10% rate on the first £1m of gains. And this need not change.

Tory tax plans discriminate against sole traders and partnerships

Last Sunday George Osborne explained in a TV interview how the Tories plan to fund the reductions in corporation tax they have promised.

During the Andrew Marr show Mr Osborne initially stated that the reductions in the rate of corporation tax would be paid for by the “abolition of some complex reliefs”. When pressed however, he went a little further and stated that "an investment relief predominantly available to small businesses would be abolished" to “simplify tax".

The only obvious candidate for such abolition would be the 100% Annual Investment Allowance (AIA). However this relief currently simplifies the tax position for small businesses as it enables them to write off the cost of capital assets acquired each year (upto £50k pa). Crucially the relief is also available to sole traders and to partnerships who would not benefit from the reduction in corporation tax. So abolishing the AIA completely would mean more tax and complexity for them and no compensatory reduction in the rate of tax payable on their profits.

At this stage we can but hope that, if the Tories are elected, that the AIA remains available to the smallest businesses (regardless of their legal structure). The tax system has long been distorted due to the damage caused by constant tweaks to the tax status of small businesses. Reductions in the rate of tax paid by small companies on their profits will perpetuate the destablising impact of constant tax changes for smaller businesses.

Is permanent residence different to domicile?

Back in March 2000, Lord Ashcroft undertook:

"to take up permanent residence in the UK again before the end of this calendar year."

Many people assumed this meant that he would cease to retain his non dom status. In fact as all half decent tax advisers will tell you there is an enormous difference between the concepts of residence and domicile. Even a 'permanent' resident can, if not currently domiciled here, retain their non dom status. This is because that status is dependent on a number of other factors including where they anticipate ending their days.

Lord Ashcroft's advisers will have been well aware of the ambiguity of his statement and that he could retain his non-dom status whilst also being "fully tax resident" in the UK. He will have been liable to UK tax on all UK 'source' income, such as from property, jobs and investments held in the UK. Non-dom status allows income and gains that arise outside of the UK to escape UK tax unless the money is 'remitted' to the UK.

As regards his future intentions, Lord Ashcroft has chosen his words very carefully. He says:

As for the future, while the non-dom status will continue for many people in business or public life, David Cameron has said that anyone sitting in the legislature - Lords or Commons - must be treated as resident and domiciled in the UK for tax purposes. I agree with this change and expect to be sitting in the House of Lords for many years to come.

I suspect that this is intended to enable him to avoid losing his non dom status until 6 April 2010.

When the issue of non doms was last discussed in the context of Zac Goldsmith I expressed the view that he had fallen into a trap. As noted in the comments on that blog post, Mr Goldsmith's subsequent comments confirmed the veracity of my observation. It is for the same reason that Lord Ashcroft is unable to confirm explicitly that he intends to cease being a non dom or that he has already done so.

Non dom MPs - how difficult is it to change the law?

Top Tory donor and party chairman Lord Ashcroft has revealed he is still a "non-dom" but says he will at last give up that status. Leaving aside all the political mud-slinging about the timing of Lord Ashcroft's announcement I was intrigued by something I heard Justice Secretary Jack Straw say on the subject.

He was being interviewed on Channel 4 news about the change in the law required to ensure that all donors to political parties are domiciled in the UK. Mr Straw noted that the law had been changed a few years ago to ensure that all donors were registered UK voters. A further change is now required to ensure that they are domiciled here (or as Jon Snow repeatedly put it, rather simplistically, "paying full UK taxes").

Mr Straw blamed the delay on changing the law on HMRC as "the law [of domicile] is very complicated."

I'm sorry? The complexities of the law of domicile are an issue as between individual taxpayers and HMRC. Such complexities are irrelevant when framing an amendment to the law to deny political donations from non-doms. Indeed such a change would put the onus on donors to clarify their domicile status.

I note that a similar issue arises as regards a rushed amendment to the Constitutional Reform and Governance Bill. This will deem MPs and peers 'ordinarily resident and domiciled in the UK' for income tax, capital gains and inheritance tax. However it is reported that Peers would have three months from the change coming into force to ensure their status was in line with the new rules. If true this can only mean that they have 3 months to confirm their tax status from the beginning of the relevant tax year - if they were not ordinarily resident or non-doms in the previous tax year.