Spotlights

Introduction

'Spotlights' is all about tax avoidance.

It will help you to understand what we are likely to see as tax avoidance by identifying the types of arrangements or scheme which we are likely to challenge. We will do this both by providing you with some help to understand how we distinguish between artificial avoidance schemes and ordinary sensible tax planning and by describing specific schemes. Where we think there may be particular drawbacks to a scheme that might not otherwise be obvious, we will describe these.

In Spotlights we will

provide some advice on tax planning to be wary of, listing some indicators that we see as suggesting that a scheme may involve tax avoidance and which we are likely to investigate
identify specific schemes which, in our view, are not likely to deliver the tax savings advertised. Where we see such schemes being used, subject to the particular facts, we will make a challenge and seek to ensure full payment of the right tax with the right due date

Set out below are a number of indicators of tax planning to be wary of. The inclusion of one of these features does not necessarily mean that tax avoidance is involved, but the more of these features that are present, the more likely it is that HM Revenue & Customs (HMRC) would see the arrangements as tax avoidance and challenge your self assessment. If you have doubts about a scheme then you should check with a reputable tax adviser.

Tax planning to be wary of:

It sounds too good to be true.
Artificial or contrived arrangements are involved.
It seems very complex given what you want to do.
There are guaranteed returns with apparently no risk.
There are secrecy or confidentiality agreements.
Upfront fees are payable or the arrangement is on a no win/ no fee basis.
The scheme is said to be vetted by a top lawyer or accountant but no details of their opinion are provided.
The scheme is said to be approved by HMRC (it does not follow that this is true).
Taxation of income is delayed or tax deductions accelerated.
Tax benefits are disproportionate to the commercial activity.
Off-shore companies or trusts are involved for no sound commercial reason.
A tax haven or banking secrecy country is involved without any sound commercial reason.
Tax exempt entities, such as pension funds, are involved inappropriately.
It contains exit arrangements designed to sidestep tax consequences.
It involves money going in a circle back to where it started.
Low risk loans to be paid off by future earnings are involved.
The scheme promoter lends the funding needed.

Particular schemes

The spotlighted schemes are generally those which HMRC consider have the widest implications and about which there is the greatest need to warn potential users. These articles are limited exceptions to the usual rule that we do not comment on tax avoidance. No further comment will be made. Only a minority of schemes will appear in Spotlights. In particular, we will not include schemes aimed at very specialised areas, with a limited scope or where we estimate not much tax loss is involved. A scheme that has not featured in Spotlights may still be challenged. You may wish to consider it in the light of the advice above on 'tax planning to be wary of' and consult a reputable tax adviser.

Spotlight 8: Investments to obtain trade loss reliefs ('sideways loss relief') (8.2.2010)

We are aware of schemes seeking to exploit sideways loss relief by generating trade losses for individuals. Typically, a large loss is generated, either in partnership or alone, by accounting for the arrangement as a trade and either writing down the value of trading stock or claiming deductions or allowances for purported trading expenditure. Often these schemes are funded in part by borrowing and may include a mechanism that means repayment is guaranteed. The individuals claim the loss as sideways loss relief against their other tax liabilities. HMRC’s view is that these schemes fail to meet the commercial and other fundamental requirements for sideways loss relief so that no relief is available to the participants.

In addition to not meeting the fundamental requirements for sideways loss relief, HMRC’s view is that individuals participating in these schemes also do not meet the requirement that at least ten hours a week are spent personally engaged in commercial activities of the trade carried on with a view to earning profits from those activities. HMRC’s view is that the activities which these schemes claim are sufficient to meet the test, for example reading scripts or medical journals, watching TV or DVDs etc, are not undertaken on a commercial basis with a view to profit with the result that any trade loss would be subject to the sideways loss relief restrictions for non-active traders.

For arrangements made on or after 21 October 2009 a general restriction will also apply preventing sideways loss relief for a loss arising to a person from a trade, profession or vocation where a main purpose of the arrangements is to obtain a reduction in tax liability.

Whenever arrangements have been entered into to obtain a tax reduction by way of sideways loss relief we will actively challenge these arrangements and the activities of individual participants and litigate, if necessary. We will also withhold repayments of tax resulting from claims to sideways loss relief in appropriate cases.

Spotlight 7: Avoidance using gift aid (6.1.2010)

We are aware of schemes that seek to generate Gift Aid and Gift of Shares tax relief claims. A cash donation to a nominated charity is required and in return shares are received from an unnamed non UK 'philanthropist'. These shares are claimed to be worth up to eight times the amount of the cash donation and are in companies listed on a stock exchange that is not recognised by HMRC, for example The Open Market of The Frankfurt Stock Exchange. The scheme anticipates that the shares will be donated to the nominated charity.

There is also strong evidence that these schemes have links to share scams such as 'boiler rooms'. They usually involve a high level of upfront 'fee', paid to the scheme promoters, which is concealed within the original cash 'donation' given to the charity.

Our view is that no Gift Aid is due on the cash donation because the donor receives a benefit (the shares) that is in excess of the donation. We also consider that no Gift of Shares relief is due because the requirement that the shares are listed on a stock exchange recognised by HMRC is not met.

Spotlights 5 and 6

Customers, their advisers and promoters should be aware that we consider the following two tax avoidance schemes to be ineffective. This means that we will most likely investigate tax returns where these schemes have been used and seek full settlement of the tax due, plus interest and penalties where appropriate. You should also be aware that some ineffective schemes, such as that described in Spotlight 5, may give rise to unexpected tax consequences.

Spotlight 6: Employer-Financed Retirement Benefits Scheme ('EFRBS')

We are aware of schemes where companies claim a Corporation Tax deduction for employer contributions to an EFRBS scheme on the basis that either (a) the contribution to the EFRBS or (b) a subsequent transfer to a second EFRBS is a 'qualifying benefit'. This would allow the company to secure a Corporation Tax deduction before any benefits are actually paid by the scheme to the employee. Our view is that neither transaction involves the provision of a 'qualifying benefit'. Whilst it has been argued that there may be some ambiguity in the law around the meaning of the phrase 'transfer of assets' since it does not state to whom the transfer is to be made, in our view the context resolves any ambiguity. The law defines 'qualifying benefits' and such benefits are plainly, from the context, benefits that if paid under the terms of an EFRBS might fall within the employment income charge. So in that context, a 'transfer of assets' should be interpreted as a transfer that could give rise to such a charge. This will primarily mean a transfer of assets to the employee but also includes a transfer to a member of the employee's family. Neither an employer contribution to an EFRBS nor a transfer between EFRBS gives rise to a possible employment income tax charge on the employee. So there is no 'qualifying benefit' entitling the employer to a deduction.

Spotlight 5: Using trusts and similar entities to reward employees - PAYE (Pay As You Earn) and National Insurance contributions (NICs), Corporation Tax and Inheritance Tax

We're aware that companies have been seeking to reward employees without operating PAYE/NICs by making payments through trusts and other intermediaries that favour the employees or their families. The arrangements usually seek to secure a Corporation Tax deduction, as if the amounts were earnings at the time they are allocated, and also defer PAYE/NICs or avoid them altogether. Our view is that at the time the funds are allocated to the employee or his/her beneficiaries, those funds become earnings on which PAYE and NICs are due and should be accounted for by the employer.

In addition our view is that an Inheritance Tax charge may arise on the participators of a close company. Unless the participators are excluded beneficiaries and have not had funds applied for their benefit, such as the receipt of a loan, a charge to Inheritance Tax arises on participators of close companies at the time the funds are paid to the trustee by the close company. Relief is only available to the extent that a deduction is allowable to the company for the year in which the contribution is made. Later payments of earnings out of the trust that may trigger a deduction to the company would not qualify for relief.

Participators affected by this may need to self-assess a liability to Inheritance Tax. There is further technical advice on Inheritance Tax on Contributions to Employee Benefit Trusts on the HMRC Internet site.

We are actively challenging examples of such arrangements and considering legislative options to end further usage of these schemes.

Spotlight 4: Contrived employment liabilities and losses

Ministerial announcements on 13 January 2009 and 1 April 2009 gave notice of legislation that will be included in Finance Bill 2009 that will close down artificial and aggressive personal tax avoidance schemes. These schemes seek to abuse tax reliefs available for employment-related liabilities and losses by way of entering into employment arrangements where such liabilities or losses are triggered by deliberate acts or omissions. The details of the arrangements mean the users will not in fact incur any real liabilities or losses.

The legislation will be effective from 12 January 2009 in relation to both announcements and we are working to identify all users of the schemes to collect all tax that users of the scheme intended to avoid. The legislation will have no impact on those using the reliefs who are not attempting to avoid tax.

Spotlight 3: Pensions schemes artificial surplus

We are aware of schemes that purport to enable a member of a registered pension scheme to remove funds from the scheme tax-free. These involve contriving to create a funding surplus through the surrender of rights by a member. They sometimes involve cases where provision is made under a separate unconnected trust for the surviving spouse or other dependants of the member. A surplus created by a reduction in liability caused by a member surrendering rights in a scheme, and the consequential payment made in these circumstances, will be regarded as an unauthorised payment in respect of the member, and will attract tax charges on the member on the amount paid by the scheme administrator.

Spotlight 2: VAT artificial leasing

We are aware of schemes using an artificial leasing structure to exploit possible differences of interpretation by EU Member States of a lease with an option to purchase. The scheme user acquires a new pleasure craft which purportedly has 'VAT paid status' while, in reality, paying little or no VAT. The user provides the funds, directly or indirectly, that are used to purchase the asset. We will challenge examples of this scheme falling within our jurisdiction and recoup the tax that has been avoided.

Spotlight 1: Goodwill - companies acquiring businesses carried on prior to 1 April 2002 by a related party

We are aware of arrangements to claim Corporation Tax relief for goodwill under the corporate intangible fixed asset regime where a company has acquired a business that was carried on by a related party before commencement of the regime (1 April 2002). The rules of the regime exclude goodwill in these circumstances, so no relief is available. We are challenging any such claims with a view to litigation. When challenged companies have typically accepted HMRC adjustments, which has meant that a case has yet to be heard in court. Therefore legislation was announced at Budget 2009 to confirm the rules. The legislation will apply from 22 April 2009 and will be deemed to have always have had effect for the purposes of applying the legislation after that date. We will continue to challenge past claims.