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25 Mar 2010
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 now 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.
Why? All we have to do is turn to the evidence that is available to us. The requirement of the Disclosure, Tax Avoidance Scheme (DOTAS) certainly puts a dampener on tax schemes. Long gone are the good old days when some bright spark could dream up a good old tax scheme and it would take years for HMRC to catch up and legislate against it. DOTAS is akin to Sir Alex Ferguson setting out his game plan and then handing this over, in the clearest possible terms to the opposing manager before the game has even started.
Secondly, many of these schemes just don’t seem to succeed when they are actually tested in the courts. One example is the case of Irving v HMRC (2008).
While the facts are not relevant, I remember reading counsel’s opinion, which seemed certain that the taxpayer had to win. The taxpayer lost all the way to the Court of Appeal and was refused leave to appeal to the House of Lords. However, what was interesting in that case is that one of the judges criticised the legislation, saying that “not for the first time, we have had to go to Bannockburn by way of Brighton Pier. This is not how the legislation should be written”. Very helpful.
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.
If that is not enough evidence for you, then what about the government’s
history in introducing retrospective tax legislation? The Pre-Owned Asset
Legislation introduced in 2004 changed the law retrospectively to 1986.
Regardless of my protestations, tax schemes are here to stay because in the
light of the new 50% income tax rate, clients seem to want to be more and more
aggressive in their tax planning. For instance, how many of you professional
advisers out there have had this 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 seem to 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 somewhere else to someone who can.”
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.”
Lynton Stock is a partner at Shelley Stock Hutter.
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Visitor comments Add your comment
Well said Lynton!
When I was in practice I was conscious of two further related problems:
1. The accountant wants to charge fees for 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.
2. The relationship with the client will invariably worsen as the promoters 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.
Posted by: Mark Lee, 28 Mar 2010 | 00:00
Spot on
A good point well made.
I'm sure many accountants and tax advisors have spent hours sorting out the tax enquiries and compliance issues arising from a scheme sold to a client who only heard (or is only told) "all you need to do is........it will save you tax of £xxxxx" The words in between aren't what they're interested in.
The trouble doesn't just come from one side though. Tax avoidance isn't all black and white as HMRC seem to see it. Film Schemes are a good example of this.
Some schemes set out to apply the tax breaks to "film" productions that were, to be generous, right at, or just over the boundaries of what the government intended in giving the incentive. These deserved at the least some close scrutiny by HMRC. Conversely other schemes backed productions completely in spirit the governments intention but found "imaginative" ways of spreading the tax break to include investors, who as partners at the bottom of a complex structure saw very little real financial benefit and were the first in HMRC's firing line.
The point with the latter type of scheme is that it achieved what the government set out to do, which was to raise finance for the British Film Industry. Further, the tax relief generated by these overall did not, in my understanding, excessively benefit in timing or the amount of tax relief, that would have been received by an Angel investing directly into a film production. At worst they worse technically faulty. It seems that the movers and shakers at the Revenue were/are in danger of determining tax policy rather than sticking to the job of just policing it. Rant over!
I don't like tax evaders they cost me and every other taxpayer in the country money. But nether do I approve of HMRC's often over zealous, misjudged and disproportionate approach to tax avoidance; that also costs me money.
How about a universal clearance procedure - tricky but surely it can't be worse than what we have now.
Posted by: Tony Court, 30 Mar 2010 | 00:00