HMRC reviews criminal proceedings against some EBT users
HMRC has written to individuals who participated in EBT arrangements promoted by Clavis Herald Trust to notify them that ongoing enquiries will be taken over by its Fraud Investigation Service.
HMRC is in the process of contacting individuals who participated in EBT arrangements promoted by Clavis Herald Trust. The letters explain that responsibility for any open enquiries has been transferred from its Anti-Avoidance unit to its Fraud Investigation Service (FIS). The FIS team in HMRC are responsible for investigating cases of serious fraud. It does not prosecute individuals for criminal cases but will refer suitable cases on to the Revenue and Customs Prosecution Service where appropriate.
At present the team at FIS are collecting information and will advise callers that it will be a number of months before they will be in touch to explain what will happen next. HMRC has explained that they are carrying out criminal enquiries into the organisers of the scheme and are proceeding on the basis that the people who have used it have deliberately filed incorrect tax returns.
FIS conducts many of its cases under Code of Practice 9 (COP9) which is also known as the Contractual Disclosure Facility (CDF); cases of suspected tax fraud. Under COP9, HMRC offer an individual the opportunity to make a disclosure of all tax irregularities and settle the outstanding tax with late paid interest and tax geared penalties. The taxpayer will be expected to explain any and all aspects of their tax affairs that have not been reported correctly for tax purposes. The financial penalties can be significant. In return, HMRC guarantee the individual immunity from prosecution for the original offences but reserve the right to prosecute for any false reports submitted to them that do not adequately account for all aspects of the individual’s undisclosed tax problems.
It isn’t clear whether FIS will issue COP9 to the EBT users but why would HMRC even consider taking this significant step for an EBT arrangement? HMRC has opened enquiries into many thousands of EBT structures without any suggestion of criminal proceedings being considered. The answer will be found in the specific steps undertaken in the Clavis Herald Trust arrangements that were employed in that planning.
HMRC will look to test whether the planned steps in the arrangement actually took place or if the commercial rationale for a step was so unrealistic as to make it a fiction. If successful, HMRC will argue that tax returns that include the arrangement are incorrect and more importantly, the clients who bought the planning must have known their tax returns were incorrect when they were filed. HMRC will challenge the individuals who purchased the planning to show that they acted properly, that all the documents signed were bona fide and to test whether what was reported matched up to the economic reality of what took place.
An enquiry under COP 9 is a serious process that must be managed carefully. The subject of the enquiry will be expected to address all of their tax affairs for the last 20 years; the enquiry will not be limited to the EBT planning. The individual cannot risk failing to fully disclose and settle with HMRC; the consequences could involve a criminal prosecution. The experience itself can be daunting and a significant worry if there isn’t an experienced advisor to help them through the process.
We would be happy to discuss any HMRC enquiries or other issues linked to EBT and similar tax planning arrangements.
Key Points
- Voluntary settlement should not be automatically ruled out
- Settlement terms can often be advantageous
- Advance Payment Notices mean cashflow benefit may cease in any event
- Each case is different and client objectives are paramount
We have been dealing with a number of voluntary settlements of EBT and EFRBS arrangements with HMRC for clients but a deterrent to settlement on the basis of PAYE & NIC can be the upfront costs involved.
However, we have compiled a list of 10 important features that should be considered before ruling out the idea of such a voluntary settlement.
- Depending on the wording of the trust deed, the amount to be taxed may be treated as being inclusive of employers NIC. This can result in a saving of over 11% of the PAYE and NIC and a consequential saving in interest charges.
- This means that if loans are written off or other assets distributed to the beneficiaries they receive more after tax than they would had they taken a bonus.
- By settling, corporation tax relief for the original contributions and professional fees is secured and further relief for the additional costs of the PAYE & NIC being met now are given against the settlement sum rather than in the current year’s tax return.
- Inheritance tax exit charges are levied on EBT sub-funds and personal EFRBS by HMRC if the trusts are wound up. However, as part of the settlement arrangements HMRC agree that the IHT charges can be met by the company rather than the trust, leaving more for the beneficiary.
- If voluntary settlement of PAYE & NIC is made any previous income tax paid as benefits in kind on beneficial loans can reduce the amount of PAYE due or the individual who paid the tax can claim a refund of income tax paid.
- Once settlement of PAYE & NIC has been made HMRC normally accepts there has been no element of bounty in the trust. This means that the proceeds of capital gains made by the trust can be paid to beneficiaries free of tax.
- If a company pays income tax under PAYE on behalf of an individual and is not reimbursed, the payment of that tax is a benefit in kind. However, the company can pay the benefit in kind tax for the individual without further tax consequences.
- Winding up of the trust brings to an end any exposure to IHT 10 year anniversary charges based on the value of trust assets, although the IHT advantage of any outstanding loans that would reduce the value of the beneficiary’s estate would also be lost; whether this is seen as a positive or negative aspect may depend on the age of the beneficiary.
- If interest bearing loans have been made the tax leakage on the costs of servicing of the loans over an extended period may be disproportionately high.
- Finally, if HMRC issue Payment Notices the original cash flow benefits may be lost or greatly diminished.
It is very clear from our work in this area that each case needs to be looked at separately in terms of the particular circumstances and the objectives of those involved. What makes sense in one case may be completely inappropriate in another.
If you would like to discuss whether voluntary settlement might be appropriate please contact a member of the team.
Key Points
- HMRC will receive more information from overseas territories from 2016 under UK FATCA arrangements
- This will include details of bank accounts, trusts and companies involving UK residents
- UK FATCA applies to British Overseas Territories and Crown Dependencies
- Disclosure facilities exist that can remedy any tax problems efficiently
- Our special questionnaire can help identify at risk clients
Earlier this year, HMRC launched an advertising campaign aimed at people evading UK tax by holding money in offshore accounts. This was followed in April 2014 by a press release updating HMRC’s strategy for tackling offshore tax evasion.
This was front page news, thanks in no small part to the announcement of new criminal sanctions against offshore tax evaders. Here, we summarise HMRC’s most recent approaches to offshore evasion, its success to date and what the future holds for UK resident taxpayers who evade tax using offshore investments or structures.
AUTOMATIC INFORMATION EXCHANGE AGREEMENTS: THE “FATCA” MODEL
It is now 2 years since the UK became the first jurisdiction to sign an enhanced agreement to automatically exchange tax information with the United States. Based on its Foreign Account Tax Compliance Act (FATCA) legislation, the US has since negotiated several more agreements based on this model and is in negotiations with over 75 jurisdictions in total to develop similar agreements. Foreign financial institutions that fail to provide the requisite information about US resident account holders to the US authorities face, from 1 July 2014, a punitive US withholding tax on their US source investment income.
In 2013 the UK followed suit, signing automatic exchange agreements with the UK’s overseas territories with financial centres (Anguilla, Bermuda, British Virgin Islands, Cayman Islands, Gibraltar, Monserrat and Turks and Caicos) and the UK’s Crown Dependencies (Isle of Man, Jersey and Guernsey).
A new “Global Standard” for automatic exchange of information between countries has been developed by the OECD, based on the US FATCA model. To date, 44 countries have signed up to adopt this new standard as soon as possible, including the above financial centres. HMRC say these agreements mean that if a UK resident has an overseas bank account or interest in a qualifying trust, partnership or other legal arrangement (or is the beneficial owner of any of the above, even if not held in their name), then HMRC will be provided with their name, address, account number, balance and details of the income arising. It is envisaged that information collected from a starting date of July 2014 onwards will be provided by the offshore jurisdictions to the UK authorities by 30 September 2016. For subsequent years, the deadline will be 9 months after the end of the calendar year. All “Reporting Financial Institutions” in the territories that have signed up to the agreement will need to adhere to these rules; this includes banks, portfolio management companies and certain insurance companies.
Added to existing Tax Information Exchange Agreements (TIEAs), information received on EU bank accounts operated by UK residents under the EU Savings Directive and existing powers under many Double Tax Treaties, the UK now has a comprehensive range of information exchange pathways with overseas jurisdictions.
The Swiss situation
Very broadly, the UK : Swiss agreement, ratified in 2011, required UK resident Swiss bank account holders to authorise the release of their details to the UK authorities or suffer both a one off historic withholding tax on the capital value of their accounts on 31 May 2013 and future withholding taxes on any future income received. The latter option was expensive but appeared to preserve anonymity.
The agreement goes much further than that however, and allows HMRC to obtain details of UK resident Swiss account holders. Under the terms of the agreement HMRC can ask for details of Swiss accounts operated by 500 UK residents per year, with this number increasing in later years should this process success identify taxpayers with undisclosed liabilities. This will be an ongoing process, as where HMRC has plausible grounds for suspecting a person has an offshore account it can require the Swiss authorities to confirm whether they hold accounts with Swiss financial institutions.
It is also worth noting that one glance at HMRC’s foreign pages tax return guidance for 2013/14 appears to confirm that anonymity will not be preserved in any event for those who chose to suffer the Swiss withholding tax. The guidance notes that “your return should include a claim to have the withholding tax treated [as a payment on account] and you should also supply the certificates provided by your Swiss paying agent to confirm the amounts of withholding tax taken off”. HMRC are likely to take a keen interest in taxpayers now disclosing the existence of Swiss accounts for the first time, perhaps taking the opportunity to ask what other offshore interests these clients may have.
Disclosure Facilities
HMRC has attempted to make non-compliant taxpayers come forward voluntarily, with the introduction of a series of offshore disclosure facilities. Those currently in force are the Liechtenstein Disclosure Facility (LDF) and similar facilities with the three Crown Dependencies. Advantages these facilities offer include mitigated penalty levels, a requirement to disclose from 6 April 1999 onwards (rather than a 20 year period) and, in the case of the LDF only, guaranteed immunity from prosecution. To date, 56,000 people have come forward through these facilities. HMRC have reported that £966m up to March 2014 was raised through the LDF alone.
Whistleblowing
HMRC is now actively encouraging whistleblowing, the April 2014 press release noting that they will pay financial rewards for information about offshore tax evaders where appropriate. How effective a tool this is remains to be seen, but we have seen in the past examples of ex business partners or former spouses contacting HMRC to inform them of tax evasion, even if implicates them at the same time.
More punitive measures to tackle overseas evasion
HMRC has already increased the penalty for offshore tax evasion with effect from 6 April 2011, with the maximum penalty standing at 200% of the tax due in cases where they take civil sanctions only. Whilst tax evasion generally has always been a criminal offence, relatively few criminal prosecutions have historically been made, limited mainly to extremely serious cases or high profile cases.
HMRC has announced it will now consult on a new strict liability criminal offence of failing to declare taxable offshore income. Failure to declare offshore income could result in an unlimited penalty or a prison sentence. Not only will sentences be tougher, but more tax evaders will be subject to these tougher sentences – HMRC aims to bring criminal proceedings against almost 1,200 people in 2014/15, compared to only 165 in 2010/11.
SO IS THERE ANY PLACE TO HIDE?
Probably not. The UK Government (and undoubtedly other Governments) is putting significant pressure on financial centres that have not to date signed up to the new FATCA equivalent protocol. For example, Singapore has signed a FATCA deal with the United States, and it seems likely that a similar agreement with the UK will follow. In addition, the UK : Swiss agreement stipulated that on 31 May 2014 the Swiss authorities must have given HMRC a list of the top jurisdictions to which UK account holders moved their money to avoid the one off withholding tax. HMRC will use this information to form new initiatives with those jurisdictions wherever possible, to the extent they have not already signed up to international tax transparency.
What should you do?
Offshore trustees and corporate service providers should ensure they and their clients understand their UK tax position well in advance of information being automatically transmitted to the UK under the FATCA agreements.
HMRC will use FATCA information as a means of opening investigations and if action is not taken in advance this could prove costly to clients and put them at risk of serious investigations or even criminal prosecution in certain circumstances.
Key Points
- The Accelerated Payments provisions are.Included in the Finance Bill as expected.
- Potentially thousands of demands giving 90 days to pay tax could be issued in late summer.
- Contact us now for an initial review of your position and the options available to you.
The 2014 Finance Bill published on 27 March included the promised draft legislation on Follower Notices and Payment Notices. These measures represent a sea change in the approach to collection of tax in dispute cases and put the advantage firmly with HMRC. Businesses and individuals need to start preparing now for substantial payment demands this summer in relation to tax liabilities dating back up to 10 years. In this article we look at Payment Notices and we will issue a separate item shortly on Follower Notices.
Payment Notices for what are being called Accelerated Payments can be issued to users of Disclosed Tax Avoidance Schemes as long as HMRC has opened an enquiry or made an assessment that is under appeal. They can also be issued where a GAAR counteraction notice has been issued – which will be rare – or where HMRC has issued a Follower Notice. Follower Notices are issued when HMRC believes there is a relevant judicial decision in another case that means tax should be paid in similar cases.
Payment Notices can be issued for Income Tax (including PAYE), Corporation Tax, Capital Gains Tax, Stamp Duty Land Tax, Inheritance Tax and the Annual Tax on Enveloped Dwellings. VAT and NIC are not included at present but HMRC have stated that new legislation will be enacted to bring NIC into these rules.
The largest group that is likely to be affected by Payment Notices are those who have used tax avoidance schemes. HMRC believes there are 65,000 cases under enquiry and that over £1bn can be collected now rather than waiting for years to litigate cases; this is the main driver for the new rules.
There is no requirement for HMRC to have started litigation in the particular scheme or even a similar scheme to issue a Payment Notice. The amount due will be the tax that would have been payable to the best of HMRC’s judgement had the “tax advantage” not been sought. Payment Notices will give 90 days for payment to be made and although the taxpayer can make representations to HMRC, there is no right of appeal to an independent body like the tax tribunal. The decision on whether to confirm or amend the payment notice is that of HMRC alone. Therefore, the right to pay only the tax one has self-assessed is effectively withdrawn by the issue of a Payment Notice.
The normal rules on enforcement action to collect tax apply. If collection of tax has previously been postponed as part of an appeal the issue of a Payment Notice supersedes this and the tax becomes legally due for payment again 90 days later. There are special penalties for non-payment following the issue of a Payment Notice; 5% of the amount is charged if payment is not made by the payment date specified in the notice, another 5% 5 months later and a further 5% after 11 months.
If enacted, these provisions could cause enormous distress for those faced with unexpected payment demands at short notice. There are many unanswered questions concerning which schemes HMRC will target, what taxes they will try to collect in cases where they believe they have a choice, what happens if a company is insolvent, whether time to pay will be granted, how HMRC will calculate the tax it believes is due and how Payment Notices will affect those who might want to come to a voluntary settlement with HMRC instead.
Our experience so far is that the prospect of Payment Notices is causing companies and individuals to look again at the costs and terms of settlement with HMRC as an alternative. For others the issue of a large payment demand may put the future of a business in jeopardy or create a potential personal bankruptcy and they are considering much wider issues as a result.
For an initial review of your position in relation to any tax avoidance scheme and the options available to you please contact a member of the Trident Tax team.
In 2012/13 HMRC raised revenue in excessof £20.7 billion from their tax investigations and enquiry work and various voluntary disclosure facilities. This was £2 billion more than their target for the year. HMRC are putting very significant resources into the investigations field and it seems logical that this will continue, particularly as the yield drops off from initiatives like the Liechtenstein Disclosure Facility.
A new Code of Practice 9 or “COP 9”, for investigating cases of serious tax fraud, came into effect on 31 January 2012, called the Contractual Disclosure Facility (CDF). Just over two years on, it seems timely to recap on the changes and our experience to date of the updated procedure.
As was the case for the previous COP 9, the CDF covers both direct and indirect taxes. However there are significant changes contained within the new approach which need to be carefully considered.
The new CDF procedure offers taxpayers clear choices and requires a contractual commitment by the taxpayer to avoid the process becoming unnecessarily protracted, as was sometimes the case in the past. As before, an incomplete disclosure, a denial or unwillingness to participate in the CDF gives HMRC the opportunity to conduct their own investigation, which can be civil or criminal. The major change is that the CDF is designed to ensure that HMRC can begin its own investigation much earlier if it is clear that a complete disclosure will not be made.
The options available to the taxpayer when HMRC opens a COP9 investigation under the CDF are to:
- Agree to fully co-operate by signing and completing an acceptance letter, accepting the offer to participate in the CDF.
- Formally deny that there are any irregularities.
- Make no response.
The taxpayer has 60 days from the date they receive the offer of the CDF to select one of these options. If the offer of the CDF is accepted an outline written disclosure must be also be made within 60 days.
HMRC’s guidance stresses that the offer of the CDF and the taxpayer’s acceptance creates a valid contract and provides the taxpayer with an assurance that they will not be subject to a criminal investigation for the admissions contained in their outline disclosure. If it appears to HMRC that the outline disclosure is incomplete, consideration will be given to criminal investigation of the suspected tax frauds not included in the outline disclosure.
If HMRC are content that the outline disclosure is satisfactory the case will proceed to an opening meeting and the commissioning of a disclosure report by the taxpayer.
The CDF provides a more structured procedure with more control over the disclosure process for HMRC than it had before. In essence, HMRC have taken steps to remove the scope for taxpayers to deviate from the process once they are in it.
In cases where a denial of tax irregularities is made the taxpayer is not given a second bite at the cherry and the guarantee that a criminal investigation will not be undertaken is removed. Theoretically, this is also the case even where there is a change of heart and a disclosure is subsequently made. Thankfully, we have not experienced this scenario but in practice we would hope a relatively quick about turn following a denial would not result in a criminal prosecution.
In cases where an acceptable explanation for the denial is provided HMRC are required to close the enquiry, emphasising the importance of providing evidence and explanations to HMRC even if there are no irregularities. The fundamental problem remains of trying to “prove a negative” in some cases where HMRC has simply got it wrong but cannot, of course, reveal the nature of their suspicions. In such cases experience of how to manage the attendant risks and attempt to keep HMRC onside is essential to secure a successful resolution.
Alternatively, where no response is made to HMRC an investigation will be undertaken, which may be criminal or civil in nature. This course of action can only lead to problems and increased costs; in our view it is a fundamentally flawed strategy to lose control of the process by maintaining a wall of silence.
Aside from the more structured beginning, there are some other important changes to be aware of. The opening meeting previously included formal questions that had to be answered verbally and written responses were also requested at the meeting. The questions were designed to establish whether business and personal tax returns were
correct and complete, whether accounts were correct and whether the taxpayer would cooperate with HMRC, making all necessary records available.
The logic of removing the need for “the formal questions”, as they were known, is that the answers are implicit by virtue of the prior agreement to accept the terms of the CDF and the fact that an outline disclosure is made in writing before the opening meeting is held. However, sometimes the best way for a slightly reticent client to be protected from themselves is to undergo the rigour of being asked by HMRC to consider each and every tax return and business venture they have been involved with over a 20 year period before they decide how to answer each question. On balance, we believe it would have benefited clients and HMRC to leave the formal questions as part of the opening meeting. The absence of the formal questions is potentially a trap for advisers who are inexperienced in CDF work. The new style of interview places even greater emphasis on the extensive preparation work that must be carried out by advisers to ensure all the relevant business and personal history of the client has been explored in detail in advance to ensure the disclosure is correct and complete.
Another change for advisers to be wary of is the practice of HMRC to require the Statement of Assets & Liabilities, Certificate of Accounts Operated and Certificate of Full Disclosure to be submitted with the disclosure report which, as before, the adviser has 6 months to complete and submit to HMRC. It is not uncommon for HMRC to raise new questions and request further documents following submission of the disclosure report. Occasionally, despite the best efforts of the adviser, this may result in hitherto forgotten issues or assets coming to light. Although this is never ideal, the fact that the forms mentioned above were not submitted under the old COP 9 process until after the disclosure report was accepted or any additional issues agreed offered a significant level of protection for the taxpayer.
The new approach increases the stakes and is designed to make it even clearer that the taxpayer knows that if the disclosure is materially incomplete or incorrect they run a real risk of prosecution. Inviting the taxpayer to sign certificates and statements to accompany the disclosure report sounds reasonable but it is inherently difficult to ensure nothing has been missed over a period of up to 20 years, during which a taxpayer may have operated dozens of bank accounts and credit cards. When HMRC insist on completion of these documents to accompany the report great care must be taken to ensure that all possible protection is obtained for the client.
In summary, the CDF has retained most of the key elements of the COP 9 process but with some important changes that should prevent prevarication and others that require the adviser to be even more vigilant to protect the client’s interests. The very serious nature of such investigations and the imposition of a more rigid framework in the new COP 9 emphasises the need for specialist advice and representation.
If you would like to discuss any aspects of Code of Practice 9 investigations please contact a member of our team.
In his Autumn Statement on 5 December, the Chancellor of the Exchequer announced proposals (followed by draft legislation on 13 December) to put in place a requirement for taxpayers to settle tax disputes and make payment of the disputed tax on receipt of a “Follower Notice” issued by HMRC stating that their case is on the same or substantially the same grounds as a case decided by a tribunal or court in favour of HMRC.
The draft legislation is to be taken forward as part of the 2014 Finance Bill and, subject to Parliamentary scrutiny, will become law on the date of Royal Assent to Finance Bill 2014 (‘FB 2014’).
The draft legislation is to be taken forward as part of the 2014 Finance Bill and, subject to Parliamentary scrutiny, will become law on the date of Royal Assent to Finance Bill 2014 (‘FB 2014’).
In a subsequent development, HMRC has now issued further proposals, in the form of a Consultation Document dated 24 January 2014 which aims to extend the scope of the FB 2014 ‘Follower Payment’ provisions to a much wider group of taxpayers. The critical aspect of these additional changes is that Payment Notices will be issued to DoTAS scheme users if an enquiry has been opened or an appeal made rather than waiting until a case has been decided by litigation. The policy objective is to ensure no cash flow benefit arises from entering into a tax avoidance scheme and to bring in cash from existing schemes where the result of litigation may still be years away.
The additional changes will affect individuals and companies who have entered into tax avoidance schemes which are subject to disclosure under the DoTAS provisions following Royal Assent to FB 2014. It is HMRC’s intention to issue, in time for Royal Assent – which can be expected at some point in July 2014 – a list of DoTAS schemes where a “Payment Notice” will be issued under the new legislation.
Payment notices will be issued by HMRC sometime after the date of Royal Assent and, under the outlined proposals, disputed tax will be due for payment 90 days following the date of the payment notice.
The proposals to extend the scope of the “Follower Payment” provisions are subject to a consultation process until 24 February and, to subsequent Parliamentary scrutiny prior to becoming law. The proposals already have ministerial support and, as part of the Government’s Action Plan to tackle tax avoidance, it seems likely the proposals will be enacted, in some form, in this year’s Finance Act.
Although it cannot be predicted with certainty at this stage, we believe there is a strong possibility that HMRC will issue Payment Notices for corporation tax in relation to certain Employee Benefit Trusts, Employer Financed Retirement Benefit Schemes and other schemes designed to reward employees without any charges for PAYE and NICs but, for which a corporation tax deduction has been claimed. Another option for HMRC would be to issue a Payment Notice for PAYE and NICs but, given the status of current case law on contributions to EBTs being ‘earnings’ for PAYE/NIC purposes, that seems a much less likely course of action.
Many companies will be forced by these new proposals to review their options in relation to EFRBS and other DoTAS arrangements.
There is a specific point concerning companies which have implemented EFRBS arrangements that is worth highlighting. Under the November 2013 ‘EFRBS Settlement Opportunity’, HMRC has offered companies two options to settle EFRBS’ disputes; either by payment of corporation tax or by payment of PAYE and NIC. Under the second option for the payment of PAYE & NIC it will often be preferable for the trust to be wound up by 30 June 2014 for funds to be extracted free of further PAYE & NIC at the time of settlement with HMRC. Companies that have up until now decided not to settle voluntarily with HMRC on the basis of cash flow may find their position is radically altered in view of the possibility of receiving a Payment Notice later this year.
Deciding whether or not to take up the EFRBS Settlement Opportunity is, typically, dependent upon a careful consideration of the advantages and disadvantages of settlement given the specific facts and circumstances of each case. In our experience there is no ‘one size fits all’ approach to the issue.
These new payment provisions are, inevitably, now going to be an important additional factor to consider in weighing-up the pros and cons of the decision on whether to register an interest under HMRC’s
November 2013 EFRBS Settlement Offer. Strictly, the registration process under these provisions closed on 31 December, but our experience to date is that it is unlikely that HMRC would reject a late registration provided it is made in good time to allow settlement by the 30 June 2014 deadline. However, given the normal timescale for settlement of enquiry cases, it has to be expected that this particular window will close within a matter of weeks rather than months. Whether that window closes before we have draft legislation on the proposals (at Budget 2014) is a moot point.
Unfortunately, the decision on whether to register an interest under the EFRBS Settlement Opportunity, already one which was subject to a considerable number of ‘ifs and buts’, has just become subject to even more uncertainty.
What has become clear is that a decision needs to be made urgently, one way or another. A ‘wait and see’ approach in relation to litigation of EBT lead cases (including HMRC’s appeal of the FTT’s decision in the ‘Rangers’ case which is due to be heard by the Upper Tribunal at the end of this month) is simply not going to be an option post Royal Assent to FB 2014, at least in terms of the payment of tax in dispute.
If you would like to discuss how these new proposals apply in relation to your EFRBS arrangements or, to any other tax avoidance scheme which you have implemented, please do not hesitate to give us a call.
Happy Christmas and a prosperous New Year from everybody at Trident Tax
Whilst we look forward to the Christmas break and spending some time away from work we are left pondering the changes to the UK tax system that await us in 2014/15. The Chancellor’s autumn statement announced significant new initiatives that will need to be monitored as HMRC enters into consultation and releases further guidance.
Capital Gains on property owned by Non-residents
The headline grabber from the statement was undoubtedly the announcement that gains made on sales of UK residential property by non-UK residents after April 2015 will be liable to UK capital gains tax. HMRC will consult on this extension to the capital gains tax regime in the New Year but some of the features of the new rules have been announced;
- The new legislation will apply to gains arising after April 2015.
- The charge will apply to all residential property irrespective of value unlike the ATED rules that operate only for properties worth more than £2million.
- The charge is restricted to residential property and so commercial property will be unaffected.here are some important issues that are yet to be resolved:
- Will the full gain on any disposal be taxed or will the historic gains to date be “grandfathered”?
- Will the new rules apply to property held by a non-resident company or trust? If so, this will have significant impact for the offshore trust and financial services industry, affecting all current and future structures that hold UK residential property.
- At what rate will it be charged? It does not follow that the rate will be the same as for UK resident taxpayers and may be charged at a capped rate in the same way as for UK rental income received by a non-resident.
- Will there be any exemptions for a commercial property business? The rules for the ATED regime originally applied to all property with a limited exemption for developers but were widened to exclude commercial rental businesses.
We will follow the consultation on this new tax charge and send a more detailed analysis in due course.
New rules to tax the profit split in partnerships with mixed members
Another significant change was the announcement of legislation that will change the way partnerships, LLPs in particular, will be taxed. Until now it was possible to set up an LLP that was made up of individuals and companies. A typical structure would involve a number of individuals in partnership with a company to carry on a business. The individuals would also be shareholders in the company.
In the past it has been possible to organise the partnership agreement to allocate the greater part of the profits to the company. This would mean that the individual members would pay income tax on a low share of profits whilst the company paid tax on the majority of the income. The difference in tax rates and the ability to gift shares to spouses could mean that much lower tax was paid overall.
HMRC has announced new anti-avoidance legislation to address such situations. Where an individual receives a lower share of profits than a company in a partnership and it is reasonable to suppose it is because the individual will be able to enjoy the company’s share, the new legislation will tax the individual on an increased share based on the profits deferred but with corresponding provisions to prevent the company also being taxed on the same profits.
The legislation will be in place from April 2014 but with special provisions effective from 5 December 2013 to prevent any specific avoidance entered into ahead of the new legislation being introduced. The rules are complicated as they need to avoid disturbing the tax treatment for partnerships set up on normal commercial terms but this means greater care will be required when advising any partnerships with mixed members. Current partnership agreement will need to be studied in order to understand whether it is vulnerable to this new legislation.
We will write with a more detailed review of these changes once we have HMRC’s guidance and interpretation on the draft legislation.
Disguised employment relationships through a partnership
In addition to the new rules affecting mixed partnerships, HMRC has also moved to close down UK based structures where businesses seek to avoid operating PAYE by entering into a partnership with its staff. The new draft legislation treats income paid to “partners” who in other circumstance would be considered to be employees, as disguised salary. The disguised salary will be subject to PAYE.
Other anti-avoidance initiatives
HMRC has identified a number of situations and arrangements where it has identified a loss of tax. Some of these situations may affect your clients. We will be following up with more information in the New Year as details of the planned changes become available.
- Offshore employment intermediaries – HMRC has extended the scope of the legislation that deals with offshore employment agencies. The new legislation extends the meaning of an employment to cover situations where the individual working for the UK business is engaged by an offshore agency but on terms other than an employment. The UK business will be required to operate PAYE.
- Artificial split employment contracts for non-domiciled individuals – HMRC will be introducing legislation to prevent non-UK domiciled individuals artificially splitting an employment into two employments so that part of the income arises offshore. The new rules will prevent the remittance basis being used to avoid tax on the non-UK employment income.
- Onshore employment intermediaries using false self-employment – New legislation is planned to widen the scope of the PAYE legislation in respect of agencies to avoid the exploitation of a weakness in how an employment is defined. This will prevent agency staff being described as self-employed in circumstances where PAYE would ordinarily apply.
- Some companies are finding that the ‘net cost’ (i.e. after corporation tax relief) of agreeing to settle on the basis of PAYE and NICs is materially less than they had anticipated, particularly if the terms of the EFRBS trust deed avoids any additional liabilities on the trust beneficiaries under the grossing – up provisions in Part 3 of ITEPA (‘tax on tax’).
- For some companies, the opportunity to settle the PAYE / NICs now and wind up the EFRBS and the certainty that such an option provides is of more tangible value than ‘sitting tight’ and running the risk of HMRC being successful in any future litigation (which, if such litigation goes beyond the First Tier Tribunal, could still be 3 or more years away).
- For those companies which made contributions to EFRBS (either directly to sub-funds or where the funds were appointed onto a single member EFRBS scheme) prior to 6 April 2009 there is the possibility of negotiating ‘settlement terms’ with HMRC on a PAYE and NIC basis, without having to pay PAYE for years prior to 2009/10, save for cases where adequate ‘disclosure’ has not been made in the company’s Corporation Tax Return.
- For those companies which settle under the PAYE and NIC option and take the opportunity to then wind-up the trust, exposure to any IHT liabilities for the trust (under the ‘Relevant Property’ regime) can also be concluded.
- Accept that a corporation tax deduction for the EFRBS contribution is not available and the corporation tax enquiry will be closed, denying the tax relief claimed and also meaning that any later payments from the EFRBS will be taxed in the normal way as a pension; or
- Agree to settle on the basis PAYE & NIC will be accounted for on the contributions, achieving the original CT deduction and a further CT deduction in the settlement for the tax and NIC now being paid; or
- If neither settlement route is accepted, HMRC say they will issue closure notices and start preparing for litigation
If you wish to discuss any of the above issues any further then please do not hesitate to contact us.
Since issuing our Newsletter on HMRC’s Settlement Offer for EFRBS on 30 November, we have been helping a number of companies in exploring their options in relation to the offer. Some of the additional insights which we have gained from those cases may be worth sharing with companies which have not yet made a decision on how or whether to respond to HMRC’s offer before the 31 December deadline.
The additional insights are summarised below:
Of course, notwithstanding all of the above, for many companies sitting tight and waiting for the outcome of litigation may still be the preferred option. It is absolutely critical to make the decision in each case on the basis of the specific facts and circumstances (including consideration of the directors’ plans for both the Employer Company and their wishes in relation to the future use of the funds in the EFRBS).
Please contact us now for an initial appraisal of your particular facts and circumstances to assist in making your decision on whether to register an ‘Expression of Interest’ in the Settlement Offer before 31 December 2013.
As expected for some time, HMRC recently announced its Employer Financed Retirement Benefit Schemes (EFRBS) settlement opportunity. Broadly, HMRC’s position is that a corporation tax deduction is not allowable for EFRBS contributions until a payment has been made out of the EFRBS on which PAYE & NIC has been accounted for. As an alternative, HMRC will accept corporation tax deductions that have already been claimed for EFRBS contributions if the employer company now accounts for PAYE & NIC on the full amount of the contributions.
Letters have been issued by HMRC to employers, scheme promoters and EFRBS trustees notifying them of the settlement opportunity. Employers have until 31 December to register an interest in settlement, although this does not commit them to settling with HMRC. Those who wish to settle must do so by 30 June 2014 and those wishing to settle PAYE & NIC on previous contributions must ensure all funds have left the EFRBS by that date to avoid the possibility of the funds being taxed again if they are withdrawn later.
In summary, the options given by HMRC are as follows:
Detailed FAQs have been published by HMRC as there are many complex issues that have to be considered as a result of unwinding EFRBS. These issues include secondary income tax charges on investment income within the EFRBS, the fact that capital gains tax will not arise if the PAYE settlement route is taken and the question of inheritance tax exit charges on funds leaving the trusts.
Interestingly, the question of outstanding loans to beneficiaries and how they will be dealt with if settlement is made on the basis of accounting for PAYE & NIC on the contributions is not specifically dealt with in the FAQs.
However, from discussions with HMRC we understand that if PAYE & NIC is accounted for on the contributions to the EFRBS HMRC will not consider that any further charge to tax arises on the release or writing off of a loan by the trustees if they agree to such a write off.
If funds are extracted from an EFRBS following settlement of PAYE & NIC with HMRC and distributed to beneficiaries the only further tax charge should be on the beneficiaries in respect of investment income earned in the EFRBS. If the EFRBS has paid UK tax on the investment income it may be possible for any tax otherwise payable by the beneficiaries to be offset by tax already paid by the EFRBS.
In contrast to investment income, no further tax charges should arise on the distribution of the proceeds of chargeable gains made by the EFRBS following settlement with HMRC using the PAYE route.
If a company settles PAYE relating to an individual and is not reimbursed by that individual there is normally a benefit in kind charge on the individual. The benefit is charged on the amount of tax they have not had to pay personally. However, depending on the terms of the EFRBS trust deed, it may be possible to avoid this secondary tax charge with the agreement of HMRC.
Of course, any plans to account for PAYE and extract funds from an EFRBS must be discussed and agreed in advance with the trustees. The worst of all positions would be to settle a large amount of tax only to find that the trustees are unable to release funds and allow the trust to be wound up.
We are helping a number of companies explore their options in relation to the settlement offer and if you would like to discuss the terms of the expected settlement offer or any issues associated with this, please contact us.
New tax legislation has been introduced in the UK to restrict the use of certain types of debts for inheritance tax (IHT) purposes. The changes will be of particular interest to banks, trustees and all those who advise in relation to IHT.
The restriction on the use of debts may apply in 3 different circumstances for chargeable IHT events on or after 17 July 2013.
Firstly, borrowed money used to acquire, maintain or enhance assets that fall outside the UK estate of a non-UK domiciled person because they are excluded property will not be allowed to reduce the value of the UK estate. Borrowing money in the UK to acquire overseas property is an obvious target for the new restriction and funding arrangements will now need to be reviewed carefully. The new restriction will also apply to trusts that borrow money which could otherwise reduce the value of 10 year anniversary charges.
The second area of restriction is where the borrowed money is used to acquire, maintain or enhance assets that qualify for Business Property Relief, Agricultural Property Relief or Woodlands Relief and do not attract a charge to IHT. The restriction operates by treating the borrowed money as reducing the value of the assets that already qualify for one of the reliefs, even if the borrowing is secured against an asset that doesn’t qualify for relief, for example property.
The final restriction applies where a liability is not repaid on death unless there is a solid commercial reason for this. In the past, many people have taken loans from Employee Benefit Trusts in the knowledge that a post death write off of the loan by the trustees will not result in an income tax charge. This was also efficient for IHT as there was a debt in the estate. However, this may be the kind of arrangement that could be caught by the new rules.
The new rules are likely to have a major impact on IHT and succession planning and will become a key consideration for all involved in this area. Please contact us if you would like to discuss this area in more detail.