As the party conference season fades into the distance, the air is still ringing with soundbites designed to rouse the nation’s solidarity while, ideally, offending as few voters as possible. And you can’t exactly blame the politicians for putting on all that performance. I mean, they’re all quite painfully aware of the dangers of discussing immigration or HS2 or the bedroom tax – all of which have supporters who are likely to take offence and vote for somebody else.
But the one thing on which 95% of the nation agrees is……that the wealthy should pay more tax. And that so-called aggressive tax avoidance schemes should be exposed and forcibly smashed wherever they may be found – regardless of whether it’s Starbucks or Amazon we’re talking about, or singleton investors with personal allergies to the HMRC regime. Cameron, Clegg and Miliband are all united in their insistence that we should hound the tight-fisted and the downright slippery into submission. It’s safe territory for any politico in need of a PR boost. And the Daily Mail and Daily Telegraph are in full support, which is always helpful.
So far, so good. As professionals, not very many of us would think it a good idea these days to poke our heads above the parapet and try to defend aggressive tax avoidance strategies. The mood out there is simply too ugly – and anyway the legal predecents being applied in tax judgements these days are changing. But it was not always thus….
Poachers And Gamekeepers
Not so many years ago, I got the heave-ho from a well-known UK tax and investment publication because I wasn’t finding enough devious little tax loopholes that my readers could exploit. My bosses declared that their job was to make the most of even the most convoluted set-ups for mitigating tax liability. And that they had the law on their side.
The bizarre thing was that it was absolutely true – they were indeed operating inside the law. (Just.) But I wasn’t feeling comfortable with the constant need to keep my lawyer on speed-dial, so perhaps we were well rid of each other?
There were limits, of course, to what we could tell the largely UK-resident readership, because it was considered bad form to go overboard on offshore trusts and numbered accounts and suchlike. But when it came to side-stepping a CGT bill, or setting up an IHT-efficient accumulation and maintenance trust, or benefiting from a more lenient tax environment in some foreign clime, or staying out of the UK for just enough weeks of the year, the in-house expertise was all there.
The existence of tax-haven bolt-holes wasn’t specifically mentioned, mainly because a sophisticated readership was already taking that sort of thing as a given. Like I say, it was all a bit too near the knuckle for my liking. But then again, I suppose that these days any UK-resident investor with the determination to find out this kind of offshore stuff could probably locate it in seconds via Google. Which is not the same thing as saying that an adviser could raise the subject with a client unless he was very sure indeed of his ground.
Tort A Lesson
In their justification, my bosses were able to call upon a landmark tax ruling that dated right back to 1936, and which made it completely okay to employ every possible route toward tax exemption. The case of Duke of Westminster v CIR 19 TC 490, had resulted in the historic finding that “every man is entitled to arrange his affairs so that the tax attaching under the appropriate act is less than it otherwise would be”. And those judicial words had formed the sacred basis of the profession’s thinking ever since. As long as a client acted within the laws of the time to reduce his taxes, then he was employing tax avoidance measures; if he broke those laws, then it was tax evasion and it might well be criminal.
“The art of taxation consists in so plucking the goose as to obtain the largest possible amount of feathers with the smallest possible amount of hissing.” (Jean-Baptiste Colbert, Minister of Finance to Louis XIV)
But you won’t have missed the fact that things have moved on a bit since those days. As long ago as 2006, the then Chancellor Gordon Brown retroactively declared that some IHT avoidance trusts in operation since the mid-1980s had been evasive in their intentions, and that they should be dismantled immediately or they’d attract hefty levies. So much for Duke of Westminster v CIR
You’ll also be aware that the Enterprise Investment Scheme rules relating to film investment have been turned inside out during the last twelve months, with some 800 EIS schemes under investigation for doing stuff that seems to have been legal, on paper at least. And you’ll know that, only recently, the government has threatened to name and shame accountancy firms if they encourage ‘aggressive avoidance’.
Now, ‘aggressive avoidance’ is a bit of a weasel phrase if you ask me. It’s blurring the lines between what’s technically allowed and what’s morally right – and the legal process is being forced to accept the dilution of Duke of Westminster v CIR 19 TC 490.
And maybe that’s not such a bad thing.
New patterns of trading, internet-based information-swapping, sophisticated new trusts and derivatives and a whole new world of tax havens have combined to open up a range of international tax mitigation possibilities that would have blown the poor old judge’s mind in 1936. There isn’t much doubt that the law has needed to be brought into line with the new situation.
And, that, as advisers, we might as well not try too hard to fight it. What we can be doing, however, is making sure that we sharpen up our own awareness – and that we don’t let too many obvious mitigation opportunities slip away.
The Crackdown Begins
Here in Britain, HMRC is getting well into its 2010 commitment to quintuple the number of criminal prosecutions for tax evasion – the number of cases more than doubled last year from 302 in the 2011-12 tax year to 617 in 2012-13. That may be due in part to whistleblower incentives that are now being offered.
It’s the same story internationally, where pressure from the United States tax authorities is starting to make inroads in places where nothing else has seemed to work in the past. In August, America reached a deal with Switzerland on total cross-border banking transparency, because it was getting fed up with the number of its own citizens who were using Swiss institutions to avoid tax. (Fines of well over $1 billion have already been levied.)
In September, the G20 Group came out with “an ambitious and comprehensive plan” to stop multinationals like Apple or Google from shifting their profits artificially into low-tax countries. And only a few days later, the EU competition commissioner came down hard on Ireland, Luxembourg and the Netherlands, all of which attract foreign businesses with very low corporation taxes. (There’s an amazingly informative comparative table from KPMG at http://tinyurl.com/bj5d7wk, by the way.)
The G20 members also committed themselves to a new scheme whereby the 34 members of the Organisation for Economic Co-operation and Development will be exchanging tax information automatically between by the end of 2015. And in June the British government was able to confirm that Britain’s Overseas Territorities and Crown Dependencies (including the Channel Islands and Bermuda) would also align with the multilateral agreements.
In May, HMRC announced that it was sifting through 400 gigabytes of US and Australian data that pointed toward “the use of companies and trusts [by Britons] in a number of territories around the world including Singapore, the British Virgin Islands, the Cayman Islands, and the Cook Islands.” And that “the data also exposes information that may be shared with other tax administrations as part of the global fight against tax evasion.” Some 100 people were under investigation, it said, and 200 accountants and advisers were being scrutinised.
“I regard tax evasion and, indeed, aggressive tax avoidance, as morally repugnant.” (George Osborne, September 2013)
Jennie Granger, HMRC’s Director General for Enforcement and Compliance, was firm about the boundaries of her competence. “There is nothing illegal about an international structure,” she said, “especially in a globally integrated economy and these arrangements may be perfectly legitimate and may already have been declared to HMRC.”
But…. (You just know there’s a But coming, don’t you?)
“However, they may involve tax evasion, avoidance or other serious offences by taxpayers. What has to stop is using offshore structures to illegally hide assets and income.” Not much room for doubt there, then.
So Where Do We Go From Here?
From where I’m standing, the battle for Duke of Westminster v CIR looks as though it’s over and we may as well get used to it. Seventy years of barristers’ guile, technical progress and a fiendishly complex tax system have bored so many woodworm holes through its estimable structure that there’s nothing much holding it together any more.
The Chancellor’s fall-back onto talk about “aggressive tax avoidance” makes moral sense even if it does sound a bit theological. How many tax lawyers can dance on the head of a pin, I’d like to know?
An irrelevance, possibly. Coincidentally, other countries are getting just as cross about tax non-payment issues as we are. And without their help we probably couldn’t have got even this far.
But the campaign for our more affluent clients continues. It’s not just about finding new and ever more ingenious ways to safeguard our clients’ interests from the probing reach of Captain Hook. It’s also about service.
It’s about making sure that instruments such as EIS and VCT are properly used, and are properly explained to our clients. And that the appropriate tax exemptions, especially with regard to IHT and CGT, are properly communicated to them and integrated into their long-term tax planning.
It’s about looking hard at Ucis funds, and making pretty damn sure that we don’t propose one to a client unless he properly qualifies as an experienced investor. (Remember, only one in four of the Ucis deals that the old FSA investigated last year turned out to have been suitable for the client it was sold to.) We have until 31st December to get our acts cleaned up – and by the time that Policy Statement PS 13/03 (Restrictions on the Retail Distribution of Unregulated Collective Investment Schemes and Close Substitutes) kicks in, we’re supposed to have overhauled our procedures and checked that each client is still suitable to hold these investments.
It’s about taking careful account of which clients have the right to run foreign bank accounts or use offshore trusts, and ensuring that they aren’t being (ahem) misused. Because we can be pretty sure that the wrecking ball will eventually swing back in our direction if we don’t.
It’s about knowing which sorts of trusts are still legal and upstanding, and which ones are pushing the limits a bit. It’s about proper IHT planning, and long-term care provisions, and wills and living wills and powers of attorney, and school fees and potentially exempt transfers, and CGT mitigation on assets like AIM stocks or forestry or own-company assets.
In short, it’s the same old stuff as before, except that the legal parameters have changed. We need to get used to it.