Topic 7 - Current Issues in Personal Taxation

Question 1

What is the current tax gap?

Give some examples of recent celebrities involved in the tax debate/scandals?

Answer 1

HMRC (2018) estimate tax gap to be £33bn a year or 5.7% of UK’s total tax liability. Most attributable to tax avoidance, evasion and fraud. Including ‘cash in hand’.

Acceptable that people who benefit from society should contribute but should not pay any more than they should have to.

2014 - Gary Barlow repaid millions in tax relief for investing in icebreaker partnerships designed to support music industry projects but court ruled it was simply for tax avoidance.

2012 - Jimmy Car sheltered £3.3m in Jersey based K2 Scheme.

2012 - Mark Haddon - Author - complained he wasn’t paying enough tax.

Question 2

What schemes and measures are in place to stop tax avoidance?

Answer 2

Anti avoidance legislation and case law to close loopholes and stem proliferation fo complex and sophisticated avoidance schemes.

HMRC anti-avoidance group

Responsible for development, maintenance and delivery of HMRC’s anti-avoidance strategy. Deploys resources where risk is greatest.

The Ramsay Principle

Evolved through case law.

• Tax must be charged where a scheme has no purpose other than to avoid tax.
• Applied by courts when schemes involve a transaction effected via a series of steps.
• Looks at the whole series and not at the tax position of each individual step.
• Principle can only be applied when legislation requires this approach and each step need not be a sham for the pricniple to apply

Disclosure of Tax Avoidance Schemes (DOTAS)

• Regime allows HMRC to keep up to date with all Tax Avoidance Schemes
• Means they can review and if necessary amend legislation to block scheme
• Scheme promoter must disclose main elements of scheme to HMRC.
• If scheme promoter does not disclose then scheme user must. Steps are:
  
  • HMRC monitor use of scheme. If necessary legislate to terminate it.
  • Issue scheme with DOTAS number
  • Scheme user must notify HMRC it is using scheme using DOTAS number in tax return
  • Financial penalties levied on those who fail to comply with regime.

General Anti-Avoidance Rule (GAAR)

17 July 2013 - In light of court cases which formed case law that judged tax payers were at liberty to arrange their finances to avoid tax.

Individuals must complete accurate self-assessment form and must decide if GAAR applies to. praticualr arrangement and if so to declare it. If unsure must put details on white space.

If HMRC considers scheme to fail GAAAR, they issue a notice giving chance to correct position without penalty up until case referred to GAAR Advisory Panel. If scheme fails with panel then penalties apply:

up to 60% of the counteracted tax

total penalties are limited to higher of 100% of tax avoided or current maximum stated in legislataion.

Lord Clyde stated, in his summing up in the Ayrshire Pullman case (1929):

“No man in this country is under the smallest obligation, moral or other, so as to arrange his legal relations to his business or to his property as to enable the Inland Revenue to put the largest possible shovel into his stores.”

Lord Tomlin, in summing up the Duke of Westminster v CIR case in 1936 stated:

“Every man is entitled if he can to order his affairs so that the tax attracted under the appropriate Act is less than it otherwise would be. If he succeeds in ordering them so as to secure this result then, however unappreciative the Commissioners of Inland Revenue or his fellow taxpayers may be of his ingenuity, he cannot be compelled to pay an increased tax.”

Question 3

What the the main principles of the GAAR?

Answer 3

• Targeted at artificial and abusive schemes where main purpose is tax avoidance.
• ‘egregious’ / ‘very agressive’ / ‘contrived and artificial’.
• Narrower application than most general anti-avoidance rules in other countries.
• Should not effect central tax palnning such as ISAs or arranging a business in the most tax efficient manner.
• using the GAAR, where it applies, as an additional tool alongside existing anti-avoidance tools;
• using existing anti-avoidance tools where the GAAR does not apply

Question 4

What are the 10 taxes which GAAR applies to?

Answer 4

1. income tax;
2. capital gains tax;
3. inheritance tax;
4. corporation tax, and other taxes charged as if it were corporation tax;
5. petroleum revenue tax;
6. stamp duty land tax;
7. annual tax on enveloped dwellings;
8. diverted profits tax;
9. apprenticeship levy;
10. national insurance.

Question 5

What are the 7 legal considerations a financial planner sould take into account as part of their advice?

Answer 5

1. Make sure client is aware of obligations to pay right amount of tax at right time. Helps them avoid paying late, fines and prosecution.
2. Inform of the tax implications of their advice. ‘Tax tail should not wg the investment dog’. Needs must come first.
3. To advise clients on investment strategies that minimise their tax obligations and maximise growth.
4. Ensure plans set up correctly to meet regulataions and qualifying criteria, for example trusts.
5. Ensure advice is holistic and minimises tax with no unexpected consequences
6. Help clients provide means to pay tax bills when they fall due ie IHT
7. Professionalism & ethical approach Reporting suspicions of tax evation to Money Laundering Officer.

Question 6

What are some ways of tax efficient giving?

Answer 6

Gift Aid

Donations are allowed as deductions from income before income tax is applied.

If donation is made after tax, the donor can reclaim basic rate tax on donation. Gift aid allows charity to claim tax back on behalf of donor and keep it itself.

Higher & additional rate taxpayers can claim the additional 20% or 25% through self assessment. Employees can ask to change their tax code to recieve additional relief by increasing their basic rate tax threshold by gross donation in same way as with pensions.

Can also complete gift aid form for items so charity can claim tax relief when item is sold as if the donor sold item and donated the money themselves.

Payroll giving

• Employer sponsored scheme donating through pay system. Gross donation deducted from salary before tax but not NIC.
• Employee gets full income tax relief immediately.
• Payroll giving agencies may charge fee normally taken from donations or employer can pay fees claiming as a business expense

IHT

Since 6 April 2012 - 10% or more of net estate left to charity then IHT reduced to 36% not 40%.

3/4 of population give something to charity every year, but only 7% of that leaves to charity in Will.

Deed of variation

Beneficiaries can arrange deed of variation to make/increase donation to charity to possibly reduce IHT after death.c