©2010 Grant Thornton UK LLP. All rights reserved. AAT & CIMA 12 October 2011 The Future for Legitimate Tax Planning in a Climate of Confrontation and Challenge.

©2010 Grant Thornton UK LLP. All rights reserved.

AAT & CIMA 12 October 2011

The Future for Legitimate Tax Planning in a Climate of Confrontation and Challenge from

HMRC

Heather Taylor & David PedleyGrant Thornton LLP

1

AAT and CIMA Joint Presentation 12 October 2011 .ppt


Agenda:

• Where we are now• Avoidance v Evasion• Bespoke Tax Planning• HMRC Information Powers and the New Penalties• The New Record Inspections Regime• The HMRC approach to the Profession• The New First Tier Tax Tribunal• VAT- The MTIC supply chain elephant trap


After the 23 March 2011 Budget

Some good things:•Reduced CT rate, relaxations of CFC regime, enterprise zones,

•Doubling of Entrepreneurs Relief, Charitable Giving IHT break

Some tightening up:

•Disguised Remuneration - Loan manipulation, EBT/Efurbs schemes attacked•Non Doms- additional annual payment if 12 years here = £50K

•Remittance Basis relief if invested in UK business

•New Statutory Residence definition to be introduced

•VAT Importation Equalisation on low value goods

•The Coming of the GAAR•SDLT schemes exploiting Sharia stopped

•Payment up front during appeals?


Where are we now?

• The "Tax Gap" per Office of Budget Responsibility in September 2011 has fallen from £42Billion in 2010 to £35Billion.

• Press publicity about major corporates and banks not paying their "fair share"- 2011Budget extended Bank Levy and imposed new Oil Tax. EU is proposing a Financial Transactions Tax as well as Stamp Duty.

• However, HMRC evidence on 17 March 2011 to the PAC is that 75%of that Tax Gap is down to SME's and individuals and relates to IT,CGT, NIC and VAT, and only 25% relates to large corporates.

• Government pledged to simplifying the system - looking to merge income tax and NIC during this parliament. New penalty systems for PAYE and for CIS have come into force in September and October 2011. Filing dates for individuals have come forward, with automatic penalties for late filing strictly enforced.


HMRC Risk Assessment of Taxpayers

.•Emphasis on assessing and collecting as much as possible from the taxpaying base and joining more people to that population•Risk assessment is the name of the game.•All taxpayers risk assessed to identify those thought to be 'a systemic risk to the tax base'!•Not High Risk taxpayers are viewed to be compliant with the submission of returns and payment of liabilities, and not to take filing positions not accepted by HMRC.•HMRC issues 'toolkits' and 'spotlights' to let taxpayers know what is the acceptable view of HMRC on an issue. Taxpayers are expected to follow and accept that view.


Risk Assessment

• Who are these people who are a 'systemic risk to the tax base? '• Typically, these are individualistic entrepreneurs who have a high

appetite for tax planning and who have possibly had previous enquiries by HMRC.

• HMRC has set up specialist teams to make life a little uncomfortable for such folk! Their reviews have found that additional tax has been recovered from the enquiries made.

• All businesses, including companies and partnerships, in which they have an interest are likely to be investigated very regularly and very thoroughly. THERE IS NOTHING TO STOP HMRC MOUNTING AN ENQUIRY EVERY YEAR IF THEY PERCEIVE A HIGH RISK.

• All such enquiries are likely include a full top to bottom records review for both direct and indirect taxes, with a review of the personal financial records as well.


Avoidance v Evasion (1)

Politicians and HMRC blur the definitions

BUT

TAX AVOIDANCE IS LEGAL! TAX EVASION IS NOT! Simples!



The Courts now are taking a "purposeful" test of Parliamentary Intention

•Judges asking themselves "would I have done this in this way?" as a test.

•Prescriptive legislation allows creative tax planning to exploit any weaknesses in drafting. We have specific anti avoidance legislation and a body of case law which has evolved over the last 30 years at an accelerating pace to move from a literal interpretation of tax law to a purposeful one.

•The leading case remains the 1981 case of CIR v Ramsay, where HMRC succeeded in establishing that where a transaction had no substance other than to reduce tax, HMRC was entitled to look through it as if it had not taken place.



• "Acceptable and Unacceptable" Tax planning: the twin cases in 2004 of Scottish Providence and Barclays Mercantile- Scottish Providence succeeded despite the tax planning being "aggressive" as the transaction actually happened, Barclays Mercantile didn’t because of the artificial nature of the events concerned.

• "The driving principle in the CIR v Ramsay line of cases continues to involve a general rule of statutory construction and unblinkered approach to the analysis of the facts. The ultimate question is whether the relevant statutory provisions, construed purposefully, were intended to apply to the transaction, viewed realistically" (Ribeiro J in Arrowtown)

• Ramsay has been around now since 1981. The principle was reaffirmed in TowerM Cashback v HMRC in 2011, where a scheme to enhance capital allowances by paying over the odds for software using an interest free loan was disallowed. The Supreme Court looked at what was the true cost of the software and what was artificially paid for the purposes of tax liability reduction, and restricted relief to the true cost only.

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• The 2011 Budget indicated that HMRC intended to extend international information exchange and international collection cooperation; we are seeing this in practice.

• The Budget indicated that HMRC is to clamp down on 'treaty shopping' tax avoidance planning- this has actually been shelved in September 2011 as it was too difficult without totally unpicking the double tax treaty framework.

• The Budget indicated that HMRC will get legislation to prevent cash flow advantages of 'milking' of the appeals process. HMRC looking to get payment of tax in dispute up front, or hefty surcharge if HMRC view prevails

• The Budget indicated that HMRC will be able to legislate at very short notice to plug perceived loopholes. This demonstrates that despite the support of the Courts taking a purposeful line, HMRC is still concerned about putting a quick stop to anything it deems as "abusive".


Common Challenges by HMRC

• HMRC has increasingly wide information powers and there is also a very wide Disclosure of Tax Schemes ( DOTAS) requirement.

• HMRC challenges planning on particularly provocative areas- if tax is avoided by several taxpayers using the planning HMRC will act very quickly to litigate or legislate.

• If a repayment is claimed from the planning it will be withheld- fact finding to determine the position may take years before HMRC decides to litigate.

• Often, group deals are offered to settle rather than litigate, many taxpayers give in during the process and withdraw their claim because of potential costs.



Some areas where HMRC is particularly concerned:.

•Disguised remuneration

•EBTs where entitlement not truly universal

•SDLT mitigation arrangements- particularly domestic property

•Image rights arrangements/ split contracts

•Film partnerships

•Careless implementation

•The tax saving is too good to be true

•Tenuous use of statutory exemptions

•Transforming Income into Capital



- Poor implementation gives easy meat to HMRC - Ensure all 'post it notes' are removed from papers sent to HMRC - Ensure clients are aware that HMRC can see emails as well as

letters - Advise clients against needless group forwarding of emails and draft

information

Example: December 23rd 2009, email from client to his solicitor acting on a conveyance:

" Just a note to keep the file up to date. These minutes are purely for the

record as no one was actually in the room for the meeting detailed in

the enclosed Board Minutes. I am in UK with my family as usual

as I never actually go to the Isle of Man"

This memo was a bit of a problem when trying to establish no

UK management and control with HMRC!


The Future for Tax Planning

• Q: So what tax planning can be undertaken?

• A: Bespoke and tailored planning advice specific to the client has a better chance of success and less chance of being blocked by legislation

1. Use mainstream ideas and tailor to the clients needs and circumstances.

2. If client retiring in next few years, check Entrepreneurs Relief qualifying position, check potential for loan planning, check will position and IHT gift position, maximise spouse to spouse planning

3. If client has a high appetite for risk then design specific vehicles for them, but with a very clear rider about the likelihood of HMRC challenge

4. Residence and domicile planning may become more difficult as HMRC reviewing and consulting with a view to change.

5. Don’t get caught out on bad implementation of a good idea.



TIP:

DO THE EASY THINGS WELL!



Discovery

•This is a constantly changing area.

•There is nothing wrong with taking an alternative filing position if it is tenable and very clearly disclosed.

•Generally, both case law and statute law have given HMRC the ability to challenge returns outside of the filing window unless the quality and extent of the disclosure is exemplary.

•Valtema, Corbally Stoulton and Patullo cases found that HMRC could make a discovery despite disclosures being made in returns because quality of the disclosure was not sufficiently specific to draw the Inspector's attention to a 'potential insufficiency'.

•However, 2011 case Charlton & Others v HMRC found for the taxpayers (despite the planning being doubtful!) as the disclosure was exemplary.


The Attack on Evasion

• Most people tacitly condone low level evasion! i.e. "Cash in Hand/No VAT" tradesmen. HMRC looking to bring in as much as possible.

• Series of Amnesties - Very cost effective initially. ODF raised about £400M for a cost of <£10M, but subsequent facilities have raised a lot less and had less take up. I.E. Plumbers tax safe plan ran until 31 May 2011, and only raised an additional £328K from 600 disclosures.

• HMRC also has said that the 'Health Plan' for Doctors and Dentists was also not as effective as they had hoped. VAT registration amnesty closed 30 September 2011.

• Disclosure Opportunity for private tutors and other teachers and coaches announced 10 October 2011. The 'Tax Catch Up Plan' runs till 6 January 2012, provides 20% penalty, no guarantee of non prosecution.



• The big one appears to be the LDF ( Liechtenstein Disclosure Opportunity)continuing until 2015 - this is generally a very good deal for anyone who qualifies for it. ( Guarantee of non prosecution, 10 year look back, 10% penalty).

• Swiss UK agreement. Signed 6 October 2011. Will run from 1 January 2013. Will clean up only Swiss deposits 2003 to 2013, everything else still up for grabs. Does not regularise companies. No guarantee of non prosecution. One off 'regularisation' payment of up to 34% of balance as at 31 December 2010 will cover tax , interest and penalties on those funds only without revealing taxpayers identity. Going forwards 48% withholding tax on income, 27% on gains.

• For most people affected, the LDF is probably cheaper, but does mean surrendering anonymity.



• Autumn Statement 2010 made additional £900M available to HMRC to combat evasion, and recent announcement has been made of a further 2000 Tax Inspectors as well.

• Pledge by HMRC to increase prosecutions from only 187 in 2009 to over 1000 per annum from 2011/12 onwards.

• We are seeing all cases where fraud is involved being reviewed for prosecution- some high profile prosecutions- but the numbers still appear to bolstered by Tax Credit and MTIC prosecutions.



. •Management of Deliberate Defaulters Programme HMRC has written to taxpayers guilty of deliberate understatement of tax who have settled on a civil basis within last few years - they will be closely watched for up to next 5 years ( time limits to be strictly enforced, payments, returns- no leeway, un-announced visits, HMRC will make contact with suppliers/customers) • Will apply to any business they are associated with as well as the individuals. Will be highly intrusive.•"Name and Shame". Publication on HMRC website for 12 months of name and address and offence.


Information and Penalty Powers of HMRC

• New Information and Penalty Powers FA 2007 & 2008 • The Old and New Penalty Regimes• The benefits of Voluntary Disclosure• The 'behaviour' test• Protecting the Client


New Information Powers

• New regime from 1 April 2009 ( Sch 36 FA 2008) Replaces:- - Most of S20 TMA 1970 - S19A TMA 1970 - Para 27 Sch 18 FA 1998 - Para 7 Sch 11 VATA 1994

• Applies to all taxes CT, IT, CGT, PAYE, CIS and VAT

• Also new assessing time limits for HMRC; generally 4 years, up to 6 years if careless behaviour, and up to 20 years if fraudulent behaviour

• 2011 Budget of March 23rd states there will be an announcement soon of further data gathering powers to be given to HMRC


Main Changes

• Applies to past, present and future liabilities to pay tax - so introduces real time working

• Applies to both documents and information required to check a taxpayers tax position

• That information must be 'reasonably required• Statutory records must be produced:-

- both specified records as per TMA or VATA, - and, 'non specified' records after the year end if HMRC contends that it is reasonable to produce them


"Reasonably Required"

• Sch 36 can only be used to check someone's tax position

• Generally, will be used after HMRC has researched and risk assessed

• TIP: No transitional powers so also used for enquiries which were running as at 1 April 2009, but not for information which was not available under the old powers before that date.

• HMRC officers encouraged to make informal approaches for the information before using Sch 36 notices

• Information must be in power or possession of the recipient of the notice

• Protection retained for audit papers, appeal documents, journalistic material and personal records as defined by s12 PACE

• Legal professional privilege - highly contentious issue. Prudential case. Going to the Supreme Court Dave Hartnett thinks that the answer is easy - just stop it for both lawyers and tax advisors!


Who will information notices be served on?

• Sch 36 para 1 - 1st party notice on taxpayer

• Sch 36 para 2 - Third party notice to enable the checking of the tax position of a named taxpayer

• Sch 36 para 5 - Requires the production of details about a person or class or persons whose identity is not known to HMRC

• Trap:

- Recent prosecution of Tyneside accountant, Mr Doshi, for tipping off a client about a Sch 36 notice.


Inspection of Premises and Documents

• Sch 36 para 10 - Broadly bring direct tax position to where VATA previously enabled it for indirect taxes

• Look but don't touch - No rifling through drawers to seek out documents. May inspect both business records and business assets

• Can only enter premises used for the business at least in part. Entry can be refused, penalty will apply. May remove of copy documents.

• Usually give 7 days notice - BUT can make unannounced visit with permission of Tribunal

• TIP : An unannounced visit indicates that there is potentially a serious issue. Consider advising client to politely refuse entry and pay fine, while seek advice


Business Records Check

• HMRC considers that 40% of SME's (5 million businesses) have poor records leading to a loss of tax - even when there has been an audit

• Sch 36 enables real time checking of records to ensure that records are fit for purpose. HMRC will check 50,000 businesses p.a. for the next 4 years. HMRC have trained staff and aim to start from summer 2011

• Separate penalties for poor records even if there is no tax effect. Can take the £3000 records penalty anyway even if no tax loss

• Can be used real time where HMRC suspects fraud or is aware of tax avoidance planning undertaken which may not yet have been filed by the taxpayer. HMRC particularly keen to use this power to identify implementation failures


Naming and Shaming

• Applies to tax offences committed after 1 April 2010• From 1 April 2011, if tax is evaded in excess of £25,000, and the taxpayer has not made a

full disclosure either voluntarily or on challenge from HMRC, they will publish full personal details of taxpayer concerned on HMRC website for a period of 12 months, detailing the offence committed

• Can appeal, but only on grounds of peril to security

• Trap: An incomplete disclosure on challenge will put the client squarely

in the "name and shame" frame

• TIP: Even if disclosure comes from an HMRC challenge, full disclosure will protect from "Name and Shame"


Penalties

• New regime applies to offences committed in returns filed on or after 1 April 2009 for periods beginning on or after 1 April 2008

• Many cases where irregularities are identified in next few years will straddle this date, so penalty negotiations and calculations must firstly identify to which period an incorrect return belongs, and so to which penalty regime each year and each offence applies

• New regime covers past, present and future liabilities after the operative date, so penalties on overstated losses

• TIP: Watch out that the Inspector does not try to do the whole case under the new regime!


Behavior Based Regime

• New penalty regime based on the concept of rewarding 'compliant' taxpayers and penalising those who do not comply

• Trap: New minimum penalties there by statute for certain behaviour- the Inspector has no discretion to go below that minimum if you accept the behaviour band

• TIP: Argue for "careless inaccuracy" and suggest suspension. Do not accept HMRC's opening suggestion that it is more serious than this

• BUT high threshold of what is 'taking reasonable care' and the burden of demonstrating that so as to avoid being charged a penalty

• Late filing penalties are now rigorously enforced- easy money for the Treasury!

But is the electronic filing requirement and short time windows for filing too onerous for small traders and the less sophisticated private individual?


Take Reasonable Care

• Taxpayer must have sufficient documentation to show that they have done so

• HMRC website issues guidance that taxpayer: - Would have kept full records, maintained by suitably qualified staff if appropriate

- Would consult the HMRC website and follow the advice therein of the HMRC view on contentious issues (i.e. read and follow HMRC toolkits?) - Would take advice from a competent professional advisor and follow that advice Would ensure that all returns, claims and elections are submitted timeously to HMRC - Would alert HMRC to any alternative filing position on any contentious tax issue by drawing the attention of HMRC to the point and highlighting that such an alternative position may lead to a loss of tax.


Simple Mistakes despite taking Reasonable Care

• No penalty if become aware of an error and notify HMRC of it within 30 days of spotting it

• TIP: You must make a case for the error being only a simple mistake, and that reasonable care has been taken

• TRAP: If you don't draw it to the attention of HMRC, it will be deemed to be 'careless' and penalty of up to 30% potentially due


Reductions for Voluntary Disclosure

Whether 'prompted' or 'unprompted' will make a big difference!

When you have the 'behaviour' and the 'prompted/ unprompted' position agreed, then seek reduction of the band penalty for:

- Telling about the nature of the irregularity- a reduction of up to 30% of the band penalty - Helping by cooperating with the process- a reduction of up to 40% of the band penalty, and

- Access to records - a reduction of up to 30% of the band penalty


Penalties where Losses over claimed

NEW:

If a loss was created by the irregularity and was going to be carried forwards to use against future profits, deemed PLR of 10% of the wrongly claimed loss


Penalties and Powers - Overall Message

• Much higher ratchet of penalties

• Much more rigorously enforced with nationally consistent standards

• Discretion taken away from individual Inspectors once you agree the behaviour band

TIP: VOLUNTARY DISCLOSURE MAKES SENSE!

and if an amnesty of any kind is available, taxpayer

would be well advised to use it


VAT

• MTIC – carousel fraud

• Where HMRC have reason to believe that dishonest conduct has occurred

• HMRC handling of transactions caught up in MTIC fraud

• Penalties


MTIC - New Developments

• Mobile phones

• Electronic devices

• Razor blades

• Soft drinks

• Carbon credits

• Fuel & power

• Soap & deodorant



• How can MTIC be prevented?

• Joint and several liability - s.77A, VATA

• Prosecutions - s.72, VATA

• Notice 161 - Civil Evasion

• Who will pay the missing VAT?



• Notice 726

• Warnings

• Disallow input tax

• Frustrate the fraudsters

• Insolvency

• Prosecute the worst offenders


Case LawKittel v. Belgium (C-439/O4)

"........where it is ascertained, having regard to objective factors, that the supply is to a person who knew or should have known that, by this purchase, he was participating in a transaction connected with fraudulent evasion of value added tax, it is for the notional court to refuse that taxable person entitlement to the right to deduct"


MTIC - Risks for Business

• Negative consequences of the single market

• Fraudsters are one step ahead

• Legislating doesn't easily work

• Pragmatic approach by HMRC

• Greater compliance will suffer

• Innocent parties will suffer- don’t let this be your clients

• Rigorous procedures are now required


The New Tax Tribunals

• First Tier - Tax

• Upper Tier - Tax and Chancery Chamber

• Composition - Judges and Members (Chairs now "Judges")

• Dedicated direct and indirect tax forum

• Categorised:

- Default - Paper sift

- Basic

- Standard

- Complex


The New First Tier Tribunal

• Generally, no costs regime

• Trap: except costs will be awarded where either party is unreasonable in bringing proceedings, or negligent in the way they proceed, i.e. potentially expensive for the determinedly vexatious litigant who would merely have 'had their say' at the old General Commissioners

• Hearings in public, the press there, and decisions published

• ADR(Alternative Dispute Resolution) is being actively promoted • Reviews - S49A-I TMA - Either side can request

• Trap: If HMRC offers a review, and TP does not respond within 30 days s.54TMA treats the HMRC view as a binding settlement to the appeal. So VERY IMPORTANT to respond even if decline review


HMRC and the Profession

• Consultation 'Dealing with Tax Agents' - HMRC considers that some are complicit in poor behaviour poor compliance by clients

• Difficulty in legislating for qualification only based liaison• The Christopher Lunn Case - CL has not yet been charged with any offence, but evidence

in court case of ability of HMRC to ruin a practice by refusing to accept returns from it. Courts only found for taxpayer that notice period was insufficient, not that HMRC action should not occur

• By-passing agents - Many attempts to go direct to client - 64-8 delays legendary• Recent PTSP, TCP and LDF published as do-it yourself to clients• Personal tax returns actively encouraged to be do-it-yourself for clients

• Trap: HMRC themselves frustrated with personal litigants in the Tribunal system. Beware the effects of inadvertent S54 determination if no response made to an HMRC offer of a review.


Any Questions?

Heather Taylor 0121 232 512107989 161 666

[email protected]

David Pedley0121 232 526607976 994 334

[email protected]

AAT and CIMA Joint Presentation 12 October 2011 .ppt

©2010 Grant Thornton UK LLP. All rights reserved. AAT & CIMA 12 October 2011 The Future for Legitimate Tax Planning in a Climate of Confrontation and Challenge.

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