‘Taxation’ the Government has said ‘is not to be treated as a game where taxpayers can indulge in any ingenious scheme in order to eliminate or reduce their tax liability’.
But where is the line between avoidance and planning?
In 2013 the Government introduced the General Anti Abusive Regime (GAAR). In its press release it made it very clear that planning is permitted, but if the planning goes ‘beyond anything which could reasonably be regarded as a reasonable course of action’ then the GAAR could be invoked. In practice it never has been.
A taxpayer carrying on a trade can do so either as a sole trader or through a limited company, and can accumulate the income in the company rather than paying it out as a salary. The Government has said this is planning and not abusive avoidance. Making gifts of capital to a son or daughter with a view to reducing inheritance tax is also considered planning and not abusive avoidance.
Similarly making the best use of Business Property Relief for owners of private company shares is not abusive avoidance – provided the use is not a contrived arrangement to obtain a relief without incurring an equivalent economic risk.
However, with inheritance tax rates now the fifth highest in the world and the Government’s attitude to the rich as seen in the harsh treatment of the non doms, the temptation to look to other reliefs to mitigate tax, becomes ever more tempting – but be careful!
The first rule of planning is, do not get into something which cannot be unravelled without making a transaction. If you set up a trust, you may be taxed on distributions if you want to unravel it. A better plan is to write a good Will, which can at any time be rewritten without making a transaction.
The second rule of planning is to try to avoid anything offshore, and if you already have a structure offshore review it, now.
Atif is not resident or domiciled in the UK - he is an importer of fruit to the UK and owns a property in Surrey through an offshore company in Jersey. No one told him that he should be paying an annual tax on his home in Surrey since 2013, so he has not paid it. According to HMRC Atif has ‘evaded tax’ but did not know he was doing anything wrong.
We all know that evading tax is a criminal offence and should be stopped, but what happens to the taxpayer who does not know that tax is due? Lack of knowledge according to HMRC is no defence. Furthermore the Government has signed the Common Standard of Reporting with 94 countries which will automatically exchange information starting with the Crown Dependencies and Offshore Territories – so the Government may have information about Atif from Jersey which he knows nothing about and the information may even be wrong.
The taxpayer has no right of compensation or appeal if no tax is found to be due. Although the TaxPayers Charter promises to treat taxpayers with respect, and treat them as honest, it is also committed to stamp out evasion and the bending of rules. If Atif is suspected of evading tax, he could be in for a very unpleasant and lengthy investigation. Our advice therefore to Atif is to review all offshore structures and obtain an independent review of any arrangement and confirmation to say that no further tax is due.
The third rule of tax planning is to make sure you get the best advice (at the best possible rate): failing to do so could be the most expensive decision you have ever make.