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Tony Wickenden: HMRC campaigns and vulnerable beneficiary trust rules

Tony Wickenden Tax Planning Technical Area

To supplement the General Anti-Abuse Rule and the cap on income tax relief, the Government is keen to improve information available to itself and the public about tax avoidance schemes and the risks of using them. With this in mind, the following initiatives are proposed with a view to improving information.

HMRC will:

  • Communicate the risks of engaging in tax avoidance to the public. It is apparently ‘embracing’ the FSA principle of ‘suitability’ as justification for taking this approach, ie. ‘warning’ of the risks attached to certain tax avoidance schemes.
  • Continue to work with regulators to ensure rules are complied with and to increase awareness that breaches of the rules that apply to the promotion of tax avoidanKce schemes can lead to civil and criminal sanctions.

The Government will consult during 2012 on a package of penalty and information powers, specifically targeting high-risk promoters.

So as to improve the provision of information to HMRC under DOTAS, the Finance Bill 2013 and the accompanying regulations will include:

  • A requirement for persons who implement a disclosed tax avoidance scheme to provide certain information to the promoter.
  • A requirement for promoters to provide, upon request, further information to HMRC where the client reported on a client list is an intermediary and not the end user of the scheme.

Discussions continue on the DOTAS hallmarks, and any changes here and elsewhere will be implemented during the second half of 2013.

HMRC is keen to obtain information on tax avoidance schemes at as early a stage as possible. This will enable it to bring in measures to close down the efficiency of such schemes. Fortunately, many of the conventional IHT schemes used in the financial services industry are already known to HMRC and so are exempt from disclosure under the grandfathering principle.

Next in my consideration of upcoming tax changes I would like to consider Vulnerable Beneficiary Trusts.

Trusts which satisfy the “vulnerable beneficiary” rules are entitled to certain tax benefits. In particular, provided the various conditions are satisfied, trust income and capital gains can be taxed as if they were assessed directly on the beneficiary. The following changes are about to occur in this area:

  • Changes to the definition of a ‘vulnerable person’ will be introduced with effect from 8 April 2013. There will be no transitional rules.

  • The revised definition will remain based on welfare benefits and mental incapacity.

  • The new definition will, in part, be based on the PIP (Personal Independence Payment) which is replacing the DLA (Disability Living Allowance) in certain circumstances.

  • Where applicable, the current criteria relating to the DLA, Attendance Allowance and mental incapacity will remain.

  • New rules will be introduced which, in general, mean that for the favourable tax rules to apply income and capital can only be applied for the vulnerable beneficiary. Special rules will be introduced by secondary legislation to enable trustees to apply modest amounts for the benefit of persons other than the vulnerable beneficiary. The amount will be the lower of £3,000 and 3% of the trust fund in any tax year.

As well as the GAAR and the “Lifting the Lid” campaign, the Government has also proposed a further reform of anti-avoidance legislation.

This reform deals with two pieces of anti-avoidance legislation:

  • Section 13 of the Taxation of Chargeable Gains Act 1992 is designed to prevent avoidance of tax on capital gains by individuals sheltering them in an overseas closely controlled company. These are gains on which UK resident persons would otherwise be taxed had they disposed of the asset and realised the gain themselves.

  • The transfer of assets abroad legislation in section 721 Income Tax Act 2007 imposes a charge to income tax on an individual who is resident in the UK where there has been a transfer of assets and, as a result of the transfer (and/or any associated operations), income becomes payable to a person abroad. The taxing rule will apply where an individual can still enjoy income, or receive or have entitlement to receive a capital sum or other benefits from the arrangement.

The European Commission have asserted that these sections of the legislation are incompatible with the provisions of the Treaty on the Functioning of the European Union, arguing that the UK legislation amounts to disproportionate and therefore unlawful restrictions on both the freedom of establishment and the freedom of movement of capital.

In light of this, the Government has consulted with the tax industry and intends to introduce technical changes to this legislation to make sure that it complies with European Union legislation whilst still forming an effective barrier against individuals using overseas vehicles for tax avoidance purposes.

Tony Wickenden is joint managing director at Technical Connection

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