Tax-avoidance: what’s on?

Here is a summary of the top topical stories on tax avoidance that have hit the headlines, all from the viewpoint of an SME tax adviser.

Thanks largely to a long-running campaign by the Guardian newspaper, coupled with the combination of the House of Commons Public Accounts Committee, and the fallout of the economic crash of 2008, tax is now of great interest to the media. 

Contents:

Private Equity and Disguised Fee Carried Interests

Under the terms of a memorandum of understanding (MOU) made between HMRC and the British Venture Capital Association (BVCA), private equity and collective investment managers are not subject to income tax on their carried interests.

A carried interest is the profit paid out of a venture once all original capital invested has been repaid, and as such may include monies that might for normal directors or employees be taxed as performance-related fees. Carried interests are not subject to income tax due to the MOU but are instead subject to capital gains tax, this gives private equity managers a sizeable tax advantage. There is nothing quite as generous as this arrangement in the UK's system for taxing individuals. The advantage may also be enhanced by CGT Entrepreneurs' Relief and also for those managers who are UK resident but non-UK domiciled opportunities exist for relief by investing using UK Business Investment Relief.

Legislation is proposed in the 2015 Finance Bill that is designed to tax some deemed abusive arrangements where managers' fees are disguised as carried interests. Although some of the larger accountancy firms suggest that the draft legislation is widely drafted and will catch some carried interests, effectively converting them into income, some tax anti-avoidance protesters still regard the proposed new regime as being too lenient. See report by group 38 Degrees Getting serious: how the UK government helps private equity executives to pay lower tax rates than nurses and teachers, and what could be done about it

Comment 
We are quite curious to note that a tax anti-avoidance protest group had picked up on the issue of "Carried interests" and private equity. Broadly, we have a "gentleman's agreement" with the BVCA that appears to have no statutory footing and what is surprising in this treatment is that if any other UK taxpayer tries this one on, HMRC will say "you are trading, the badges of trade are quite obviously present" (actually we have a roundup trading v investment cases next week) and will apply income tax and NICs to your profits. Some changes are afoot, in the Finance Bill HMRC is now taking some measures to tax those aspects of carried interest profits which it labels as "disguised remuneration" (a term that those in share planning and employment intermediaries know well). Quite whether this will work, is another matter because there still remain to be exemptions for the carried interests that don't represent disguised remuneration. While we are only slightly amazed that it has taken people so long to have protested about the BVCA's agreement we wonder firstly whether it has any statutory footing and then secondly why it is that one group of people have been allowed such stunning tax breaks for so long. Food for thought before an election.

PAC and large accountancy firms

The House of Common’s Public Accounts Committee (PAC) has followed up its 2013 review on the role of large accountancy firms in tax avoidance. Their new findings are not good.

Following analysis of Price Waterhouse Coopers (PwC)’s advice to its client Shire Pharmaceuticals it accuses PwC of mass marketing a tax avoidance scheme that allows such a multinational to artificially divert its profits to low tax jurisdiction Luxembourg. The “artificiality” lies in the fact that the PAC cannot find any trading “substance” in the operations performed in the low tax jurisdiction selected. Shire diverted some £10 billion in interest payments to its Luxembourg office which had a staff of just two.

The PAC says “The tax industry has demonstrated very clearly that it cannot be trusted to regulate itself.” It recommends that:

Links: PAC the role of large accountancy firms 

Diverted Profits Tax

“Nobody” likes the chancellor’s proposals for a new diverted profits tax (DPT), according to the tax press.  The biggest protesters being, not unnaturally, some large accountancy firms and lobby groups for multinational companies.

DPT is a measure included in Finance Act 2015.

International companies will pay a 25% tax charge on profits which are found to have been artificially diverted away from the UK. The corporation tax rate for profits taxed in the UK remains at 20%. Tax credit will be given to avoid double taxation.

The legislation applies to profits arising from 1 April 2015.

DPT will be charged when:

Commentary

The first measure is designed to ensure that US high tech companies are accountable on their sales, and the second will supplement existing transfer pricing rules. These measures will have a limited impact on group financing arrangements, meaning that a financing subsidiary can still be parked in a low tax jurisdiction ensuring that interest payments made by UK companies receive tax relief at UK rates but are liable to tax in the recipient company’s hands at a lower rate. This is something that the OECD is considering.

Whilst the first measure applies only to large companies, the second rule applies where the two parties to the arrangements are not SMEs (the SME test will apply to the group). 

Accelerated Payment Notice challenge by film schemers

HMRC’s Accelerated payment regime has been challenged by a number of tax film scheme investors. HMRC is able to serve an accelerated payment notice (APN) on tax scheme users which gives them 90 days notice to make an up-front payments of the tax that they are hoping that the scheme will save. This is before the scheme has been tested by the courts, or in the case of contentious tax schemes, in the event that similar schemes have already failed on appeal. The measure was introduced to deter the use of tax schemes and reduce the government’s tax cashflow disadvantage: otherwise it might have to wait many years to find the outcome of a tax case.

There is no right of appeal against an APN that, say tax scheme users say is a breach of their human rights. The High Court heard an application for judicial review by the film scheme users in the summer of 2015. The appeal was unsuccessful as have all subsequent appeals for judicial review in respect of APN's. See Accelerated Payments and follower notices.

Film scheme fails before the Court of Appeal

The long-running saga of the Eclipse 35 film tax scheme has ended. The Court of Appeal confirmed the findings of the tribunal: there was no actual film trading activity to speak of, just a complicated set of transactions and so investors do not qualify for tax relief on their loan interest payments made.

Commentary
This scheme was slightly more sophisticated than the "Working Wheels" tax scheme in which ex-Radio 1 DJ Chris Moyles (and many others) claimed to be operating a second-hand car trade, but tax relief was denied for the similar reasons in each.

HSBC’s leaked Swiss banking list

HSBC’s leaked list of some 6,000 UK resident Swiss bank holders made the headlines back in 2010. The list was leaked in 2007 to the French tax authorities but it took several years for them to release it to the UK. Many observers have been subsequently surprised that HMRC had followed it up with just one criminal prosecution. The list was featured on TV’s Panorama last week and by the Guardian newspaper: both have demanded an explanation for HMRC's apparent inaction as well as "naming and shaming" some of those connected to the government who are included on the list.

We’ve followed this story since 2010, and the reason for so few prosecutions is twofold:

Finally, HSBC had another list of clients leaked to the tax authorities in 2012, this time featuring its Jersey bank account holders. The press seem to have forgotten about this list.

What about the General Anti Abuse Rule?

The General Anti Abuse Rule (GAAR) was introduced in 2013. It is designed to prevent tax avoidance with a panel of experts on board to rule on whether contentious tax avoidance schemes are abusive and should be barred for being contrary to government policy. Two years down the line the GAAR was "toothless" according to all the scheme promoters we have talked to. Worse still for the government the GAAR panel which spent the last two years setting itself up, and which lost one member last year (he was caught lecturing on tax avoidance) did not have any cases before 2017. There have been seven opinions issued by the panel to date all of which have been in HMRC's favour; the arrangements in question, all of which were variants of disguised remuneration schemes, were held to be abusive and failed the double reasonableness test.

Tax litigation 

In July 2018 HMRC published their tax avoidance litigation decision results for 2017 to 2018 which showed 23 cases won by HMRC, none lost and one mixed result. The cases heard have ranged from IR35 to employee benefit trusts, various other disguised remuneration schemes, film partnerships, capital allowance schemes, tax on QCBs, capital loss schemes and offshore avoidance schemes.