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Compliance
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More tax avoidance schemes blocked
The Government has added further measures to the Finance Bill in order to block newly discovered tax avoidance schemes.
Gifts of shares and securities to charities
The Inland Revenue has been alerted to a scheme using a complex arrangement of offshore trusts and options to manipulate the value of gilts donated to charities. The scheme is designed to cut the income tax liability of the individual, but gives negligible benefit to the charity concerned. In theory, this device could be used to write off the entire income tax liability for users of the scheme. The use of such schemes is blocked with immediate effect.
The changes affect Section 587B Income and Corporation Taxes Acts 1988 (Gifts of shares, securities and real property to charity) and act to prevent individuals from obtaining income tax relief in excess of the benefit received by a charity from the donation of shares or securities.
Section 587B enables those making gifts of shares, securities and real property to charity to claim a deduction against income equivalent to the market value of the gift. In the majority of cases the market value reflects the value of the gift in the hands of the charity. This complex avoidance scheme manipulates the value of the gift in the hands of the charity so that it bears no relation to the market value of the underlying asset.
For example, two trusts might each buy for a token amount options to purchase from a charity any gilts that may be donated to that charity during a specified period, if a certain condition is met. The conditions for the exercise of the two options are near-mirror images of each other - e.g., Trust A having the option to purchase if X does happen and Trust B having the option to purchase if X does not happen. Each option to purchase will be at a tiny fraction of the market value of the gilts (e.g. £;5,000 for £;1 million gilts). The options may be dressed up so that, for example, the charity has to sell the gilts at market value and then hand over the cash realised (so that strictly the value of the gilts is not affected). Various arrangements can be put in place to secure the transfer of benefit back to the donor from the trusts.
The effect of the avoidance scheme is to eliminate most of the value of the gift in the hands of the charity, while potentially returning virtually the whole value of the gift to the control of the donor. In short, the donor gets substantial tax relief while potentially getting his donation back.
The new clause ensures that the amount of income tax relief claimed by the donor cannot exceed the net benefit to the charity. Where a person places an obligation on the charity that results in the value of the gift in the hands of the charity being less than the value of the gift in the hands of the donor, the income tax relief that can be claimed by the donor is restricted to the lower amount.
Artificial arrangements
Further clauses added to the Finance Bill prevent avoidance of tax by businesses using artificial arrangements. The new clauses, which take immediate effect, will block two new avoidance schemes which have emerged since the Budget, the first involving rent factoring for plant and machinery, and the second involving manufactured payments arrangements.
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...back to 2 July 2004
Sources:
www.gnn.gov.uk/content/detail.asp?ReleaseID=121942
www.gnn.gov.uk/content/detail.asp?ReleaseID=121936
www.hm-treasury.gov.uk/media//2D76B/newclause1.pdf
www.hm-treasury.gov.uk/media//F6474/newclause2.pdf
www.hm-treasury.gov.uk/media//48504/newclause3.pdf | |
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Disclosure of tax avoidance schemes
Our Newsletter of 21 May gave a summary of the Government's proposals to require promoters and users of tax avoidance schemes to disclose details of such arrangements to the Inland Revenue. Consultation on the proposals ends on 30 June. As a result of representations made so far, a number of changes have been made to the draft regulations to set out how the tax avoidance disclosure requirements will operate in practice. Among the principal changes are:
- The definition of a promoter of a scheme excludes anyone who is not involved in those parts of the scheme that give rise to a tax advantage (for example, someone dealing only with the company law aspects of a scheme), and most people responsible for the organisation or management of the arrangements, unless connected with the designer of the arrangements.
- To ensure the financial products test is easier to apply in practice, the requirement to calculate the value of the tax benefit versus the difference between the economic benefit and the cost of the arrangements has been removed. A list of financial products to which disclosure does not apply, e.g. ISAs and finance leasing, is included.
- Changes to the commencement rules to help ensure a smooth transition to the new disclosure regime are included.
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...back to 25 June 2004
Source: www.gnn.gov.uk/content/detail... | |
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Disclosure of tax avoidance schemes
The new statutory provisions requiring the disclosure of tax avoidance schemes were considered in a news item in the Newsletter dated 21 May 2004. The Inland Revenue has now published draft forms that must be used by promoters of notifiable schemes (forms S292 and S293) and by users of schemes for which there is no external promoter (form S294). It is form S294 that would be used by an employer using a scheme or arrangement that is intended to obtain a tax advantage and that has not be disclosed by an external promoter.
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...back to 28 May 2004
Source: www.inlandrevenue.gov.uk/drafts/disclosure.htm | |
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Disclosure of tax avoidance schemes
The Inland Revenue has published draft regulations setting out the rules under which promoters and users of certain tax schemes will be required to disclose details of those arrangements to the Inland Revenue. This new approach to tackling tax avoidance schemes, similar to that in force under US legislation, was proposed by the Chancellor of the Exchequer at the time of his 2004 Budget.
The draft regulations include:
- details of the financial and employment based arrangements that must be notified under the disclosure rules,
- procedural rules setting out how and when disclosures need to be made, and
- a restriction on the definition of promoter where a group tax department provides tax services to another company in the same group.
The full details of the new disclosure arrangements are set out in three sets of draft Regulations, i.e.
- The Tax Avoidance Schemes (Information) Regulations 2004
- The Tax Avoidance Schemes (Promoter and Prescribed Circumstances) Regulations 2004
- The Tax Avoidance Schemes (Prescribed Descriptions of Arrangements) Regulations 2004
These draft regulations and detailed explanatory notes are available on the Inland Revenue's website. A draft guidance document is also provided.
In brief, the disclosure arrangements are as follows:
- The purpose of the rules is to enable the Inland Revenue to identify avoidance schemes sooner than at present and to discover schemes that they might not otherwise have found. This will enable the Government to make a swifter and more targeted response to deliberate abuses of the tax system.
- The rules will require disclosure of schemes and arrangements whose main benefit is the obtaining of a tax advantage. The statutory tests are designed to target schemes and arrangements where past experience has demonstrated a high risk of tax avoidance.
- rules apply to income tax, corporation tax and capital gains tax.
- The schemes and arrangements covered by the rules are of two types, financial products and "arrangements connected with employment".
- Employment arrangements are those involving
- securities or associated rights, i.e. securities, interests in securities, securities options, or any right derived from securities (but not Revenue-approved share and share option schemes, and qualifying Enterprise Management Incentives),
- payments to trustees and intermediaries, i.e. payments made to a trust or other third party for the benefit of employees or persons associated with employees (but not payments to Revenue-approved pension schemes or to share and share option schemes), or
- loans, i.e. the making, releasing or writing off any loan by an employer for the benefit of an employee or any other person by reason of an employee's employment (but not loans that are taxable - or exempt from tax - under the provisions of chapter 7 of the Benefits Code, or that are exempt under the bridging loan rules).
- Promoters of such schemes and arrangements will be required to report the details to the Inland Revenue, including a description of the scheme, details of the types of transactions involved, the expected tax consequences and the statutory provisions on which they rely. The promoters will not be required to disclose any details of the clients who are using the scheme or arrangement. The Inland Revenue will register these schemes and allocate each a reference number.
- On receipt of the reference number, the promoter of a scheme will be required to give it to all their clients who use the scheme or arrangement. Taxpayers will then be required to show the reference number on their tax return. However, taxpayers that are using a scheme that has been provided by a promoter abroad and that has not been registered, or that are using a scheme that the taxpayer has personally devised, will be required to provide full details of the scheme.
- In the context of employment, any employers that make use of a scheme or arrangement will be required to quote the scheme reference number on their P35 Annual Return. The P35 will be amended for this purpose from the 2005/06 tax year.
Consultation on the draft regulations will end on 30 June 2004. The shorter than normal consultation period is to enable the final Regulations to be approved by Parliament and take effect from 1 August 2004.
Source:
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...back to 21 May 2004
Source: www.inlandrevenue.gov.uk/drafts/disclosure.htm | |
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International action to tackle the tax avoidance industry
Tax Commissioners of Australia, Canada, the United Kingdom and the United States have established a joint task force to increase collaboration and coordinate information about abusive tax transactions by signing a Memorandum of Understanding in Williamsburg, Virginia on 23 April 2004.
An initial focus of the work will include the ways in which financial products and derivative arrangements are used in abusive tax schemes by corporations and individuals to reduce their tax liabilities, and the identification of promoters developing and marketing those products and arrangements. Many abusive tax transactions employ strategies that cross borders, and many of the promoters of these transactions operate globally.
Officials of the tax administrations will work together in Washington DC during the initial phase of the task force's operations. Commissioners from the four countries will review the operation of the task force after twelve months.
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...back to 7 May 2004
Source: www.gnn.gov.uk/gnn/national.nsf... | |
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Money Laundering Regulations
The latest issue of Tax Bulletin, Issue 70, discusses the manner in which the Inland Revenue intends to handle its obligations under the Money Laundering Regulations 2003.
Organisations affected by the Regulations, including Estate Agents, casino operators, insolvency practitioners, tax advisers, accountants, auditors, legal advisors, company formation agents and dealers in high value goods, are required to make a report of any suspicious activities, including suspicion of tax evasion, to the National Criminal Intelligence Service (NCIS) on a Suspicious Activity Report form.
Any report received by the NICS that concerns evasion of direct tax and NICs and that is not linked to wider criminality will be referred to the Inland Revenue for investigation. This procedure has implications for Agents, i.e. accountants and bureaux, that handle their client's payrolls. The author is already aware of an accountant that has made a report concerning a sole trader who appeared to be unlawfully evading the payment of income tax.
If an Agent is acting for a client and the client wishes to make a voluntary disclosure of tax evasion, the Agent is still required to submit a Suspicious Activity Report to the NCIS. So that the Inland Revenue hears about the voluntary disclosure before the Report is passed on by the NCIS, the Inland Revenue recommends that Agents send a "marked letter" to the Revenue at the same time as the Report is sent to the NCIS, giving the date by which the Agent expects, on behalf of the taxpayer, to provide the Revenue with full disclosure.
Source: www.inlandrevenue.gov.uk/bulletins/tb70.pdf
...back to 23 April 2004
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Prosecution for evasion of income tax
A self-employed painter and decorator in Northern Ireland has been prosecuted for failing to declare his income for tax purposes and claiming benefits to which he was not entitled. He was given a two-month jail sentence, suspended for two years.
This case was brought by the Inland Revenues under its drive to prosecute people who claim state benefits while working at the same time. Individuals who make a voluntary disclosure of their income by coming forward before the Inland Revenue starts an investigation can normally expect to settle with the Inland Revenue for tax, interest and penalties. The amount that has to be paid by someone who comes forward voluntarily is usually considerably less than would be payable under a confiscation order, which may be sought in prosecution cases. Additionally the matter is dealt with in confidence and there would be no criminal record against the individual concerned.
Source: www.gnn.gov.uk/gnn/national.nsf/IR...
...back to 23 January 2004
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Compliance audits
The Inland Revenue has published the Pre-Inspection Questionnaire that is sent to large businesses prior to a compliance audit. The questionnaire has nearly 300 questions covering all areas of income tax in employment, including
- general PAYE matters, e.g. directors, casual staff, part-time staff, construction industry workers
- expatriates, both staff from abroad and staff sent abroad
- payments made through the payroll
- profit-related pay, share schemes and trust funds
- payment of all kinds of expenses
- company car benefits, chauffeurs and use of private vehicles
- benefits in kind
The employer is required to complete the questionnaire in advance of the audit, describing in some detail the organisation's policies and procedures in all of these areas. The completed form is used by the compliance officer as the basis for the review.
(Source: www.inlandrevenue.gov.uk/lbo/questionnaire.pdf)
...back to 19 December 2003
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Contracts tainted with illegality
The decision of the Court of Appeal in the case of Colen and Anor -v- Cebrian (UK) Ltd on 20 November 2003 provides guidance on the circumstances in which an employment contract is tainted with illegality and, as a result, cannot be enforced in the courts.
Mr. & Mrs. Colen (AC and MC) worked for Cebrian and were paid a basic salary plus commission. They were dismissed and successfully won a wrongful dismissal claim before the High Court. It fell to an Employment Tribunal to decide on remedies. The Tribunal's decision was to dismiss the claims on the basis that the couple's employment contracts were "tainted with illegality".
The illegality referred to was the practice of Cebrian to pay commission jointly to the couple based on their joint sales and to split it in the most tax-efficient manner. The Tribunal decided that this amounted to tax evasion and fraud. The decision was appealed, heard first by the Employment Appeal Tribunal and then by the Court of Appeal.
The Court of Appeal found that the Employment Tribunal's reasoning had been flawed and, instead of addressing the issues that related to the appropriate levels of compensation, it had been unduly swayed by the issue of illegality.
The significant points made by the Court of Appeal's decision on the matter of illegality are as follows:
- In determining whether a contract is tainted with illegality, Lord Justice Waller stated that "an analysis is needed of the party's intentions. If the contract was unlawful at its formation or if there was an intention to perform the contract unlawfully as at the date of the contract, then the contract will be unenforceable. If at the date of the contract the contract was perfectly lawful and it was intended to perform it lawfully, the effect of some act of illegal performance is not automatically to render the contract unenforceable. If the contract is ultimately performed illegally and the party seeking to enforce takes part in the illegality, that may render the contract unenforceable at his instigation. But not every act of illegality in performance even participated in by the enforcer, will have that effect. If the person seeking to enforce the contract has to rely on his illegal action in order to succeed then the court will not assist him. But if he does not have to do so, then in my view the question is whether the method of performance chosen and the degree of participation in that illegal performance is such as to "turn the contract into an illegal contract".
- The manner in which the commission had been split between Mr. and Mrs. Colen had been openly stated. The Employment Tribunal had been right to consider whether there was something wrong or unlawful about the arrangement. The decision drew a distinction between three situations:
- a contract made between the company and AC and MC under which commission was to be paid jointly with the sole motivation of defrauding the Revenue because in reality the commission belonged to MC alone (undoubtedly an illegal contract)
- a contract with MC alone but performed by payment to AC with the intention of defrauding the Revenue (a contract rendered illegal by the performance and participation in the performance)
- a contract under which both AC and MC were jointly entitled to commission for work done and participation in the business, but which may, when the question of actual payment came to be considered, have been paid with tax considerations in mind.
- The Court of Appeal could not endorse an arrangement whereby commission, jointly earned, should be divided based on tax considerations. However, as no evidence had been presented on the arrangement and the Inland Revenue had not expressed any concern over the alleged infringements, the Court of Appeal did not offer a view on any illegality in this particular case.
(Source: www.courtservice.gov.uk/judgmentsfiles/j2085/colen.htm)
...back to 28 November 2003
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Inland Revenue interest rates
Four months after reducing interest rates on income tax and NICs paid late, the Inland Revenue has reversed the changes to reflect recent increases in market rates.
Effective 6 December 2003, the rate of interest charged on income tax and NICs paid late is increased to 6.5%. The rate paid on overpaid tax and NICs is reduced to 2.5%.
(Source: http://www.gnn.gov.uk/gnn/national.nsf/IR/...)
...back to 21 November 2003
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Employment Regulation - striking a balance
This was the title of a report published by the Better Regulation Task Force in May 2002. It found that businesses feel overburdened by regulation and are not convinced by claims that the UK is among the least regulated countries. The following comments of a Caterer and Hotel Keeper were quoted:
"No sooner was the minimum wage underway - in our case complicated by the fact that most staff live in - than we had the holiday issue to contend with. And following closely behind are paternity and maternity leave changes. Small wonder that we managers of small businesses spend less and less time looking after our clients and more and more time snowed under behind the scenes."
Among a range of recommendations aimed mainly at the Department of Trade and Industry (DTI) and the Advisory, Conciliation and Arbitration Service (ACAS), were the following:
- The DTI should take the lead in ensuring that, when considering how to implement Government policy in employment matters, proper consideration is given to how they might be achieved without statutory regulation.
- The DTI and other Government agencies should, wherever possible, group together the commencement dates of employment policy changes.
- All new regulations should be "stress tested" to identify those industry sectors and business sizes that will be most affected.
- Guidance on employment regulations should take the form of questions and answers, rather than a detailed explanation of the regulations.
- An interactive CD-ROM about employment rights should be published annually for employers.
- ACAS should provide free seminars for the smallest employers and law advice visits to employers with fewer than 50 employees.
- ACAS should provide free or subsidised mediation and arbitration services for employers with fewer than 50 employees.
The Government has accepted most of the recommendations but is now consulting on the proposal that the commencement dates for changes in regulations should be grouped together. Two options are presented for comment, i.e. whether changes should take effect
- on fixed annual, twice-yearly or quarterly dates, or
- grouped together, with an annual statement that sets out the changes that will take effect over the coming year.
The consultation period will run until 30 January 2003. Copies of the reports and consultation document are available at www.dti.gov.uk/er/commencement.htm .
Payroll Briefing 10 - 7 November 2002
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Compliance and human rights
Some difficult human rights issues are tackled in guidance recently issued to Revenue staff. The Human Rights Act provides the right to silence and the right not to self-incriminate in the context of criminal offences. Although cases pursued by Revenue inspectors do not normally result in criminal charges, the Revenue is concerned that the rights are not infringed accidentally. The difficulty that inspectors have is that they must make it clear to taxpayers in the course of enquiries and compliance reviews that they do not have any obligation to incriminate themselves while, at the same time, drawing their attention to the potential to reduce penalties by making a disclosure and co-operating with the enquiry.
The document also describes the procedures for taxpayers to obtain public funding (formerly called legal aid) in cases before the General and Special Commissioners. Public funding is not available, however, to companies.
The document is available at www.inlandrevenue.gov.uk/specialist/humanrights.pdf . It would be useful to keep a copy on file in preparation for any future compliance review.
Payroll Briefing 7 - 26 September 2002
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National Insurance Numbers
The latest guidance notes for payroll systems developers give, for the first time, precise instructions as to what employers should enter in the 'NI number' boxes on statutory forms when they do not have an employee's NI number. In addition to guidance on what to report when forms are being submitted electronically by magnetic media, over the Internet or by EDI, the following instructions are given for forms that are printed out or completed manually:
- End of year forms P14 and P38S - leave the box blank but show the employee's date of birth
- End of year form P38A - enter the words "not known"
- Expenses and benefits forms P11D, P9D and P46(Car) - leave the box blank
- In-year movements forms P45(part 1), P45(part 3) and P46 - leave the box blank
Note that a temporary NI number should not be used on any of these forms that are printed or completed manually.
Payroll Briefing 1 - 11 June 2002
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Revenue interest charges
Following recent falls in bank interest rates, the Revenue has reduced the rate used when income tax and NICs are paid late or overpaid. From 6 November 2001, the rate charged for late payment of tax and NICs decreases from 7½% to 6½%. The rate paid for overpaid tax and NICs drops from 3½% to 2½%. - Payroll Briefing 212 - 8 November 2001
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For Payroll and Human Resource Professionals
