General Anti-Avoidance Rule a Possibility

A general anti-avoidance tax rule has been muted as being appropriate for the UK for a long time.  It now looks a genuine possibility following the Aaronson Report.

The idea of such a rule is to draw a line akin to a test of what the tax rules are intended to achieve ie their spirit.  If a transaction crosses that line, even though it is within the wording of the legislation, it will be caught.

Any general rule of this nature must be drawn at the right level so as to not impinge on innovative but “within the spirit” planning.

If such a rule was implemented it would be interesting to see whether the specific anti-avoidance rules in the existing legislation will be scrapped.  This would probably more than halve the content of the legislation.

Chancellor’s Autumn Statement 2011

Compared to recent offerings, the Autumn Statement provided relatively few announcements on taxation.

Potentially the most interesting from a planning perspective is the new Seed Enterprise Investment Scheme (SEIS) which is designed to encourage investment in new start-up companies. The new scheme will provide income tax relief of 50 per cent for individuals who invest in shares in qualifying companies (limited to £100,000 per year).  This compares to 30% relief in standard EIS companies.

 There will also be a ‘capital gains tax holiday’ for investments made in the new scheme. This will provide for a CGT exemption on gains on the disposal of an asset in 2012-13 which are invested through SEIS in the same year.

 More details are likely to follow in December.

Loss Relief Disallowed

In the recent case of Admirals Locums & Bhadra (TC 1416) the First Tier Tribunal disallowed the taxpayers claim for trade loss relief on the grounds that the taxpayer’s trade had ceased.

The taxpayer had previously carried on an employment agency for locums and doctors.  In 1998 he was suspended by the General Medical Council (GMC) and since that date the business had no turnover.

The taxpayer incurred legal fees challenging the GMC’s decision and consequently claimed trading losses.  The taxpayer argued that he had continued to trade despite receiving no income.  Furthermore, he argued that HM Revenue and Customs had allowed the claims in previous years thus creating a legitimate expectation that the claim would continue to be allowed.

The First Tier Tribunal concluded that the expenses were incurred to re-establish a previous trade rather than maintain an existing one  and that no legitimate expectation existed.

The Tribunal did allow the taxpayers appeal in respect of some of the earlier years under question, on the basis that the taxpayer had made a full disclosure therefore a discovery assessment outside of the normal  enquiry window was not allowed.

Uk-Swiss Tax Treaty: An Overview

UPDATE: Please see Eaves and Co’s Swiss Treaty Brochure for full details of the treaty

The UK and Swiss governments have now signed the long awaited UK-Swiss Confederation Taxation Cooperation Agreement. The new treaty still has to be ratified before coming into effect, but is expected to be fully effective from 1 January 2013.

The treaty will generally apply to UK taxpayers who held a Swiss account as of 31 December 2010 and where the account remains open as of 31 May 2013. Non-UK domiciliaries will have to prove, by way of a certification by a lawyer or tax agent that they have claimed the remittance basis of taxation for the year in question, and give notice to opt-out of the agreement. Under the terms of the agreement, UK taxpayers may either:

1) Retain anonymity and suffer an initial one off deduction of between 21-41%, or

 2) Make a voluntary disclosure to HMRC regarding their Swiss assets and income.

Option 1

There will be an initial one-off deduction, in order to settle past tax liabilities, of between 21% and 41% applied to the balance of a UK resident’s existing Swiss accounts as of 31 December 2010.

The rate charged depends upon the number of years of investment and the account movement. It is estimated that the applicable rate will be 22-28% for most taxpayers.

 In addition to this from 2013 there will be a withholding tax of 48% on interest income, 27% on Capital Gains, and 40% on dividends.

Taxpayers who pay the levy and withholding tax will be able to retain anonymity (subject to EU approval).

Option 2

Alternatively the taxpayer can make a full disclosure of untaxed Swiss income and gains to HMRC. HMRC will then seek unpaid taxes, interest and penalties from this disclosure.

If a disclosure is made, the taxpayer’s accounts will not be subject to the one off charge and future withholding tax. However the taxpayer must inform their banks that they have chosen to disclose otherwise the one-off levy will be automatically applied.

 What to do now

 It is likely that UK persons with undisclosed Swiss income will need to contemplate whether to make a disclosure or pay the one off levy and suffer the withholding tax moving forwards.

Disclose

There is no specific disclosure facility contained within the Treaty, so HMRC will levy penalties at normal rates on any liabilities disclosed. HMRC can assess such tax liabilities for up to twenty years so the total cost of tax, interest and penalties could be very high.

A more generous disclosure opportunity is available using the Liechtenstein Disclosure Facility (LDF). The LDF provides certainty of settling past worldwide tax issues, with liabilities being limited to those arising after April 1999, and with a set 10% penalty rate for years up to 5 April 2009. More importantly, the LDF provides immunity from prosecution.

Pay the Levy and Withholding Tax

The one off charge is levied on the value of Swiss funds as of 31 December 2010 and therefore only clears tax liabilities associated with those funds and therefore does not guarantee that all past Swiss liabilities will be settled.

 As a result it does not offer immunity from prosecution but does however ensure that anonymity is retained.

Move Assets to another Jurisdiction

It is possible to move assets to another jurisdiction before the 31 May 2013 to avoid the regime; however Swiss banks will be providing information to HMRC on the top ten destinations where funds are being moved. If the taxpayer is subsequently caught they will be liable for tax due going back to 20 years, penalties of up to 200%, public ‘naming and shaming’ and the risk of prosecution.

How Eaves & Co Can Help

Based on the LDF’s that Eaves & Co have already made for clients, the average cost is around 17% of the account value at the time of the disclosure. This is less than the 21%-41% levied under the Swiss Tax Treaty; however each case will need to be judged on its own merits.

In order to establish the best option for the individual involved it would be useful to undertake a technical review to compare the net costs of both options. Eaves & Co would be happy to have a no names discussion (so as not to contravene the money laundering rules) to discuss the options available in more detail to anyone feels they may be affected.

Multiple PPR Claims Allowed (Clarke v Revenue & Customs [2011] UKFTT 619 (TC))

The appellant’s claim for Private Residence relief for houses sold was denied by HMRC.  They claimed that there was no intention of permanent residence because he had never had important documents such as his driving licence and utility bills addressed at these abodes. Also his correspondence had still been delivered to his old marital home.

The taxpayer appealed this decision and was successful, due to the fact he had proved he intended to live in each property permanently and had continued to attend his offices at his old marital home in order merely to collect any correspondence, and his business remained there.

The key in this case was that although the appellant had not formally changed his address it was clear that he was merely operating his business from the marital property and it had ceased to be his main residence.

No PAYE or NIC’s: Talentcore Ltd v R & C Commrs

 HM Revenue & Customs (HMRC) raised assessments to PAYE and NIC’s for the years 1998/99 to 2006/07 totalling £3.6m on the basis that the consultants were employees of the taxpayer.

The taxpayer supplied individuals for counter and promotional work to major cosmetic companies at duty free shops at airports. It had a database of 100 individuals (consultants) upon which to call upon. The taxpayer was under no obligation to offer the consultants work and the consultants were under no obligation to accept work offered. In addition there were no formal contracts between the taxpayer and the cosmetic company or consultants.

Talentcore Ltd successfully appealed HMRC’s assessment to the First Tier Tribunal (FTT). HMRC then appealed to the Upper Tier Tribunal (UTT) challenging the FTT’s application of ITEPA 2003 s.44.

The rules state that the consultants would not be deemed to be employed by the taxpayer for Income Tax and NIC’s, if the individual was not:

 (a) Providing, or under an obligation to provide personal services; or

 (b) Subject to (or to the right of) supervision, direction or control.

The Tribunal found the consultants had complete freedom to arrange for substitutes if they wished. This amounted to an unfettered right to substitution. Therefore condition (a) was met as the consultant was not obliged to perform the services personally.

 The Judge dismissed HMRC’s appeal saying “Since the First Tier Triubunal held, correctly in my judgment, that the terms of the contract did not oblige the consultant to provide the services personally, it is not an ‘agency contract’”.

The case shows if it is possible to structure contracts so that either or both of the conditions (personal service and supervision) are not met, then PAYE and NIC obligations can be avoided when providing temporary workers.