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A question of ethics

The first of two articles looks at the clampdown on tax avoidance

You have to worry when the Deputy Prime Minister is reported as having the opinion that legal tax avoidance is “ethically wrong”.
Danny Alexander, Chief Secretary to the Treasury, recently announced at the LibDem annual conference that there would be a new “major initiative” to clamp down on tax avoidance.

Regardless of the (increasingly familiar LibDem) strong philosophical drive, the economic background to this “initiative” is, of course, to gather in more funds to reduce the enormous Government debt. The seriousness of official commitment to do something about evasion and legal avoidance is evident from the comments of the Deputy PM and of Mr Alexander who states the Treasury, through these new plans, will be “ruthless on rich people and corporates who think they can treat paying tax as an optional extra”.

Coming as a joint initiative as part of the coalition Government, the Treasury will, reportedly , make £900m available to HMRC to tackle avoidance, specifically targeting offshore tax havens and those whom it believes are avoiding the 50 per cent income tax charge. The new investment should raise an extra £7bn each year by 2014/15. Various reports have suggested this will be achieved by a fivefold rise in criminal prosecutions for tax evaders, the creation of a dedicated team of offshore haven investigators and by examining the affairs of all 50 per cent taxpayers. Details of how this is to be achieved will be unavailable until the spend-ing review, but there has been much press and professional comment on how the initiative could work, its “challenges” and how successful it could be.Something which must be fully appreciated by IFAs is the apparent likelihood that HMRC will examine all (roughly) 150,000 people thought to be additional rate taxpayers – the new 50% rate. This group will be a vital current or target client segment for IFAs. It is vital that financial advisers are at least familiar with the main components of this initiative once they become clear. At this stage, though, it is enough to be aware of it and how it might affect attitudes to and appetites for tax planning. Despite official rhetoric, clients should be reassured that legitimate, legislatively contemplated planning, for example through Isas, pensions and tax-effective/tax-deferring products, is unlikely to be targeted for attack.

It is fairly well known, for example, that trust-based employer-backed deals, like EFRBS and EBTs, are set to be targeted. But ordinary pensions and most retail pensions alternatives will remain available and potentially highly tax-effective.

Advisers should take heart from the fact that

l few of them will have promoted/arranged execution of some of the more “innovative” tax planning strategies as part of their core business offering and

l many clients, even high-networth clients, will have significant capacity to make worthwhile (and acceptable) tax saving through unprovocative measures – measures that will fall within the core competences of most financial advisers.

The Government’s aim to boost prosecutions fivefold creates more problems, founded on expense and delivery in collection. HMRC’s success in the courts has not been exactly stellar and this must increase significantly if this route is adopted as one of the key parts of the revenue-raising strategy.

With such a demanding target, many expect HMRC to have to look beyond the so-called “rich”. The potential extension of “investigation rigour” further down the “wealth chain” is another factor that advisers need to keep an eye on.

HMRC is at the moment already being significantly aided and abetted in its drive to be “better at attacking avoidance” by the Disclosure of Tax Avoidance Schemes (DOTAS) provisions.

July 27 saw the publication of the consultation document on extending the so-called Dotas regime to trust-based IHT avoidance arrangements. The closing date for comment is 20 October 2010. The aim is to introduce regulations on the subject later in 2010/11 to come into effect from April 2011. The Dotas regime is contained in Part 7 of the Finance Act 2004. This “core” legislation is then applied to appropriate taxes by government regulation.

The so-called “main regime” was initially applied to income tax, corporation tax and capital gains tax. It was extended to cover SDLT in 2005 and NICs in 2007. In the June 2010 Budget, the Government announced that it would consult with a view to extending DOTAS to trust-based IHT schemes.

This followed specific legislation attacking two such schemes. At the time, HMRC confirmed this specific anti-avoidance legislation would not apply to regular discounted gift schemes – which was welcome.

The intention is that the Dotas regime would apply to any arrangements where property becomes relevant property (subject to the IHT discretionary trust regime) and the main benefit of the arrangement is the avoidance, reduction or deferral of the entry charge.

The financial planning sector (advisers and providers) will undoubtedly be a little concerned over the potential additional burden that the proposed extension of DOTAS may have on well-used IHT arrangements, such as on loan trusts and on any discounted gift trusts.

As I mentioned in a previous article, some relief seems to be at hand with existing and known schemes falling outside those that must be disclosed.



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