Strategic Tax Blog

DOTAS and Accelerated Payments – Latest

Background

The Government issued a consultation process in January 2014, in which they proposed that HMRC would be able to assess and collect the tax due on any DOTAS scheme irrespective of whether the scheme had been tested through the courts. They only allowed 4 weeks for consultation.

In the 2014 budget the Government then announced new legislation to collect tax on DOTAS schemes exactly in accordance with the consultation document, having ignored all the issues that accountants and our professional organisations raised.

Main issue

One of the main concerns was the apparent retrospective nature of the legislation, as it would be applied to all current, not just future, DOTAS schemes. Not surprisingly many taxpayers and tax advisors were pretty upset by the proposals

Reaction

We have actually seen and increase in people looking for tax planning ideas to mitigate tax just to meet the potential HMRC demand.

Latest

A glimmer of hope has now appeared on the horizon from the House of Commons Treasury Committee. It has just released a report into the 2014 Budget, which included the following statement:

“Retrospective tax legislation conflicts with the principles of tax policy recommended by this Committee. In our 2012 Budget Report we recommended that the Government restrict the use of retrospection to wholly exceptional circumstances………..[The accelerated payment proposals]…will retrospectively apply to some of the 65,000 outstanding tax avoidance cases..[and] the Government has yet to explain what is wholly exceptional about these cases that justifies this retrospective measure. It should do so in response to this Report…..”

 

Government Predicts An Extra £3bn In IHT Revenue In The Next Four Years

In the recent Autumn Statement, the Government predicted even higher increases in house prices in the next couple of years. If these figures are accurate, and house prices increase as the Government predicts, the total IHT paid by 2018 will be a whopping £21.4 billion, £3 billion more than the £18.4 billion predicted back in March 2013. Some commentators are not convinced that house prices will rise so dramatically, but even a small yearly increase in property prices will mean that many more people will have estates that are now subject to Inheritance Tax.

Since the IHT threshold increased from £312,000 to £325,000 (£650,000 for couples) in the 2009-2010 tax year, it has been frozen at £325,000 until 5th April 2018. As the economic outlook begins to improve, the government has made some pretty optimistic predictions regarding the prices of a number of assets, particularly properties. They predict that house prices will rise by 5.2% in 2014 and 7.2% in 2015. These increases will inevitably put a number of additional homeowners over the nil rate threshold, meaning their families will have to pay 40% Inheritance Tax when they pass away.

Will Your Beneficiaries Be Liable To Pay Inheritance Tax On Your Estate?

If your estate is worth more than £325,000 your beneficiaries will be liable for the 40% Inheritance Tax Rate when you pass away. There are a number of strategies that can be used to significantly reduce their tax liability. The exact strategies that we recommend will very much depend on your individual requirements. If this is something that you would like to find out more about, you can contact us here or give us a call on 0116 340 2150. We will then arrange a free, no-obligation consultation where we can make some clear recommendations based on your personal circumstances.

HMRC Faces Heat from Public Accounts Committee

Representatives of the HMRC, including a tax assurance commissioner and the director of enforcement and compliance, were grilled by a parliamentary committee over the inaccuracy of their numbers, particularly an estimated £35 billion pound ‘tax gap’.

Led by labour MP Margaret Hodge, the House of Commons public accounts committee (or PAC) put the HMRC under the spotlight on October 28th and questioned the representatives over thorny issues such as the HMRCs inability to act against corporate tax avoidance and the secrecy revolving around the HMRC’s relationship with Swiss banks. Hodge labelled the HMRC as ‘institutionally incapable’ during a heated discussion over the loss of billions in unpaid tax.

The HMRC projected that they would recoup over 3 billion in lost tax from Swiss accounts this year, but have so far gained only £440 million, calling into question whether the HMRC have been pursuing this line of tax avoidance far enough.

Hodge said about the gap, “It does not include a lot of what ordinary punters in the street think you should be collecting, particularly in regard to the large corporations. The tax gap is really the tip of the iceberg in the gap between the money that you collect and the money if everyone paid their fair share.”

Hodge also compared HMRC unfavourably to their European counterparts, especially French authorities who had successfully raided the offices of huge corporations who have avoided tax payments such as Google and Microsoft.

The HMRC officials argued that corporations taking advantage of loopholes were a matter for larger institutions such as the G20 or the OECD.

The officials are due to appear before the committee later again this year.

IHT Rules Change Surrounding Deduction of Debts

To combat tax avoidance, Finance Act 2013 brought about a number of changes to the rules surrounding the deduction of debts when calculating inheritance tax (IHT). In many cases, the changes increase the IHT payable.

The rules apply to outstanding loans that were used to finance ‘relievable property’ (a business or agricultural investment) or ‘excluded (non-UK) property’, affecting the value of the taxable estate, the value of taxable gifts and the amount of tax payable by trustees.

Liabilities (such as loans and mortgages) reduce the value of a property and therefore reduce its IHT charge. But since business and agricultural assets also qualify for ‘business property relief’ (effectively eliminating their IHT charge) a further deduction is regarded by the Government as a ‘double dip’. From now on, loans will be deducted before other reliefs, which may increase the IHT payable on securities.

As well as this, loans left outstanding indefinitely will be scrutinised to make sure that there is a ‘real commercial reason’ for the debt and that it is not being maintained for tax purposes. This change particularly targets individuals that borrow from family companies or trusts.

If you are concerned by these changes or the way they will affect your estate, contact us to arrange a free, no obligation consultation.

New ‘Let Property’ Campaign Puts Tax Avoiding Landlords in Spotlight

With their ‘We’re Closing In…’ tax evasion campaign in full swing, HM Revenue and Customs have announced another drive to try and net as much unpaid tax as possible.

The ‘Let Property’ campaign is targeting landlords, a group who may be underpaying as much as £500 million in tax every year, mostly due to landlords not understanding that income tax must be claimed from rent paid to landlords. The campaign will run for 18 months and allow landlords to come forward and admit to underpaying tax, whether through honest mistakes or deliberately, without fear of a criminal prosecution.

HMRC recently calculated that up to 1.5 million landlords in the UK aren’t paying enough tax, and so the campaign has provided a window for those who are underpaying to come forward and pay any tax that is owed, including interest.

Marian Wilson, head of HMRC campaigns, said “The message for all landlords owing tax is simple – it is better to come to us before we come to you.” The point is simple – landlords come forward voluntarily are guaranteed to pay less than those who are tracked down by HMRC after the campaign is over, and will avoid fees, penalties and criminal prosecution.

All kinds of landlords in the UK are being targeted, from traditional residential rentals to holiday homes to students. All rentals are subject to tax, and it is hoped that the new campaign will collect a large amount of tax while spreading a clear message to tax avoiders.

After the campaign finishes, HMRC will take a hard line on the landlords who did not come forward.  Similar HMRC campaigns have collected over £550 million in tax since 2007, and it is hoped that this operation will yield similar results.

Inheritance Tax Affects More People As House Prices Increase

Despite the downward pressure on house prices in the last four years, we are starting to see a slight recovery, and in the past year, house price have once again started to increase. Although an increasing house price has a number of benefits for homeowners, it also means that a higher proportion of people are having to pay Inheritance Tax (IHT) on their properties. In 2009 the government froze Inheritance Tax until 2019. Individuals pay Inheritance Tax on any assets worth more than £325,000, and for couples the threshold is £625,000.

For the 2011/2012 tax year, a total of £2.9 billion was paid in Inheritance Tax. However, in the most recent tax year, a total of £3.1 billion was collected. These figures suggest that the price of houses has increased and put a significant number of people into the tax bracket, meaning their assets are now subject to the 40% IHT rate. Assets are not currently eligible for Inheritance Tax if they are left to a spouse or civil partner, even if their total value is greater than the current threshold for individuals. The spouse or civil partner taking ownership of the assets must live in the UK permanently to be exempt.

Other exemptions include certain payments, either whilst alive or in a will, that an individual makes to charities. However, only certain charities qualify for these exemptions. Most assets that are given away more than seven years before a person passes away will be exempt, including your property. However, if someone does not pay rent after giving their house to a family member, the house will be subject to IHT when the previous owner passes away. Other potentially exempt transfers must be made at least seven years before an individual’s death. For example they can give up to £3,000 each year, up to £250 to an unlimited number of people and parents can give £5,000 as a wedding or civil ceremony gift, and grandparent and great-grandparents can give away £2,500. Other potential exemptions may include owning a business or certain types of land.

There are several other important factors which must be considered when tax planning and considering your IHT liabilities. A professional will enable you to look at the whole picture and help you to make the best decision for you and your family.

HMRC Humiliated Following Overseas Pension Judicial Review

HM Revenue and Customs have been left red-faced after conceding defeat to a personal pension scheme based in Singapore during a High Court judicial review.

HMRC chose to withdraw relevant assessments from the review and were required to pay the applicants’ costs on an indemnity basis. The proceedings have been publicised across the investment world, although the withdrawal means that a judgement is now unlikely to be issued.

The review came after a delisting of the Recognised Overseas Self Invested International Pension Retirement Trust (Singapore) (ROSIIP) by HMRC.

Established in Singapore in 2007, the ROSIIP personal pension scheme was included in HMRC’s list of Qualified Recognised Overseas Pension Scheme (or QROPS) in 2006, according to draft documents provided by ROSIIP’s trustee.

In 2008 however, HMRC reversed their decision and said that ROSIIP was not a QROPS, withdrawing it and delisting the scheme. Now, all funds that had been paid into ROSIIP were unauthorised transfers, which meant that tax charges up to 55 per cent (40 per cent charge plus a 15 per cent surcharge) would apply, along with other interest and penalties.

It was then ROSIIP members who applied for a High Court judicial review, claiming that the delisting of the scheme infringed:

  • EU law – it restricted the free movement of capital between an EU member state and a non-EU state;
  • The European Convention of Human Rights law – the circumstances of the assessments were such that the applicants could not have foreseen that they would subsequently be chargeable; and
  • English public law – the applicants had a legitimate expectation that HMRC would not retrospectively alter their tax treatment of ROSIIP.

In 2012, a group litigation order was made and permission to apply for a review was granted in May of this year. The fundamental application was heard by Charles J across four days in June, and it is believed that he was critical of HMRC, describing their behaviour as “shameful”. He is also thought to have taken them to task for failing to make a full disclosure.

Since then, the question remains as to whether HMRC’s conduct is a move closer to a ‘win at all costs’ litigation; it wasn’t until HMRC ran into difficulty in the case that they became keen to settle it.

Ultimately, the case may apply to other areas of taxation where HMRC have issued documents similar to the public list, before failing to apply them consistently to all taxpayers.

Mansion Tax Debate Rages On

Talks continue over Labour and Liberal Democrat plans to introduce a ‘mansion tax’ on properties worth £2 million and above.

If implemented, the tax would raise £2 billion from residents in expensive properties, most of which are located in London and the South.

The so-called ‘mansion tax’ would be charged at 1% on properties worth £2 million, rising to £35,000 and above on the highest-value properties.

The Conservatives argue that the proposed tax would bring in less than anticipated unless the wealthiest home owners were charged at extremely high rates. They claim that the Labour and Lib Dem Parties have overestimated the number of qualifying UK properties, consequently overestimating the economic benefit such a tax would bring to the economy. The Tories put the number closer to 55,000.

However, Labour and the Lib Dems defend their 70,000 – 75,000 estimate and insist that the mansion tax would bring in the full £2 billion; money they say they would use to reinstate the 10p bottom rate of tax for people on lower incomes.

As the debate rages on between the different Parties, the mansion tax is proving to be a battle ground for the hearts and minds of the voters in the 2015 general election.

Peers: Corporate Tax is ‘Not Working and Needs Reform’

A cross-party group of peers have urged the Treasury to explore radical alternatives to the current corporate tax.

Towards the end of July, peers insisted that the current UK corporate tax system “is not working and urgently needs reform”.

The Committee on Economic Affairs, within the House of Lords, also released a report that ultimately called for a review of tax rules. More specifically they requested  a review of the “generous” relief on interest payments, arguing that the relief has the potential to force British businesses into taking on masses of debt. The report also urged a move towards increased  transparency and a greater oversight of the system.

The report – which comes after the tax-dodging scandal surrounding the likes of Starbucks and Google broke into the public arena – also called for: new regulations for tax advisors; a requirement for big companies to publish summaries of their tax returns; and a new joint committee of the Commons and the Lords to be set up to take evidence.

Chairman of the Committee Lord MacGregor said: “There is a sense that corporation tax is voluntary for some multinationals that operate globally, while small UK-based businesses go by the book and have to pay. That brings the tax system into disrepute and loses much-needed revenue.”

‘Serious’ Tax Avoidance at 5-Year Low

According to a recent report, incidents of ‘serious’ tax avoidance – where the deficit is worth £50,000 or more – is the lowest it has been for 5 years. Between 2010/11 and 2011/12, there was a 16% drop in the number of such recorded cases, though it is trickier to tell if tax avoidance as a whole is increasing or decreasing.

One explanation for these declining figures could be found in the HMRC’s recent crackdown on tax evasion, particularly overseas structures. Over the past 12 months, HMRC has side-lined £1 billion to tackle offshore tax evasion and £5 million to recruit 100 new Affluent Compliance officers, as well as slapping a hefty fine on evaders, worth up to 200% of the tax owed. These are all part of on-going efforts to prevent the wealthy from concealing their assets outside of British jurisdiction. Plans to create a public register of shell companies were discussed at this month’s G8 Summit, which would go further in the battle against offshore.

On Sunday 23rd of June, Starbucks, notable user of the ‘Double Irish’ offshore arrangement, paid £5 million in UK Corporation Tax, the first payment of its kind since 2009. The US coffee chain faced particular criticism last year when it was revealed that it had declared just a single taxable profit in Britain in 15 years.

Starbucks’ actions seem to suggest that tax havens’ (as we know them) days are numbered. However, whether this apology payment (the first instalment of a total £20 million pledged last year) will be enough to keep the brand off the taxman’s radar – and out of the media – only time will tell.