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Tony Wickenden: Tax outrage an opportunity for planners


So taxation has been in the news a bit of late. Understatement or what? Add in a good helping of celebrity and some pretty charged political comment, and we have what became a week-long front-page story supplemented by TV news, live shows and much public and private debate.

There are very few people who don’t have a strong point of view on the matter with “morality” and “legality” featuring strongly in most of these opinions.

There can’t be many in the country, let alone the financial services sector, who are not now familiar with the terms “K2” and “Icebreaker”. “Eclipse”, an early frontrunner in the name awareness stakes, is not far behind.

The interesting thing about the tax schemes that hit the news is that they all involve loans at one stage or another. The much-discussed K2 scheme appears to have involved loans from an offshore employer-financed retirement benefits scheme or employer. It would seem that this was a “V2” put together and intended to work to deliver tax benefits (in the shape of the receipt of tax- free funds) despite the introduction of the disguised remuneration legislation.

Other arrangements, predominantly film and other entertainment-based partnerships, aimed at delivering a tax shelter for the investor through the sideways use of the trading loss created. This loss was, in effect, “super-charged” by borrowed money.

Yes, HMRC had tried to limit sideways loss relief in the not-too-distant past, but the resulting targeted anti-avoidance provisions seem not to have been as effective as they should have.

There is a history of targeted anti-avoidance legislation failing to achieve its purpose as a result of the loopholes in drafting being exploited by the tax avoidance industry. Typically, this then results in either or both of subsequent additional legislation or an attempt to secure a “purposive” decision in the tribunals and courts. All very costly and time-consuming and, for HMRC, too uncertain in relation to the outcome.

With the passage of time, it has become obvious that the specific nature of the legislation can leave scope for an interpretation. It permits, formally at least, a taxpayer-beneficial outcome to be achieved that could, arguably, not be what Parliament intended when the legislation was conceived.

Where these “loopholes” are exploited to defeat what the authorities believe to be the purpose underlying the legislation, then HMRC will either assess the “exploiting” taxpayers if they believe that it can win through the tribunal/court system, which the taxpayer may then use to resist the assessment and/or seek to change the legislation.

In relation to an attack through the tribunals and courts, there is some evidence that a purposive approach is being used to “come to the rescue” of the authorities. Broadly speaking, this kind of approach will look to ignore steps inserted that have no commercial purpose so that the believed intention of the Government can be enforced.

However, the very nature of the judicial system makes the outcome (highly dependent on the facts) far from certain. Supporting anti-avoidance legislation, for example the “disguised remuneration” provisions to supplement the provisions in relation to the taxation of employment-related benefits provided through third parties, to date has been what is known as “targeted” as opposed to purposive. So, over time, we have witnessed a pattern of “legislation, tribunal, new legislation” as loopholes get gradually closed and then exploited again in their new form.

That is broadly why there is consultation on the introduction of a general anti-abuse rule. This will be an essentially purposive rule and will act as an overall “back up” to more targeted anti-avoidance provisions where they fail to achieve the purpose of the Government.

It will essentially give HMRC the legislative platform to mount an attack on a purposive or “substance over form” basis.

I will look at the proposed GAAR in more detail in a future article. However, it is important to note that while the GAAR is a general as opposed to targeted anti-avoidance provision it is still relatively narrowly focused. This explains why it is called a general anti-abuse rule as opposed to a general anti-avoidance rule. The latter would require a robust clearance procedure to accompany it that was thought to be too complex and potentially expensive.

So what does all this high profile “tax avoidance” and resulting strong public sentiment for stopping the tide of “immoral” activity mean for the overwhelming majority of Money Marketing-reading financial planners?

Well, while needing to be informed on the fundamentals of the plans in the news and the GAAR, these developments represent an opportunity to put clear blue water between the acceptable, permissible, legitimate and effective tax and financial planning strategies and the more provocative schemes that have been attracting the negative sentiment in the media.


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